Deck 15: Equity

Question 1

For a compensatory stock option plan for which the date of grant and measurement date are the same,compensation cost should be recognized in the income statement

A)At the date of retirement
B)Of each period in which services are rendered
C)At the exercise date
D)At the adoption date of the plan

Answer 1

D

Question 2

Which of the following securities must be reported as a liability because they have the characteristics of both liabilities and equity,but the liability characteristic is dominant?

A)Redeemable preferred stock.
B)Stock options issued with a debt security .
C)Detachable stock options.
D)Mandatorily redeemable preferred stock.

Answer 2

D

Question 3

When a stock option plan for employees is compensatory,the measurement date for determining compensation cost is the

A)Date the option plan is adopted,provided it precedes the date on which the options may first be exercised by less than one operating cycle
B)Date on which the options may first be exercised if the first actual exercise is within the same operating period)or the date on which a recipient first exercises any of his options
C)First date on which are known both the number of shares than an individual employee is entitled to receive and the option or purchase price,if any
D)Date each option is granted

Answer 3

C

Question 4

Under the residual equity theory

A)A business is viewed as a social institution.
B)Management is responsible for maximizing the wealth of common stockholders.
C)A manager's goals are considered as important as those of the common stockholders.
D)Equities are viewed as restrictions on assets..

Question 5

The purchase of treasury stock

A)Decreases common stock authorized
B)Decreases common stock issued
C)Decreases common stock outstanding
D)Has no effect on common stock outstanding

Question 6

A feature common to both stock splits and stock dividends is

A)A reduction in total capital of a corporation
B)A transfer from earned capital to paid-in capital
C)A reduction in book value per share
D)Inclusion in conventional statement of source and application of funds

Question 7

The dollar amount of total stockholders' equity remains the same when there is a an)

A)Issuance of preferred stock in exchange for convertible debentures
B)Issuance of nonconvertible bonds with detachable stock purchase warrants
C)Declaration of a stock dividend
D)Declaration of a cash dividend

Question 8

Under which of the theories of equity is a manager's goals considered as important as those of the common stockholder.

A)Proprietary theory.
B)Commander theory.
C)Entity theory.
D)Enterprise theory.

Question 9

When a dividend paid to stockholders who own mandatorily redeemable preferred stock,the company must report the dividend

A)As an adjustment to retained earnings in its statement of owners' equity .
B)As an expense in the income statement.
C)As a reduction to other comprehensive income.
D)In the financing activities section of the statement of cash flows.

Question 10

On December 31,2014,when the Conn Company's stock was selling at $36 per share,its capital accounts were as follows: Capital stock par value $20,100,000 shares issued)$2,000,000
Premium on capital stock 800,000
Retained Earnings 4,550,000
If a 100 percent stock dividend were declared and the par value per share remained at
$20

A)No entry would need to be made to record the dividend
B)Capital stock would increase to $5,600,000
C)Capital stock would increase to $4,000,000
D)Total capital would decrease

Question 11

As a minimum,how large in relation to total outstanding shares may a stock distribution be before it should be accounted for as a stock split instead of a stock dividend?

A)No less than 2 to 5 percent
B)No less than 10 to 15 percent
C)No less than 20 to 25 percent
D)No less than 45 to 50 percent

Question 12

The equation,assets = equities,expresses which of the following theories of equity?

A)Proprietary theory.
B)Commander theory.
C)Entity theory.
D)Enterprise theory.

Question 13

A company has not paid dividends on its cumulative nonvoting preferred stock for 20 years.Healthy earnings have been reported each year,but they have been retained to support the growth of the company.The board of directors appropriately authorized management to offer the preferred shareholders an exchange of bonds and common stock for all the preferred stock.The exchange is about to be consummated.Which of the following best describes the effect of the exchange on the company?

A)The statute of limitations applies; hence,cumulative dividends of only seven years need to be paid on the preferred stock exchanged.
B)The company should record an extraordinary gain for income determination purposes to the extent that dividends in arrears do not have to be paid in the exchange transaction.
C)Gain or loss should be recognized on the exchange by the company,and the exchange would have to be approved by the Securities and Exchange Commission.
D)Regardless of the market value of the bonds and common stock,no gain or loss should be recognized by the company on the exchange,and no dividends need to be paid on the preferred stock exchanged.

Question 14

Payment of a dividend in stock

A)Increases the current ratio
B)Decreases the amount of working capital
C)Increases total stockholders' equity
D)Decreases book value per share of stock outstanding

Question 15

Which of the theories of equity is consistent with the definition of equity that is found in Statement of Financial Accounting Concepts No.6?

A)Proprietary theory.
B)Commander theory.
C)Entity theory.
D)Enterprise theory.

Question 16

The directors of Corel Corporation,whose $40 par value common stock is currently selling at $50 per share,have decided to issue a stock dividend.The corporation has an authorization for 200,000 shares of common,has issued 110,000 shares of which 10,000 shares are now held as treasury stock,and desires to capitalize $400,000 of the retained earnings balance.To accomplish this,the percentage of stock dividend that the directors should declare is

A)10
B)8
C)5
D)2

Question 17

Assuming the issuing company has only one class of stock,a transfer from retained earnings to capital stock equal to the market value of the shares issued is ordinarily a characteristic of

A)Either a stock dividend or a stock split
B)Neither a stock dividend nor a stock split
C)A stock split but not a stock dividend
D)A stock dividend but not a stock split

Question 18

When a stock dividend is small,for example a 10% stock dividend,

A)Retained earnings is not reduced because the dividend is immaterial .
B)Retained earnings is reduced by the fair value of the stock.
C)Retained earnings is reduced to the par value of the stock.
D)Paid-in capital in excess of par value is unaffected.

Question 19

A restriction of retained earnings is most likely to be required by the

A)Exhaustion of potential benefits of the investment credit
B)Purchase of treasury stock
C)Payment of last maturing series of a serial bond issue
D)Amortization of past service costs related to a pension plan

Question 20

The par value method of reporting a treasury stock transaction

A)Will be reported in the balance sheet as a reduction of total stockholders' equity.
B)Results in no change to total stockholders' equity.
C)Results in a reduction in the number of shares that are available to be sold to prospective investors.
D)Assumes constructive retirement of the treasury shares.

Question 21

When preferred stock is converted to common stock

A)The debt-to-equity ratio decreases.
B)The debt-to-equity ratio increases.
C)The debt-to-equity ratio is unchanged.
D)A gain or loss is reported in earnings for the difference between the fair value of the common stock and the book value of the preferred stock that was converted .

Question 22

What is mandatorily redeemable preferred stock and how is it accounted for under the provisions of SFAS No.150 FASB ASC 480-10)?

Question 23

Define and discuss the two methods of accounting for treasury stock.

Question 24

Discuss the difference between a stock dividend and a stock split.Include in your discussion,the reasons a company might issue either a stock dividend or a stock split.

Question 25

How did SFAS No.123R change accounting for stock options?