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Acct 3021 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

FASB requires stock options, convertible bonds, preferred stock, to be reported as a _____.

A

liability

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2
Q

Convertible Bonds

A

can be changed into other corporate securities during specified period of time after issuance.

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3
Q

What are the two benefits of issuing convertible bonds?

A
  1. To raise equity capital without giving up more ownership control
  2. To obtain debt financing at cheaper rates
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4
Q

The method for recording Convertible Bonds at the date of issue is similar to the method used for ________.

A

straight debt issue

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5
Q

What value method is used to record the conversion of bonds into other securities?

A

book value method

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6
Q

Induced Conversions

A

additional consideration, called ‘sweetener’, expensed in current period to induce conversion

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7
Q

Retirement of Convertible Debt

A
  1. No proceeds attributed to conversion feature, no credit to paid-in capital acct
  2. Recognize gain/loss in current income
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8
Q

Convertible bonds are considered ______, whereas convertible preferred’s are considered part of _________.

A

liabilities, stockholders’ equity

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9
Q

Do companies recognize gain/loss when stockholders exercise convertible preferred stock?

A

No

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10
Q

Stock Warrants

A

certificates entitling holder to acquire shares at a certain price within period

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11
Q

What type of stock do Stock Warrants become?

A

Common stock (dilutive effect)

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12
Q

Existing stockholders have a preemptive right to __________.

A

Purchase common stock first upon additional common stock

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13
Q

Detachable Stock Warrant

A

separated from the stock and traded as separate security

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14
Q

What are the two methods for proceed allocation for a detachable stock warrant?

A

Proportional method and incremental method

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15
Q

Stock Right

A

privilege to purchase newly issued shares in proportion to their holdings, prevents dilution of voting right

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16
Q

What type of journal entry is made when rights are issued to stockholders?

A

memo

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17
Q

Stock compensation is what % of total compensation?

A

59%

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18
Q

Grant Date

A

date you receive the option

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19
Q

Intrinsic-Value Method

A

difference between market price and exercise price

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20
Q

Recognize compensation expense when?

A

period that the employees performed the service

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21
Q

What entry is made on the grant date for stock compensation under FV method?

A

no entry

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22
Q

If the amount of the Employee Stock Purchase Plan discount is __% or less, no compensation needs to be recorded.

A

5

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23
Q

Companies report earnings per share only for _______.

A

common stock

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24
Q

EPS Formula =

A

(Net Income - Preferred Divs) / Weighted-Avg Common Shares Outstanding

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25
Q

Are dividends in arrears included in EPS calculation?

A

No

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26
Q

When computing weighted average shares outstanding, assume the additional shares outstanding have been outstanding since _________.

A

the beginning of the year

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27
Q

What do stock dividends or stock splits do to the net assets of a company?

A

Nothing

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28
Q

What does a stock issue do to the net assets of a company?

A

Increase cash

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29
Q

A stock split or dividend does not change the _______.

A

shareholders total investment

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30
Q

Income available to common stockholders

A

Net Income From Continuing Operations - Preferred Dividends

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31
Q

Diluted EPS Formula =

A

EPS - Impact of Convertibles - Impact of Options, Warrants and Other Dilutive Securities

32
Q

Antidiultive Securities

A

Upon conversion/exercise increases EPS

33
Q

Likely occur vs worst-case scenario

A

Basic EPS vs Dilutive EPS

34
Q

If-Converted Method

A

To measure dilutive effects of potential conversions. Assume conversion at beginning of period and elimination of related interest.

35
Q

What does the If-Converted method do to EPS?

A

Additional shares increase the denominator (WAvgSO). Elimination of interest expense increases the numerator (NI)

36
Q

Diluted EPS

A

includes stock options and warrants outstanding

37
Q

Treasury-Stock Method

A

Method to include options and warrants and equivalents in EPS calculations

38
Q

Treasury stock method assumes that options/warrants are exercised _______.

A

at the beginning of the year

39
Q

If the exercise price of the option/warrant is ____ than market price, dilution occurs.

A

lower

40
Q

If the exercise price of the option/warrant is ____ than the market price of the stock reduces common shares/

A

higher

41
Q

If the ‘Passage of Time’ condition or ‘Certain Earnings’ condition is met, what happens to contingent shares in calculating DEPS?

A

They are included in the diluted EPS calculation

42
Q

Can antidilutive securities be used to offset dilutive securities?

A

No

43
Q

_____ revenue from a debt investment and _____ revenue from an equity investment.

A

Interest, dividend

44
Q

Debt - No plans to sell
Debt - Plans to sell
Equity - Exercise control
Equity - Plans to sell

A

Valuation: Amortized cost, FV, Equity Method, FV

45
Q

What are the 3 categories for debt investments?

A

Held-to-maturity, trading, and available-for-sale

46
Q

Valuation:
Held-to-Maturity
Trading
Available-for-Sale

A

Amortized Cost, FV, FV

47
Q

Only _____ securities can be classified as HTM.

A

debt

48
Q

What type of debt security doesn’t increase volatility of reported earnings/capital?

A

HTM

49
Q

Available-for-sale securities are recorded at ____ and records _______ in a holding account.

A

FV, unrealized gains/losses

50
Q

Are unrealized gains and losses on debt securities included in net income?

A

No

51
Q

Companies report trading securities at ___, with unrealized holding gains/losses reported as part of ______.

A

FV, net income

52
Q

Debit or credit to the “FV Adjustment” account for a gain?

A

Debit

53
Q

Realized gain on trading securities is recorded in _______.

A

other revenues/expenses and gains/losses

54
Q

Equity securities example

A

common, preferred, or other capital stock

55
Q

What % of ownership classifies Passive Interest, Significant Influence, and Controlling Interest?

A

Less than 20% 20-50%, more than 50%

56
Q

What type of valuation method for Passive interest, significant influence, and controlling interest?

A

FV method, equity method, consolidated statements

57
Q

Do equity securities have a maturity date?

A

No

58
Q

Passive interest: Investor recognizes net income only when the investee _________.

A

declares cash dividends

59
Q

Significant Influence: the investor originally records investment at ____, but adjusts value based on the proportionate share of _______.

A

cost, earnings/losses

60
Q

Significant Influence Equity Method only recognizes income from ____.

A

dividends

61
Q

What is a parent company?

A

A company that owns 50% or more of the subsidiary

62
Q

Companies with controlling interest prepare _________.

A

consolidated financial statements

63
Q

To recognize impairment, credit “________”.

A

allowance for doubtful accounts

64
Q

To completely write off a receivabe after impairment, debit “_______” and credit “_______”.

A

allowance for doubtful accounts, accounts receivable

65
Q

Does impairment change the cost basis of an HTM debt investment?

A

Yes

66
Q

AFS Debt Investment: What is the limit for credit loss?

A

Amortized cost - FV

67
Q

Equity Investment Impairment Loss: If FV is less than cost, the decline in value is reported thru ______.

A

net income

68
Q

When are two goods considered one performance obligation?

A

when they are interdependent

69
Q

Expected Value:

A

probability-weighted, many similar contracts with customers, discrete outcomes/probabilities

70
Q

Most Likely Amount:

A

most likely consideration in a range of outcomes, appropriate if the contract has only two possible outcomes

71
Q

Companies recognize non-cash consideration by valuing it as the ____ of what was received.

A

FV

72
Q

What are indicators that the customer has obtained control of an asset/service?

A

right to payment, legal title, physical possession, risk/reward, accepted

73
Q

GAAP requires issuer of convertible debt to record ______.

A

only the liability

74
Q

Convertible bonds are usually converted into _______.

A

Common stock

75
Q

When convertible debt is retired, ________.

A

either gain or loss on retirement is recognized

76
Q

The issuance of warrants does NOT arise in what situation?

A

To give bondholders preemptive right to purchase additional stock.

77
Q

Detachable stock warrants outstanding should be classified as ______.

A

paid-in capital

Acct 3021 (2 decks)

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