Ch. 14-16 Test Bank

111 Questions

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Banking Exam Quizzes & Trivia

Questions and Answers
  • 1. 
    An example of an item which is not a liability is
    • A. 

      Dividends payable in stock.

    • B. 

      Advances from customers on contracts.

    • C. 

      Accrued estimated warranty costs.

    • D. 

      The portion of long-term debt due within one year.

  • 2. 
    The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the
    • A. 

      Bond indenture

    • B. 

      Bond debenture

    • C. 

      Registered bond

    • D. 

      Bond coupon

  • 3. 
    The term used for bonds that are unsecured as to principal is
    • A. 

      Mortgage bonds

    • B. 

      Debenture bonds

    • C. 

      Indebenture bonds

    • D. 

      Registered bond

  • 4. 
    Bonds for which the owners' names are not registered with the issuing corporation are called
    • A. 

      Bearer bonds

    • B. 

      Term bonds

    • C. 

      Debenture bonds

    • D. 

      Callable bonds

  • 5. 
    Bonds that pay no interest unless the issuing company is profitable are called
    • A. 

      Collateral trust bonds

    • B. 

      Debenture bonds

    • C. 

      Revenue bonds

    • D. 

      Income bonds

  • 6. 
    If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be
    • A. 

      Greater than if the straight-line method were used.

    • B. 

      Greater than the amount of the interest payments

    • C. 

      The same as if the straight-line method were used.

    • D. 

      Less than if the straight-line method were used.

  • 7. 
    The interest rate written in the terms of the bond indenture is known as the
    • A. 

      Coupon rate

    • B. 

      Nominal rate

    • C. 

      Stated rate

    • D. 

      Coupon rate, nominal rate, or stated rate.

  • 8. 
    Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.One step in calculating the issue price of the bonds is to multiply the principal by the table value for
    • A. 

      10 periods and 10% from the present value of 1 table.

    • B. 

      20 periods and 5% from the present value of 1 table.

    • C. 

      10 periods and 8% from the present value of 1 table.

    • D. 

      20 periods and 4% from the present value of 1 table.

  • 9. 
    Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.Another step in calculating the issue price of the bonds is to 
    • A. 

      Multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table.

    • B. 

      Multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table.

    • C. 

      Multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.

    • D. 

      None of these answers is correct.

  • 10. 
    Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that
    • A. 

      The effective yield or market rate of interest exceeded the stated (nominal) rate.

    • B. 

      The nominal rate of interest exceeded the market rate.

    • C. 

      The market and nominal rates coincided.

    • D. 

      No necessary relationship exists between the two rates.

  • 11. 
    If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will
    • A. 

      Exceed what it would have been had the effective-interest method of amortization been used.

    • B. 

      Be less than what it would have been had the effective-interest method of amortization been used.

    • C. 

      Be the same as what it would have been had the effective-interest method of amortiza-tion been used.

    • D. 

      Be less than the stated (nominal) rate of interest.

  • 12. 
    Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to
    • A. 

      The stated (nominal) rate of interest multiplied by the face value of the bonds.

    • B. 

      The market rate of interest multiplied by the face value of the bonds.

    • C. 

      The stated rate multiplied by the beginning-of-period carrying amount of the bonds.

    • D. 

      The market rate multiplied by the beginning-of-period carrying amount of the bonds.

  • 13. 
    When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will
    • A. 

      Increase only if the bonds were issued at a discount.

    • B. 

      Decrease only if the bonds were issued at a premium.

    • C. 

      Increase only if the bonds were issued at a premium.

    • D. 

      Increase if the bonds were issued at either a discount or a premium.

  • 14. 
    If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a
    • A. 

      Debit to Interest Payable.

    • B. 

      Credit to Interest Receivable.

    • C. 

      Credit to Interest Expense.

    • D. 

      Credit to Unearned Interest.

  • 15. 
    When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be
    • A. 

      Decreased by accrued interest from June 1 to November 1.

    • B. 

      Decreased by accrued interest from May 1 to June 1.

    • C. 

      Increased by accrued interest from June 1 to November 1.

    • D. 

      Increased by accrued interest from May 1 to June 1.

  • 16. 
    Theoretically, the costs of issuing bonds could be
    • A. 

      Expensed when incurred.

    • B. 

      Reported as a reduction of the bond liability.

    • C. 

      Debited to a deferred charge account and amortized over the life of the bonds.

    • D. 

      Any of these answers are correct.

  • 17. 
    The printing costs and legal fees associated with the issuance of bonds should
    • A. 

      Be expensed when incurred

    • B. 

      Be reported as a deduction from the face amount of bonds payable.

    • C. 

      Be accumulated in a deferred charge account and amortized over the life of the bonds.

    • D. 

      Not be reported as an expense until the period the bonds mature or are retired.

  • 18. 
    Treasury bonds should be shown on the balance sheet as
    • A. 

      An asset.

    • B. 

      A deduction from bonds payable issued to arrive at net bonds payable and outstanding.

    • C. 

      A reduction of stockholders' equity.

    • D. 

      Both an asset and a liability.

  • 19. 
    Early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition
    • A. 

      Any costs of issuing the bonds must be amortized up to the purchase date.

    • B. 

      The premium must be amortized up to the purchase date.

    • C. 

      Interest must be accrued from the last interest date to the purchase date.

    • D. 

      All of these answers are correct.

  • 20. 
    The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as
    • A. 

      An adjustment to the cost basis of the asset obtained by the debt issue.

    • B. 

      An amount that should be considered a cash adjustment to the cost of any other debt issued over the remaining life of the old debt instrument.

    • C. 

      An amount received or paid to obtain a new debt instrument and, as such, should be amortized over the life of the new debt.

    • D. 

      A difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

  • 21. 
    "In-substance defeasance" is a term used to refer to an arrangement whereby
    • A. 

      A company gets another company to cover its payments due on long-term debt.

    • B. 

      A governmental unit issues debt instruments to corporations.

    • C. 

      A company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.

    • D. 

      A company legally extinguishes debt before its due date.

  • 22. 
    A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?
    • A. 

      The balance of mortgage payable at a given balance sheet date will be reported as a long-term liability.

    • B. 

      The balance of mortgage payable will remain a constant amount over the 10-year period.

    • C. 

      The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period

    • D. 

      The amount of interest expense will remain constant over the 10-year period

  • 23. 
    A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place
    • A. 

      The present value of the debt instrument must be approximated using an imputed interest rate.

    • B. 

      It should not be recorded on the books of either party until the fair value of the property becomes evident

    • C. 

      The board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction

    • D. 

      The directors of both entities involved in the transaction should negotiate a value to be assigned to the property

  • 24. 
    When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless
    • A. 

      No interest rate is stated.

    • B. 

      The stated interest rate is unreasonable.

    • C. 

      The stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note.

    • D. 

      Any of these answers are correct

  • 25. 
    Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?
    • A. 

      The shareholders' loss is the debtholders' gain.

    • B. 

      The income of the company will increase as the amount of interest payment will reduce

    • C. 

      The decrease in market rate will increase the value of equity shares.

    • D. 

      The debtholders' loss is the shareholders' gain.

  • 26. 
    If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting
    • A. 

      Bonds Payable.

    • B. 

      Gain on Restructuring of Debt.

    • C. 

      Unrealized Holding Gain/Loss-Income

    • D. 

      None of these answers are correct

  • 27. 
    A project financing arrangement refers to:
    • A. 

      An arrangement where a company creates a special-purpose entity to perform a special project.

    • B. 

      An arrangement where a company borrows from its subsidiary to finance a project.

    • C. 

      An arrangement where a company promises future repayment by placing purchased assets in an irrevocable trust.

    • D. 

      An arrangement where a company finances a project from a sinking fund established for bond repayments.

  • 28. 
    When a business enterprise enters into what is referred to as off-balance-sheet financing, the company
    • A. 

      Is attempting to conceal the debt from shareholders by having no information about the debt included in the balance sheet

    • B. 

      Wishes to confine all information related to the debt to the income statement and the statement of cash flow.

    • C. 

      Can enhance the quality of its financial position and perhaps permit credit to be obtained more readily and at less cost.

    • D. 

      Is in violation of generally accepted accounting principles

  • 29. 
    Long-term debt that matures within one year and is to be converted into stock should be reported
    • A. 

      As a current liability.

    • B. 

      In a special section between liabilities and stockholdersâ equity

    • C. 

      As noncurrent.

    • D. 

      As noncurrent and accompanied with a note explaining the method to be used in its liquidation.

  • 30. 
    Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?
    • A. 

      The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

    • B. 

      The present value of scheduled interest payments on long-term debt during each of the next five years.

    • C. 

      The amount of scheduled interest payments on long-term debt during each of the next five years.

    • D. 

      The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

  • 31. 
    Note disclosures for long-term debt generally include all of the following except
    • A. 

      Assets pledged as security.

    • B. 

      Call provisions and conversion privileges

    • C. 

      Restrictions imposed by the creditor.

    • D. 

      Names of specific creditors.

  • 32. 
    The times interest earned ratio is computed by dividing
    • A. 

      Net income by interest expense

    • B. 

      Income before taxes by interest expense.

    • C. 

      Income before income taxes and interest expense by interest expense.

    • D. 

      Net income and interest expense by interest expense.

  • 33. 
    The debt to assets ratio is computed by dividing
    • A. 

      Current liabilities by total assets.

    • B. 

      Long-term liabilities by total assets

    • C. 

      Total liabilities by total assets.

    • D. 

      Total assets by total liabilities

  • 34. 
    The residual interest in a corporation belongs to the
    • A. 

      Management

    • B. 

      Creditors

    • C. 

      Common stockholders

    • D. 

      Preferred stockholders

  • 35. 
    The pre-emptive right of a common stockholder is the right to
    • A. 

      Share proportionately in corporate assets upon liquidation.

    • B. 

      Share proportionately in any new issues of stock of the same class.

    • C. 

      Receive cash dividends before they are distributed to preferred stockholders.

    • D. 

      Exclude preferred stockholders from voting rights.

  • 36. 
    The pre-emptive right enables a stockholder to
    • A. 

      Receive the same amount of dividends on a percentage basis as the preferred stockholders.

    • B. 

      Receive cash dividends before other classes of stock without the pre-emptive right.

    • C. 

      Sell capital stock back to the corporation at the option of the stockholder

    • D. 

      None of these answers are correct.

  • 37. 
    In a corporate form of business organization, legal capital is best defined as
    • A. 

      The amount of capital the state of incorporation allows the company to accumulate over its existence.

    • B. 

      The par value of all capital stock issued.

    • C. 

      The amount of capital the federal government allows a corporation to generate.

    • D. 

      The total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

  • 38. 
    Common stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders
    • A. 

      Are entitled to a dividend every year in which the business earns a profit.

    • B. 

      Have the rights to specific assets of the business.

    • C. 

      Bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.

    • D. 

      Can negotiate individual contracts on behalf of the enterprise.

  • 39. 
    Total stockholders' equity represents
    • A. 

      A claim to specific assets contributed by the owners

    • B. 

      The maximum amount that can be borrowed by a company

    • C. 

      A claim against a portion of the total assets of a company

    • D. 

      Only the amount of earnings that have been retained in the business.

  • 40. 
    A primary source of stockholders' equity is
    • A. 

      Income retained by the corporation

    • B. 

      Appropriated retained earnings

    • C. 

      Contributions by stockholders

    • D. 

      Both income retained by the corporation and contributions by stockholders

  • 41. 
    Stockholders' equity is generally classified into two major categories:
    • A. 

      Contributed capital and appropriated capital

    • B. 

      Appropriated capital and retained earnings.

    • C. 

      Retained earnings and unappropriated capital

    • D. 

      Earned capital and contributed capital

  • 42. 
    The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is
    • A. 

      The pro forma method.

    • B. 

      The proportional method.

    • C. 

      The incremental method.

    • D. 

      Either the proportional method or the incremental method.

  • 43. 
    When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the
    • A. 

      Market value of the services received.

    • B. 

      Par value of the shares issued

    • C. 

      Market value of the shares issued

    • D. 

      Any of these provides an appropriate basis for recording the transaction.

  • 44. 
    Direct costs incurred to sell stock such as underwriting costs should be accounted for as:1.   a reduction of additional paid-in capital.2.   an expense of the period in which the stock is issued.3.   an intangible asset.
    • A. 

      1

    • B. 

      2

    • C. 

      3

    • D. 

      1 or 3

  • 45. 
    A "secret reserve" will be created if
    • A. 

      Inadequate depreciation is charged to income.

    • B. 

      A capital expenditure is charged to expense

    • C. 

      Liabilities are understated.

    • D. 

      Stockholders' equity is overstated.

  • 46. 
    Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?
    • A. 

      Authorized shares

    • B. 

      Issued shares

    • C. 

      Unissued shares

    • D. 

      Outstanding shares

  • 47. 
    Stock that has a fixed per-share amount printed on each stock certificate is called
    • A. 

      Stated value stock.

    • B. 

      Fixed value stock

    • C. 

      Uniform value stock.

    • D. 

      Par value stock.

  • 48. 
    Which of the following is not a legal restriction related to profit distributions by a corporation?
    • A. 

      The amount distributed to owners must be in compliance with the state laws governing corporations

    • B. 

      The amount distributed in any one year can never exceed the net income reported for that year

    • C. 

      Profit distributions must be formally approved by the board of directors.

    • D. 

      Dividends must be in full agreement with the capital stock contracts as to preferences and participation.

  • 49. 
    In January 2014, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2014, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares
    • A. 

      Decreased total stockholders' equity.

    • B. 

      Increased total stockholders' equity.

    • C. 

      Did not change total stockholders' equity

    • D. 

      Decreased the number of issued shares

  • 50. 
    Treasury shares are shares
    • A. 

      Held as an investment by the treasurer of the corporation

    • B. 

      Held as an investment of the corporation

    • C. 

      Issued and outstanding

    • D. 

      Issued but not outstanding.

  • 51. 
    When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?
    • A. 

      Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value.

    • B. 

      Paid-in capital in excess of par for the purchase price.

    • C. 

      Treasury stock for the purchase price.

    • D. 

      Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.

  • 52. 
    Gains on sales of treasury stock (using the cost method) should be credited to
    • A. 

      Paid-in capital from treasury stock.

    • B. 

      Capital stock.

    • C. 

      Retained earnings.

    • D. 

      Other income.

  • 53. 
    Porter Corp. purchased its own par value stock on January 1, 2014 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from
    • A. 

      Additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings.

    • B. 

      Additional paid-in capital without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein.

    • C. 

      Retained earnings

    • D. 

      Net income.

  • 54. 
    How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?
    • A. 

      As ordinary earnings shown on the income statement.

    • B. 

      As paid-in capital from treasury stock transactions.

    • C. 

      As an increase in the amount shown for common stock.

    • D. 

      As an extraordinary item shown on the income statement.

  • 55. 
    Which of the following best describes a possible result of treasury stock transactions by a corporation?
    • A. 

      May increase but not decrease retained earnings

    • B. 

      May increase net income if the cost method is used.

    • C. 

      May decrease but not increase retained earnings

    • D. 

      May decrease but not increase net income

  • 56. 
    Which of the following features of preferred stock makes it more like a debt than an equity instrument?
    • A. 

      Participating

    • B. 

      Voting

    • C. 

      Redeemable

    • D. 

      Noncumulative

  • 57. 
    The cumulative feature of preferred stock
    • A. 

      Limits the amount of cumulative dividends to the par value of the preferred stock.

    • B. 

      Requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.

    • C. 

      Means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock.

    • D. 

      Enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.

  • 58. 
    According to the FASB, redeemable preferred stock should be
    • A. 

      Included with common stock.

    • B. 

      Included as a liability.

    • C. 

      Excluded from the stockholders' equity heading

    • D. 

      Included as a contra item in stockholders' equity.

  • 59. 
    Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as
    • A. 

      An increase in current liabilities

    • B. 

      An increase in stockholders' equity.

    • C. 

      A footnote.

    • D. 

      An increase in current liabilities for the current portion and long-term liabilities for the long-term portion

  • 60. 
    At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the
    • A. 

      Declaration of a stock split.

    • B. 

      Declaration of a stock dividend

    • C. 

      Purchase of treasury stock

    • D. 

      Payment in full of subscribed stock.

  • 61. 
    An entry is not made on the
    • A. 

      Date of declaration

    • B. 

      Date of record

    • C. 

      Date of payment

    • D. 

      An entry is made on all of these dates.

  • 62. 
    Cash dividends are paid on the basis of the number of shares
    • A. 

      Authorized

    • B. 

      Issued

    • C. 

      Outstanding

    • D. 

      Outstanding less the number of treasury shares

  • 63. 
    Which of the following statements about property dividends is not true?
    • A. 

      A property dividend is usually in the form of securities of other companies.

    • B. 

      A property dividend is also called a dividend in kind.

    • C. 

      The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.

    • D. 

      All of these statements are true.

  • 64. 
    Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2014, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a
    • A. 

      Property dividend

    • B. 

      Stock dividend

    • C. 

      Liquidating dividend

    • D. 

      Cash dividend

  • 65. 
    A dividend which is a return to stockholders of a portion of their original investments is a
    • A. 

      Liquidating dividend

    • B. 

      Property dividend

    • C. 

      Liability dividend

    • D. 

      Participating dividend

  • 66. 
    A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to
    • A. 

      Retained earnings

    • B. 

      A paid-in capital account

    • C. 

      Accumulated depletion

    • D. 

      Accumulated depreciation

  • 67. 
    If management wishes to "capitalize" part of the earnings, it may issue a
    • A. 

      Cash dividend

    • B. 

      Stock dividend

    • C. 

      Property dividend

    • D. 

      Liquidating dividend

  • 68. 
    Which dividends do not reduce stockholders' equity?
    • A. 

      Cash dividend

    • B. 

      Stock dividend

    • C. 

      Property dividend

    • D. 

      Liquidating dividend

  • 69. 
    The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding
    • A. 

      Increases common stock outstanding and increases total stockholders' equity.

    • B. 

      Decreases retained earnings but does not change total stockholders' equity

    • C. 

      May increase or decrease paid-in capital in excess of par but does not change total stockholders' equity.

    • D. 

      Increases retained earnings and increases total stockholders' equity.

  • 70. 
    Quirk Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?
    • A. 

      There should be no capitalization of retained earnings

    • B. 

      Par value

    • C. 

      Fair value on the declaration date

    • D. 

      Fair value on the payment date

  • 71. 
    The issuer of a 5% common stock dividend to common stockholders should transfer from retained earnings to paid-in capital an amount equal to the
    • A. 

      Fair value of the shares issued

    • B. 

      Book value of the shares issued

    • C. 

      Minimum legal requirements

    • D. 

      Par or stated value of the shares issued.

  • 72. 
    At the date of declaration of a small common stock dividend, the entry should not include
    • A. 

      A credit to Common Stock

    • B. 

      A credit to Paid-in Capital in Excess of Par.

    • C. 

      A debit to Retained Earnings

    • D. 

      All of these are acceptable

  • 73. 
    The balance in Common Stock Dividend Distributable should be reported as a(n)
    • A. 

      Deduction from common stock issued.

    • B. 

      Addition to capital stock

    • C. 

      Current liability

    • D. 

      Contra current asset.

  • 74. 
    A feature common to both stock splits and stock dividends is
    • A. 

      A transfer to earned capital of a corporation

    • B. 

      That there is no effect on total stockholders' equity

    • C. 

      An increase in total liabilities of a corporation

    • D. 

      A reduction in the contributed capital of a corporation

  • 75. 
    Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?
    • A. 

      Dividend preferences

    • B. 

      Liquidation preferences

    • C. 

      Call prices

    • D. 

      Conversion or exercise prices

  • 76. 
    The rate of return on common stock equity is calculated by dividing
    • A. 

      Net income less preferred dividends by average common stockholders' equity

    • B. 

      Net income by average common stockholders' equity.

    • C. 

      Net income less preferred dividends by ending common stockholders' equity.

    • D. 

      Net income by ending common stockholders' equity

  • 77. 
    The payout ratio can be calculated by dividing
    • A. 

      Dividends per share by earnings per share.

    • B. 

      Cash dividends by net income less preferred dividends.

    • C. 

      Cash dividends by market price per share.

    • D. 

      Dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends

  • 78. 
    Younger Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by
    • A. 

      The declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value.

    • B. 

      The declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value.

    • C. 

      The payment of a previously declared cash dividend on the common stock.

    • D. 

      A 2-for-1 split of the common stock.

  • 79. 
    Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders' equity divided by the number of common stock shares outstanding is called
    • A. 

      Book value per share.

    • B. 

      Par value per share.

    • C. 

      Stated value per share.

    • D. 

      Fair value per share.

  • 80. 
    What effect does the issuance of a 2-for-1 stock split have on each of the following?                  Par Value per Share              Retained Earnings
    • A. 

      A. No effect No effect

    • B. 

      B. Increase No effect

    • C. 

      C. Decrease No effect

    • D. 

      D. Decrease Decrease

  • 81. 
    Convertible bonds
    • A. 

      Have priority over other indebtedness

    • B. 

      Are usually secured by a first or second mortgage

    • C. 

      Pay interest only in the event earnings are sufficient to cover the interest

    • D. 

      May be exchanged for equity securities.

  • 82. 
    The conversion of bonds is most commonly recorded by the
    • A. 

      Incremental method

    • B. 

      Proportional method.

    • C. 

      Market value method.

    • D. 

      Book value method

  • 83. 
    If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an
    • A. 

      Forced conversion

    • B. 

      Sweetener

    • C. 

      Additional conversion

    • D. 

      End conversion

  • 84. 
    Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is
    • A. 

      The ease with which convertible debt is sold even if the company has a poor credit rating

    • B. 

      The fact that equity capital has issue costs that convertible debt does not.

    • C. 

      That many corporations can obtain debt financing at lower rates

    • D. 

      That convertible bonds will always sell at a premium

  • 85. 
    When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be
    • A. 

      Reflected currently in income, but not as an extraordinary item

    • B. 

      Reflected currently in income as an extraordinary item

    • C. 

      Treated as a prior period adjustment.

    • D. 

      Treated as an adjustment of additional paid-in capital.

  • 86. 
    The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be
    • A. 

      Reflected currently in income, but not as an extraordinary item.

    • B. 

      Reflected currently in income as an extraordinary item

    • C. 

      Treated as a prior period adjustment

    • D. 

      Treated as a direct reduction of retained earnings

  • 87. 
    The conversion of preferred stock is recorded by the
    • A. 

      Incremental method

    • B. 

      Book value method

    • C. 

      Market value method.

    • D. 

      Par value method

  • 88. 
    When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to
    • A. 

      Additional paid-in capital from stock warrants

    • B. 

      Retained earnings

    • C. 

      A liability account

    • D. 

      Premium on bonds payable

  • 89. 
    Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when
    • A. 

      The market value of the warrants is not readily available.

    • B. 

      Exercise of the warrants within the next few fiscal periods seems remote.

    • C. 

      The allocation would result in a discount on the debt security

    • D. 

      The warrants issued with the debt securities are nondetachable

  • 90. 
    Stock warrants outstanding should be classified as
    • A. 

      Liabilities

    • B. 

      Reductions of capital contributed in excess of par value

    • C. 

      Assets

    • D. 

      None of these are correct

  • 91. 
    A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
    • A. 

      Zero

    • B. 

      Calculated by the excess of the proceeds over the face amount of the bonds

    • C. 

      Equal to the market value of the warrants

    • D. 

      Based on the relative market values of the two securities involved

  • 92. 
    The major difference between convertible debt and stock warrants is that upon exercise of the warrants
    • A. 

      The stock is held by the company for a defined period of time before they are issued to the warrant holder.

    • B. 

      The holder has to pay a certain amount of cash to obtain the shares.

    • C. 

      The stock involved is restricted and can only be sold by the recipient after a set period of time

    • D. 

      No paid-in capital in excess of par can be a part of the transaction

  • 93. 
    Which of the following is not a characteristic of a noncompensatory stock option plan?
    • A. 

      Substantially all full-time employees may participate on an equitable basis

    • B. 

      The plan offers no substantive option feature.

    • C. 

      Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company.

    • D. 

      Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

  • 94. 
    The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee
    • A. 

      Is granted the option.

    • B. 

      Has performed all conditions precedent to exercising the option.

    • C. 

      May first exercise the option

    • D. 

      Exercises the option

  • 95. 
    Compensation expense resulting from a compensatory stock option plan is generally
    • A. 

      Recognized in the period of exercise.

    • B. 

      Recognized in the period of the grant

    • C. 

      Allocated to the periods benefited by the employee's required service.

    • D. 

      Allocated over the periods of the employee's service life to retirement

  • 96. 
    Which of the following is an advantage of a restricted-stock plan?
    • A. 

      It creates new job opportunities in a company.

    • B. 

      It never becomes completely worthless.

    • C. 

      It increases the market price of the stock.

    • D. 

      It increases the profit of a company.

  • 97. 
    Which of the following is not a characteristic of a noncompensatory stock purchase plan?
    • A. 

      It is open to almost all full-time employees.

    • B. 

      The discount from market price is small

    • C. 

      The plan offers no substantive option feature.

    • D. 

      All of these are characteristics.

  • 98. 
    With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?
    • A. 

      Common stock, preferred stock, and convertible securities outstanding in lots of even thousands

    • B. 

      Earnings derived from one primary line of business

    • C. 

      Ownership interest consisting solely of common stock

    • D. 

      None of these

  • 99. 
    In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the
    • A. 

      Preferred dividends in arrears.

    • B. 

      Preferred dividends in arrears times (one minus the income tax rate).

    • C. 

      Annual preferred dividend times (one minus the income tax rate).

    • D. 

      None of these answers are correct

  • 100. 
    In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
    • A. 

      Weighted by the number of days outstanding.

    • B. 

      Weighted by the number of months outstanding

    • C. 

      Considered outstanding at the beginning of the year

    • D. 

      Considered outstanding at the beginning of the earliest year reported

  • 101. 
    What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?
    • A. 

      Decrease and no effect

    • B. 

      Increase and no effect

    • C. 

      Decrease and increase

    • D. 

      Increase and decrease

  • 102. 
    When computing diluted earnings per share, convertible bonds are
    • A. 

      Ignored

    • B. 

      Assumed converted whether they are dilutive or antidilutive

    • C. 

      Assumed converted only if they are antidilutive.

    • D. 

      Assumed converted only if they are dilutive.

  • 103. 
    Dilutive convertible securities must be used in the computation of
    • A. 

      Basic earnings per share only

    • B. 

      Diluted earnings per share only

    • C. 

      Diluted and basic earnings per share

    • D. 

      None of these.

  • 104. 
    In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
    • A. 

      Annual preferred dividend

    • B. 

      Annual preferred dividend times (one minus the income tax rate)

    • C. 

      Annual preferred dividend times the income tax rate

    • D. 

      Annual preferred dividend divided by the income tax rate

  • 105. 
    In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market prIn applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share. ice, the computation would
    • A. 

      Fairly present diluted earnings per share on a prospective basis

    • B. 

      Fairly present the maximum potential dilution of diluted earnings per share on a prospective basis

    • C. 

      Reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.

    • D. 

      Be antidilutive

  • 106. 
    In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants
    • A. 

      Are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.

    • B. 

      Are added, net of tax, to the numerator of the calculation for diluted earnings per share.

    • C. 

      Are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock.

    • D. 

      None of these

  • 107. 
    Antidilutive securities
    • A. 

      Should be included in the computation of diluted earnings per share but not basic earnings per share.

    • B. 

      Are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.

    • C. 

      Include stock options and warrants whose exercise price is less than the average market price of common stock.

    • D. 

      Should be ignored in all earnings per share calculations

  • 108. 
    A company uses income from continuing operations to determine whether potential common stock is dilutive or antidilutive, and this is referred to a
    • A. 

      The control number.

    • B. 

      The potential number.

    • C. 

      Dilutive information

    • D. 

      Impact information.

  • 109. 
    Due to the importance of earnings per share information, it is required to be reported by all      Public Companies          Nonpublic Companies
    • A. 

      A. Yes Yes

    • B. 

      B. Yes No

    • C. 

      C. No No

    • D. 

      D. No Yes

  • 110. 
    A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is         Dilutive               Antidilutive
    • A. 

      A. Yes Yes

    • B. 

      B. Yes No

    • C. 

      C. No Yes

    • D. 

      D. No No

  • 111. 
    The distribution of stock rights to existing common stockholders will increase paid-in capital at the      Date of Issuance          Date of Exercise           of the Rights                of the Rights
    • A. 

      A. Yes Yes

    • B. 

      B. Yes No

    • C. 

      C. No Yes

    • D. 

      D. No No