F7 - Equity, EPS

Question 1

An entity authorized 500,000 shares of common stock. At January 1, Year 2, the entity had 110,000 shares of common stock issued and 100,000 shares of common stock outstanding. The entity had the following transactions in Year 2:
March 1
Issued 15,000 shares of common stock
June 1
Resold 2,500 shares of treasury stock
September 1
Completed a 2-for-1 common stock split
What is the total number of shares of common stock that the entity has outstanding at the end of Year 2?

Answer 1

100,000+15,000+2,500=17,500*2=235,000

When treasury stock is resold, the stock is regarded as outstanding because after the resale, the stock becomes stock held by shareholders other than the corporation itself. Prior to the stock split on September 1, the entity will have 117,500 shares of common stock outstanding, which is calculated as follows: 100,000 of common stock outstanding on January 1, plus the issuance of 15,000 shares of common stock on March 1, plus the resale of 2,500 of treasury shares on June 1. The stock split doubles the number of outstanding shares (117,500) to 235,000, which would be the number of shares outstanding at the end of Year 2.

Question 2

Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, Year 1,
Cyan’s retained earnings were $300,000. In March, Year 2, Cyan reacquired 5,000 shares of its common
stock at $20 per share. In June, Year 2, Cyan sold 1,000 of these shares to its corporate officers for $25 per
share. Cyan uses the cost method to record treasury stock. Net income for the year ended December 31,
Year 2, was $60,000. At December 31, Year 2, what amount should Cyan report as retained earnings?

Answer 2

$360,000 retained earnings at 12/31 /Year 2 ($300 + $60). Because all treasury stock
transactions were recorded under the “cost method,” and the resale of treasury stock was at a price that
exceeded its acquisition price, none of the treasury stock transactions affected retained earnings.

issuance:
Dr. cash 200,000
Cr. CS 100,000
Cr. APIC 100,000

buy back:
Dr. TS 100,000
Cr. cash 100,000

Re-issue at $25 (above cost of $20)
Dr. Cash 25,000
Cr. TS 20,000
Cr. APIC-TS 5,000

NI = 300,000+60,000

Since remeasurement happens at re-issue date, and it was issued above cost, there is a gain of 5,000 to APIC. If there was a loss, that exceeded the amount in APIC, reduction to RE would have to happen

Question 3

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into thirty shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma's basic earnings per share for the current year? 
A. $3.38
B. $7.36
C. $8.00
D. $7.55

Answer 3

B. 7.36
The requirement is to calculate basic earnings per share. Basic earnings per share is calculated by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding. In this case, earnings available to common shareholders is equal to net income ($200,000) minus preferred dividends $16,000 (8,000 × $20 × 10%). Therefore, this answer is correct because basic earnings per share is equal to $7.36 [($200,000 – $16,000) ÷ $25,000].

Question 4

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma’s basic earnings per share for the current year?

Answer 4

Preferred stock dividend
(8000X20X10%)= 16,000

int expense not paid on bonds
3000 bonds X $1000par X 9%= 270,000

net of tax
270000X (1-30%)=189,000

additional shares issued
3000 bonds X 30 shares = 90000 shares

(200,000-16,000+189,000) /(25,000+90,000)=$3.24

Question 5

Mio Corp. was the sole stockholder of Plasti Corp.

On September 30, Mio declared a property dividend of Plasti’s 2,000 outstanding shares of $1 par value common stock, distributable to Mio’s stockholders.
On that date, the book value of Plasti’s stock was $1.50 per share. Immediately after the distribution, the market value of Plasti’s stock was $4.50 per share.

What amount should Mio report in its financial statements as gain on disposal of the Plasti stock?

Answer 5

Gain $6,000

Adj from BV to FV
If BV < FV record a gain

Dr. RE 9000
Cr. Asset 3000
Cr. Gain 6000

Question 6

Deck Co. had 120,000 shares of common stock outstanding at January 1, Year 2. On July 1, Year 2, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate Year 2 earnings per share?

Answer 6

140,000 shares

120,000 X (6/12)=60,000
160,000 X (6/12)=80,000

or

120,000 X (12/12)=120,000
40,000 X (6/12)=20,000

Question 7

Toft Co. had 120,000 shares of common stock outstanding at January 1. On April 1, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible preferred stock on which a dividend of $5 per share was declared during the year. Net income for the year was $480,000. What should Toft report as earnings per share for the year?

Answer 7

$2.87

WACSO:
120,000X(3/12)=30,000
160,000X(9/12)=120,000
=150,000

Pref. dividend:
10,000X$5=$50,000

480,000-50,000/150,000=$2.87

Question 8

Wall Corp.’s employee stock purchase plan specifies the following:

• for every $1 withheld from employees’ wages for the purchase of Wall’s common stock, Wall contributes $2.
• the stock is purchased from Wall’s treasury stock at market price on the date of purchase

the following information pertains to the plan’s current year transactions:

• employee withholdings for the year: 350,000
• market value of 150,000 shares issued: 1,050,000
• carry amount of treasury stock issued: 900,000

before payroll taxes, what amount should Wall recognize as expense in the current year for the stock purchase plan?

Answer 8

700,000

350,000 withheld X $2 contribution = 700,000

liability for EE withholding 350,000
EE stock purchase expense 700,000
treasury stock 900,000
APIC 150,000

700,000 expense is recognized in the current year for the stock purchase plan, because the plan states that the company will donate $2 for every $1 withheld from employees’ wages. A total of 350,000 was withheld from employees wages and another 700,000 was contributed and expensed by the company because the stock is purchased from the treasury at market price on the date of purchase.

Question 9

Instead of the usual cash dividend, evie corp declared and distributed a property dividend from overstock merchandise. the excess of the merchandise’s carrying amount over its MV should be:

Answer 9

reported as a reduction in income before income from continuing operations.

Question 10

The following changes in Vel Corp.’s account balances occurred during the current year:

Increase Assets $ 89,000
Liabilities27,000
Capital stock 60,000
Additional paid-in capital 6,000

Except for a $13,000 dividend payment and the year’s earnings, there were no changes in retained earnings for the current year. What was Vel’s current year net income?

a. $13,000
b. $9,000
c. $4,000
d. $17,000

Answer 10

9,000

89-27=62 stockholders’ equity

equity 60+6=66

66-62=4
-13 dividend payment
(+9 net income)

Question 11

Baker began operations in current year

Assets:
Cash $192,000
Accounts receivable 82,000
>Total assets $274,000

Liabilities and stockholders' equity
Accounts payable $ 24,000
Common stock 200,000
Retained earnings 50,000
>Total liabilities and stockholders' equity $274,000

Baker’s net income for the current year was $78,000 and dividends of $28,000 were declared and paid.Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its statement of cash flows for the current year?

a. $20,000
b. $50,000
c. $192,000
d. $250,000

Answer 11

20,000

since began during CY, every account was at zero.
+82,000 increase in AR; subtract for CF since AR is IS now, cash later
+24,000 increase in AP; add for CF since AP is IS now, cash later

CF indirect method: begin w/ net income adjust to arrive at cash

78,000
(82,000)
+24,000
=20,000

Question 12

Gregory’s on Ormond, Inc. grants its president 2,000 stock options on January 1, Year 1 that give him rights to purchase shares of the company for $40 per share on December 31, Year 2. At the time the options were granted, the fair value of the options totaled $20,000. At December 31, Year 1 the company’s stock sold for $45 per share and at December 31, Year 2 the selling price of the stock was $55 per share. On December 31, Year 2, the president resigned from the The company and did not elect to exercise the options. In its Year 2 financial statements, Gregory’s on Ormond would recognize compensation expense relative to the options of:

Answer 12

10,000

The company would calculate compensation expense on the grant date and recognize this expense over the service period (matching principle). Compensation expense relative to stock options is recognized regardless of whether the option is exercised. Compensation expense is calculated as follows:
Total compensation expense $ 20,000
Years ÷ 2
Compensation in the second year $ 10,000

Question 13

Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker repurchased 20,000 shares of its common stock on the open market for $50.00 per share. At that date, the stock’s par value was $1.00 and the average issue price was $40.00 per share. Baker uses the cost method for treasury stock transactions. On December 1, Baker reissued the stock for $60.00 per share. What amount should Baker report as treasury stock gain at December 31?

a.	
$200,000
b.	
$0
c.	
$980,000
d.	
$400,000

Answer 13

$0

 Corporations are not permitted to report income statement gains and losses from treasury stock transactions. Instead, treasury stock "gains and losses" are reported as direct adjustments to stockholders' equity. Gains are recorded by crediting APIC - Treasury Stock, while losses are recorded by first reducing any existing APIC - Treasury Stock to $0, and then debiting any additional losses to Retained Earnings. Baker's treasury stock transactions would be recorded as follows:
10/1 - Repurchase of Treasury Stock
Dr. Treasury stock	$  1,000,000	
Cr. Cash		$  1,000,000
12/1 - Resell Treasury Stock
Dr cash	$  1,200,000	
cr. Treasury stock		$  1,000,000
cr. APIC - Treasury stock		200,000

Question 14

IN a compensatory stock option plan for which the grant and exercise dates are different, the stock options outstanding account should be reduced at the:

Answer 14

exercise date

Question 15

a company granted its employees 100,000 stock options on January 1, Year 1. The stock options had a grant date fair value of $15 per option and a three year vesting period. On January 1, Year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company didn’t grant any additional options during year 2, what amount of share based compensation expense should the company report for the year ended 12/31/Year 2?

Answer 15

100,000*$15=1,500,000

1,500,000 / 3 years = 500,000 per year

stock options are valued at the fair value of the options issued. The value is determined based on the fair value on the grant date. This amount is recorded as compensation expense over the service period, which is the time between the grand date and the vesting date

Question 16

A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
A. Cumulative 8%, $50 par preferred stock.
B. 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.
C. 6%, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.
D. 10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.

Answer 16

B.

7% X 1000 = $70
$70 X (1-.30)=49

NI=129
129+49/100+40=$1.27

Question 17

Ute Co. had the following capital structure during Year 1 and Year 2:
Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding
$250,000
Common stock, $5 par, 200,000 shares issued and outstanding
1,000,000
Ute reported net income of $500,000 for the year ended December 31, Year 2. Ute paid no preferred dividends during Year 1 and paid $16,000 in preferred dividends during Year 2. In its December 31, Year 2, income statement, what amount should Ute report as basic earnings per share?

Answer 17

Net income
500,000

Less: cumulative preferred Stock dividend “requirement” ($10 par × 25,000 shares × 4%)

500,000 - 10,000=490,000

Divide by average common shares O/S

÷ 200,000

Basic earnings per common share

2.45

Question 18

On April 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
Common stock, no par, $1 stated value, 20,000 shares originally issued for $30
per share.
Preferred stock, $10 par value, 6,000 shares originally issued for $50 per share.
Hyde’s April 1 statement of stockholders’ equity should report:

CS: ?
PS: ?
APIC: ?

a.	
$20,000
$300,000
$580,000
b.	
$600,000
$300,000
$0
c.	
$20,000
$60,000
$820,000
d.	
$600,000
$60,000
$240,000

Answer 18

C.

Common and preferred stock are recorded at the number of shares issued times stated or par value. Any excess is paid-in capital.

Debit (Dr) Credit (Cr)
Cash 600,000
Common stock 20,000
Paid-in capital 580,000

Cash 300,000
Preferred stock 60,000
Paid-in capital 240,000

Question 19

On January 1, year 1, the board of directors of a corporation granted 10,000 stock options to the CEO. Each option permits the purchase of one share of stock at $25 per share, the current market price of the stock. The options are exercisable on December 31, year 4, as long as the CEO is still employed. The options expire on December 31, year 5. The grant date fair value of each option is $5. The corporation must recognize:
a) $50,000 of compensation expense when the options are exercised.

b) $50,000 of compensation expense in year 1.
c) $12,500 of compensation expense per year for four years.
d) $10,000 of compensation expense per year for five years.

Answer 19

$12,500 of compensation expense per year for four years.

Since it is only the CEO receiving the stock options, this is an example of compensatory stock options which must be valued at the fair value of the options issued. 10,000 options are issued with a fair value at the grant date of $5 per option for a total value of $50,000. This compensation expense, calculated on the grant date, will be recorded over the service period which is the time between the grant date and the exercise date, or four full years. $50,000 over 4 years results in $12,500 of compensation expense per year.