Hardest Banking Exam Quiz: MCQ!

The correct answer states that the cumulative feature of preferred stock requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. This means that if a company is unable to pay dividends to preferred stockholders in a particular year, it is obligated to make up for those unpaid dividends in the future before distributing dividends to common shareholders. This feature ensures that preferred stockholders receive their entitled dividends, even if there are temporary financial difficulties.

A liquidating dividend is a return to stockholders of a portion of their original investments when a company is winding up its operations and distributing its assets. This type of dividend is typically paid out when a company is liquidating or selling off its assets to pay off its debts and obligations. It is different from regular dividends, which are usually paid out of a company's profits. A liquidating dividend signifies the end of a company's existence and the return of capital to its shareholders.

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 reflected currently in income, but not as an extraordinary item. This means that the difference should be recognized as a regular item in the income statement, rather than being classified as an extraordinary event. Extraordinary items are reserved for rare and unusual events that are not expected to recur in the normal course of business. Therefore, the correct answer states that the difference should be reflected in income, but not as an extraordinary item.

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used. This is because the straight-line method of amortization allocates the same amount of bond discount to each period, resulting in higher interest expense in the earlier years. On the other hand, the effective-interest method of amortization allocates a higher amount of bond discount to the earlier periods, resulting in lower interest expense in those years. Therefore, interest expense will be higher with the straight-line method compared to the effective-interest method in the earlier years.

The correct answer is "the market rate multiplied by the beginning-of-period carrying amount of the bonds." Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is calculated based on the market rate of interest and the carrying amount of the bonds at the beginning of the period. This method ensures that the interest expense recognized over the life of the bond reflects the effective interest rate rather than the nominal rate.

When bonds are issued between interest dates, the issuing corporation needs to account for the interest expense that will accrue between the date of issuance and the next interest payment date. This is done by crediting the Interest Expense account. The corporation will later debit the Interest Expense account and credit the Interest Payable account when the interest payment is made. Therefore, the correct answer is credit to Interest Expense.

The correct answer is "is granted the option." The compensation element in a stock option is typically measured on the date the employee is granted the option. This means that the value of the option is determined at the time it is given to the employee, rather than any other point in time such as when the employee exercises the option or fulfills all conditions. The date of grant is important because it establishes the starting point for calculating the compensation element and determining the employee's potential gain from the stock option.

A restricted-stock plan is a type of compensation plan where employees are granted company stock that is subject to certain restrictions or conditions. This plan can be advantageous as it can incentivize employees to stay with the company and contribute to its success, thereby creating new job opportunities. By granting employees stock, they have a vested interest in the company's performance and are more likely to work towards its growth and profitability. This can lead to the company expanding and creating new positions to accommodate its growth.

The correct answer is income before income taxes and interest expense by interest expense. This ratio helps determine a company's ability to cover its interest obligations with its earnings. By dividing income before income taxes and interest expense by interest expense, we can assess how many times a company's earnings can cover its interest payments. A higher ratio indicates a greater ability to meet interest obligations, while a lower ratio may suggest financial difficulties.

Debenture bonds are a type of bond that is unsecured as to principal. This means that there is no specific asset or property pledged as collateral for the bond. Instead, debenture bonds rely on the general creditworthiness and reputation of the issuer to repay the principal amount. Unlike mortgage bonds, which are secured by specific properties, debenture bonds do not have any specific assets backing them. Indebenture bonds and registered bonds are not commonly used terms in finance and do not accurately describe the concept of unsecured bonds.

The residual interest in a corporation refers to the remaining assets after all debts and obligations have been paid off. Common stockholders are the owners of a corporation and have a claim on these residual assets. Therefore, the correct answer is common stockholders.

When a company sells treasury stock at a price higher than its cost, it generates a gain. This gain represents the excess amount received from the sale compared to the cost of the treasury stock. Since treasury stock is considered a contra-equity account, gains on its sale should be credited to paid-in capital from treasury stock. This account represents the amount of capital contributed by shareholders when repurchasing their own shares. Therefore, crediting the gain to paid-in capital from treasury stock accurately reflects the increase in shareholders' equity resulting from the sale.

A stock dividend is a distribution of additional shares to existing shareholders, which increases the number of shares outstanding without affecting the total value of the company. By issuing a stock dividend, management can capitalize part of the earnings by converting them into additional shares. This allows the company to reward shareholders without using cash or other assets.

The balance in Common Stock Dividend Distributable should be reported as an addition to capital stock because it represents the amount of dividends declared by a company that have not yet been paid to shareholders. This balance is considered a temporary liability until the dividends are actually distributed to the shareholders, at which point it will reduce the company's cash and be transferred to the capital stock account. Therefore, it is appropriate to classify it as an addition to capital stock.

Both stock splits and stock dividends result in an increase in the number of shares outstanding without any change in the total stockholders' equity. In a stock split, the number of shares is increased by a certain ratio, while in a stock dividend, additional shares are distributed to existing shareholders. However, the value of each share is adjusted proportionally to maintain the same total value of the stockholders' equity. Therefore, both actions do not impact the overall equity position of the corporation.

The given answer, "Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company," is not a characteristic of a noncompensatory stock option plan. Noncompensatory stock option plans typically have a specified exercise period, after which the options expire if not exercised. Unlimited time periods for exercise would make the plan compensatory, as it allows employees to potentially benefit from future increases in the stock price without any risk.

The pre-emptive right of a common stockholder refers to their right to purchase additional shares of stock in the company before it is offered to other investors. This allows common stockholders to maintain their proportional ownership in the company and prevents dilution of their ownership stake. Therefore, the correct answer is that common stockholders have the right to share proportionately in any new issues of stock of the same class.

Legal capital in a corporate form of business organization refers to the minimum amount of capital that a company must maintain in order to protect creditors. It is typically set by the state of incorporation and represents the par value of all capital stock issued by the company. This value is important because it ensures that there is a certain level of financial stability and assets available to cover any debts or liabilities. It is not related to the amount of capital allowed by the federal government or the total capital raised by the corporation within SEC limits.

When a company declares a liquidating dividend, it is distributing its assets to shareholders as a return of their investment. This means that the company will be reducing its paid-in capital, which represents the amount of money contributed by shareholders in exchange for shares of the company's stock. Therefore, the journal entry to record the declaration of a liquidating dividend should include a debit to a paid-in capital account.

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Upon exercise of the warrants, the holder has to pay a certain amount of cash to obtain the shares. This means that in order to acquire the shares, the warrant holder must make a cash payment to the company. This is different from convertible debt, where the conversion of debt into equity does not require a cash payment. Instead, the debt is simply converted into shares of stock.

When a company's creditworthiness is becoming worse, it is likely that the company will default on its debt obligations. This means that the debtholders will suffer a loss as they may not receive the full amount of their investment back. On the other hand, the shareholders of the company may benefit from this situation as the company's financial distress may result in a decrease in the value of its debt, which in turn increases the value of the equity shares held by the shareholders. Therefore, the debtholders' loss becomes the shareholders' gain.

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A bond indenture is a legal document that outlines the terms and conditions of a bond agreement between the issuer of the bonds and the lender. It includes details such as the interest rate, maturity date, repayment terms, and any covenants or restrictions placed on the issuer. This document serves as a binding contract between the two parties and provides clarity and protection for both the issuer and the lender.

Treasury stock transactions refer to when a corporation buys back its own stock from shareholders. This can result in a decrease in retained earnings because the money used to repurchase the stock is taken out of the company's earnings. However, it cannot increase retained earnings because the repurchased stock is considered to be "retired" and no longer counts as part of the company's equity. Therefore, the correct answer is that treasury stock transactions may decrease but not increase retained earnings.

According to the FASB (Financial Accounting Standards Board), redeemable preferred stock should be included as a liability. This is because redeemable preferred stock represents an obligation of the company to redeem the shares at a future date or at the option of the shareholder. It is similar to a debt instrument and is therefore classified as a liability on the balance sheet rather than being included with common stock or as a contra item in stockholders' equity.

Cash dividends are paid on the basis of the number of shares outstanding. This means that only the shares that are currently held by shareholders and not held as treasury shares are eligible to receive cash dividends. Shares that have been authorized or issued but are not currently held by shareholders are not considered when determining the amount of cash dividends to be paid.

The conversion of preferred stock is recorded by the book value method. This method involves converting the preferred stock at its book value, which is the value reported on the balance sheet. The book value is calculated by dividing the total equity by the number of outstanding shares. This method ensures that the conversion is recorded based on the actual value of the preferred stock, as reported in the company's financial statements.

Treasury bonds should be shown on the balance sheet as a deduction from bonds payable issued to arrive at net bonds payable and outstanding because treasury bonds are bonds that have been repurchased by the issuing company. By deducting the treasury bonds from the bonds payable, it reflects the reduction in the company's outstanding debt. This allows for a more accurate representation of the company's net bonds payable and outstanding on the balance sheet.

Compensation expense resulting from a compensatory stock option plan is generally recognized in the period of exercise. This means that the expense is recorded when the employee exercises their stock options and becomes entitled to the shares. The expense is not recognized in the period of grant, as the employee does not yet have the right to exercise the options at that time. Similarly, the expense is not allocated over the employee's service life to retirement, as it is recognized when the employee actually exercises the options. Finally, the expense is not allocated to the periods of the employee's service life, but rather to the periods benefited by the employee's required service, which is typically the period between the grant date and the exercise date.

This relationship can be expected because as the loan is outstanding, the corporation will be paying off the principal amount of the loan through the annual payments. As the principal amount decreases, the interest expense will also decrease over time. This is because interest is calculated based on the outstanding balance of the loan. Therefore, the portion of the annual payment applied to the loan principal will increase each period, while the amount of interest expense will decrease.

A project financing arrangement refers to an arrangement where a company creates a special-purpose entity to perform a special project. This means that the company sets up a separate entity specifically for the purpose of carrying out a particular project. This arrangement allows the company to isolate the risks and liabilities associated with the project, ensuring that the project's success or failure does not impact the overall financial health of the company. It also allows for more efficient management and allocation of resources for the project.

The company uses income from continuing operations to determine whether potential common stock is dilutive or antidilutive. This is referred to as the control number because it helps the company assess the impact of potential stock issuances on its earnings per share and overall financial performance. By comparing the income from continuing operations with the potential number of shares, the company can determine whether the stock issuance will have a dilutive or antidilutive effect on the earnings per share.

The distribution of stock rights to existing common stockholders will not increase paid-in capital at the Date of Issuance, but it will increase paid-in capital at the Date of Exercise. This means that when the stock rights are initially distributed, there is no impact on paid-in capital. However, when the stock rights are exercised and new shares are issued, the proceeds from the exercise are recorded as an increase in paid-in capital.

Direct costs incurred to sell stock such as underwriting costs should be accounted for as a reduction of additional paid-in capital. This is because underwriting costs are considered as a cost of issuing stock and are directly related to the sale of stock. Therefore, they should be deducted from the additional paid-in capital, which represents the amount received from investors in excess of the stock's par value. This treatment ensures that the costs are properly allocated and do not inflate the reported additional paid-in capital.

The statement "The amount distributed in any one year can never exceed the net income reported for that year" is incorrect because a corporation can distribute dividends even if the net income reported for that year is lower than the amount distributed. Corporations have the flexibility to distribute dividends from retained earnings or accumulated profits from previous years, even if the current year's net income is lower. Therefore, this statement does not represent a legal restriction related to profit distributions by a corporation.

An ownership interest consisting solely of common stock would be most indicative of a simple capital structure. This is because common stock represents the basic ownership in a company and does not have any complex features or rights attached to it. It does not include preferred stock or convertible securities, which can have additional features that complicate the computation of earnings per share. Additionally, having earnings derived from one primary line of business does not necessarily indicate a simple capital structure, as the ownership composition could still be complex.

The correct answer is that the proceeds assumed to be received upon exercise of the options and warrants are used to calculate the number of common shares repurchased at the average market price when computing diluted earnings per share. This means that when determining the dilutive effect of stock options and warrants, the assumption is made that the proceeds from exercising these options and warrants will be used to repurchase common shares at the average market price. This is done to determine the potential impact on the diluted earnings per share calculation.

If a convertible bond issue is included in the diluted earnings per share computation, it means that the assumption is being made that the bonds have been converted into common stock. If the inclusion of the convertible bond issue has a dilutive effect on earnings per share, it means that the conversion of the bonds would result in a decrease in earnings per share. Therefore, the answer "Yes No" suggests that the convertible bond issue should be included in the computation, but its inclusion would have an antidilutive effect on earnings per share.

The $8,000 difference between the cost and sales price of the stock should be recorded as a deduction from additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein. This means that if there have been previous net gains from sales of the same class of stock included in the additional paid-in capital account, the $8,000 difference should be deducted from that account. However, if there have been no previous net gains from sales of the same class of stock included in the additional paid-in capital account, the $8,000 difference should be deducted from retained earnings.

A property dividend is when a company distributes shares of stock in another company to its stockholders. In this case, Houser Corporation distributed its 4,000,000 shares of stock in Baha Corporation to its stockholders. This means that Houser distributed ownership of Baha Corporation to its stockholders as a dividend. Therefore, the correct answer is property dividend.

When a stock dividend larger than 25% of the shares previously outstanding is declared and issued, it decreases the amount of retained earnings. This is because a stock dividend is paid out of retained earnings. However, it does not change the total stockholders' equity. The total stockholders' equity remains the same because the increase in common stock outstanding due to the stock dividend is offset by the decrease in retained earnings. Therefore, the correct answer is that it decreases retained earnings but does not change total stockholders' equity.

The book value per share of the common stock is unaffected by the payment of a previously declared cash dividend on the common stock because cash dividends do not affect the book value of a company. Book value per share is calculated by dividing the total shareholders' equity by the number of outstanding shares, and cash dividends are not considered as part of shareholders' equity. Therefore, the payment of a cash dividend does not impact the book value per share of the common stock.

The correct answer is to accumulate the printing costs and legal fees in a deferred charge account and amortize them over the life of the bonds. This is because these costs are directly related to the issuance of the bonds and should be allocated over the period in which the bonds are outstanding. By doing so, the expenses are matched with the revenue generated from the bonds, providing a more accurate representation of the financial performance.

When a business enterprise enters into off-balance-sheet financing, it aims to enhance the quality of its financial position and potentially make it easier to obtain credit at a lower cost. By keeping the debt off the balance sheet, the company can present a stronger financial picture to shareholders and potential creditors. This strategy allows the company to improve its financial ratios and make it appear more attractive to lenders. It is not an attempt to conceal the debt from shareholders, but rather a way to optimize the company's financial position and access credit more easily.

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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 premium on bonds payable. This is because the premium on bonds payable represents the amount received from investors that is above the face value of the bonds. In this case, the excess cash proceeds from the detachable stock warrants are considered additional premium on the bonds, which is recorded as a liability on the balance sheet.

Earnings per share information is required to be reported by all public companies because it is an important measure of a company's profitability and financial performance. However, it is not required to be reported by nonpublic companies because they are not required to disclose their financial information to the public. Therefore, the correct answer is b. Yes for public companies and No for nonpublic companies.

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the par value of the shares issued. Par value represents the minimum legal value assigned to each share of stock, and it does not reflect the actual value of the services received. The market value of the services received or the market value of the shares issued would be more appropriate measures for recording the transaction, as they reflect the fair value of the exchange. Therefore, the par value of the shares issued is the least suitable basis for recording the transaction.

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, the account that should be debited is "Treasury stock for the purchase price." This is because treasury stock represents shares of a company's own stock that has been repurchased, and the purchase price is recorded as a reduction in the company's equity. Since the cost method is used, the excess of the purchase price over the par value is not recorded separately in any other account.

Stock dividends do not reduce stockholders' equity because they involve the distribution of additional shares of stock to existing shareholders. This means that the total number of shares outstanding increases, but the proportionate ownership and value of each shareholder's stake remains the same. As a result, there is no impact on the overall equity of the company. Cash dividends, property dividends, and liquidating dividends, on the other hand, involve the distribution of assets or cash to shareholders, which directly reduces the company's equity.

When computing earnings per share, the equivalent number of shares of convertible preferred stock are added to the denominator. If the preferred stock is cumulative, it means that any unpaid dividends accumulate and must be paid before common stockholders receive dividends. Therefore, the amount that should be added to the numerator as an adjustment is the annual preferred dividend, as it represents the amount that needs to be paid to preferred stockholders before calculating earnings available to common stockholders.

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The acquisition of treasury shares by a company decreases total stockholders' equity. This is because treasury shares are considered to be issued shares that have been repurchased by the company. As a result, the company's ownership of its own stock increases, but the ownership of other shareholders decreases. This reduction in ownership leads to a decrease in total stockholders' equity.

The book value per share is calculated by dividing the total stockholders' equity by the number of common stock shares outstanding. This metric represents the value of each share of common stock based on the company's net assets. It is a measure of the company's intrinsic value and can be used to assess the financial health and performance of the company.

The acquisition of treasury stock refers to a company buying back its own shares from the open market. This action decreases the number of outstanding shares, which in turn reduces stockholders' equity. This decrease occurs because the company is essentially using its own assets to repurchase its shares, thereby reducing the amount of equity available to shareholders. However, the acquisition of treasury stock has no direct effect on earnings per share. Earnings per share is calculated by dividing the net income by the weighted average number of outstanding shares, and since the acquisition of treasury stock does not impact net income, it does not affect earnings per share.

Antidilutive securities should be ignored in all earnings per share calculations because their inclusion would not have a dilutive effect on the earnings per share. These securities are typically stock options or warrants that have an exercise price higher than the average market price of common stock, meaning they would not decrease the earnings per share if exercised. Therefore, including them in the calculations would not accurately reflect the potential dilution of earnings per share.

All of these statements are true. A property dividend is usually in the form of securities of other companies. It is also called a dividend in kind. The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.

The payout ratio is a financial metric that measures the proportion of earnings distributed to shareholders in the form of dividends. It indicates how much of the company's profits are being paid out to investors. To calculate the payout ratio, cash dividends (the amount of dividends paid out in cash) should be divided by net income less preferred dividends (the company's total earnings minus any dividends paid to preferred shareholders). This calculation provides a more accurate representation of the proportion of earnings being distributed to common shareholders.

When a company issues a common stock dividend to common stockholders, it should transfer an amount equal to the fair value of the shares issued from retained earnings to paid-in capital. This means that the company should record the value of the shares at their current market value. This ensures that the company accurately reflects the value of the shares issued and maintains transparency in its financial statements. The fair value of the shares is considered a more accurate measure than the book value, minimum legal requirements, or par value.

When a small common stock dividend is declared, it means that the company is distributing additional shares of its common stock to its shareholders. This distribution does not affect the total value of the shareholders' equity, as the value of the additional shares being distributed is relatively small. Therefore, there is no need to credit the Common Stock account, which represents the total value of the company's common stock. Instead, the entry should include a credit to Paid-in Capital in Excess of Par, which represents the amount received from shareholders in excess of the stock's par value, and a debit to Retained Earnings, which reduces the accumulated profits of the company.