Far module 1

Question 1

Jones Company purchased 1,000 shares of ABC common stock for $190,000 on January 1, Year 1. At quarter end, the value of the investment had declined to $182,000. Jones should reflect the stock’s decline in value by:

Answer 1

Recognizing an unrealized loss e of 8,000 or from income from continuing operations in its first quarter income statement

Question 2

Losses on securities are not realized until

Answer 2

The security has been sold

Question 3

A European company has made a purchase, which it intends to pay for in Japanese yen. Which of the following exchange rate movements will give rise to a loss for the company?

Answer 3

The yen appreciating versus the euro this means that more euros are needed to buy one yen
also the euro depreciating versus the yen and also when more euros are needed to buy one yen

Question 4

A segment of Ace Inc. was discontinued during Year 1. Ace’s loss from discontinued operations should not:

Answer 4

Choice “B” is correct. Ace’s loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1. All Year 1 operating losses should be included.
Choice “A” is incorrect. Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations.

Choice “C” is incorrect. Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations.

Choice “D” is incorrect. Ace’s loss on discontinued operations should include operating losses of the current period up to the date the decision to dispose of the segment was made and also after that date. All Year 1 operating losses should be included.

Question 5

Ignoring taxes, what amount would Sag report as accumulated other comprehensive income on its December 31 balance sheet under U.S. GAAP?

Projected benefit obligation

5,000,000

Unrecognized prior service cost

600,000

Current-year amortization of pension gains

250,000

Unrecognized pension gains

1,400,000

Current-year return on plan assets

450,000

Answer 5

Explanation
Choice “B” is correct. Under U.S. GAAP, unrecognized prior service cost and unrecognized net gains or losses must be reported in accumulated other comprehensive income, net of tax, until recognized as part of pension expense through amortization. Prior service cost increases pension expense and is recorded as a debit to OCI. Net gains decrease pension expense and are recorded as a credit to OCI.

Accumulated OCI is reported on an after-tax basis. The amount in accumulated OCI is as follows:

Unrecognized prior service cost

(600,000)

Unrecognized pension gains

1,400,000

800,000

Choice “A” is incorrect. The current-year amortization of pension gains and the return on plan assets for the current year are part of current-year pension expense and are not included in the calculation of accumulated other comprehensive income.

Choice “C” is incorrect. The unrecognized pension gains at the end of the year, not the current-year amortization, is included in accumulated other comprehensive income.

Choice “D” is incorrect. The unrecognized prior service cost and unrecognized pension gains are netted against each other, not added, since the unrecognized prior service cost represents a future addition to pension expense and the unrecognized pension gain represents a future offset to pension expense

Question 6

Ball Corp. had the following foreign currency transactions during Year 1:

Merchandise was purchased from a foreign supplier on January 20, Year 1, for the U.S. dollar equivalent of $90,000. The invoice was paid on March 20, Year 1, at the U.S. dollar equivalent of $96,000.
On July 1, Year 1, Ball borrowed the U.S. dollar equivalent of $500,000 evidenced by a note that was payable in the lender’s local currency on July 1, Year 3. On December 31, Year 1, the U.S. dollar equivalents of the principal amount and accrued interest were $520,000 and $26,000, respectively. Interest on the note is 10% per annum.
In Ball’s Year 1 income statement, what amount should be included as foreign exchange loss?

Answer 6

Foreign exchange
gain or loss
Merchandise purchased from a foreign supplier on 1/20/Year 1
for $90,000 was paid on 3/20/Year 1 with $96,000

$6,000

Loss

Loan made on 7/1/Year 1 for $500,000 payable on 7/1/Year 3:

Principal U.S. $ equivalent 7/1/Year 1

$500,000

Principal U.S. $ equivalent 12/31/Year 1

$520,000

Foreign exchange loss on principal

$20,000

Loss

Accrued interest for six months

U.S. $ equivalent 7/1/Year 1 ($500,000 x 10% x 1/2 year)

$25,000

U.S. $ equivalent 12/31/Year 1

$26,000

Foreign exchange loss

$1,000

Loss

Total foreign exchange loss for Year 1

Question 7

Acela Co. reports $340,000 in accumulated other comprehensive income in Year 1. In Year 2, the company recorded the following:

Foreign currency translation loss:

30,000

Unrealized gain on available-for-sale debt security:

10,000

Unrealized loss on available-for-sale equity security:

10,000

Amortization of actuarial pension loss:

15,000

Actual return on pension plan assets:

65,000

Acela Co.’s Year 2 balance in accumulated other comprehensive income will be:

Answer 7

Choice “B” is correct. The beginning balance of $340,000 in accumulated other comprehensive income (AOCI) will be decreased by the $30,000 foreign currency translation loss, and increased by the unrealized gain on the available-for-sale debt security of $10,000 and the amortization of the actuarial loss on pension plan assets of $15,000. The balance in Year 2 will therefore be: $340,000 − $30,000 + $10,000 + $15,000 = $335,000. The actual return on pension plan assets is not specifically a part of AOCI.

Question 8

Badel Co., a U.S. company, enters into a contract in which a company in Japan agrees to buy electronics products from Badel, payable in yen after year-end. If the yen depreciates versus the U.S. dollar, Badel will:

Answer 8

Choice “C” is correct. Badel is a U.S. company set to receive payment in yen. Because the yen has depreciated versus the U.S. dollar, this will cause a loss for Badel that will go on its income statement at year-end.

Question 9

Which of the following statements is correct regarding the reporting of comprehensive income?

A.	 The statement of comprehensive income can be shown as part of the footnotes only or as a separate financial statement.

B.	 Other comprehensive income per share is presented in a statement of comprehensive income.

C.	 Comprehensive income may be presented in a single financial statement that presents both net income and comprehensive income.

D.	 All companies must present a statement of comprehensive income.

Answer 9

Explanation
Choice “C” is correct. Comprehensive income can be shown in one statement of comprehensive income which displays other comprehensive income items individually, and in total, below the net income amount, and totals them for comprehensive income. At the company’s discretion, comprehensive income can also be shown as a separate statement that follows the income statement.

Choice “A” is incorrect. Comprehensive income and its components are presented with the same prominence as the other financial statements that constitute a full set of financial statements. Comprehensive income cannot be shown as in the footnotes only.

Choice “B” is incorrect. Comprehensive income is not reported on a per share basis.

Choice “D” is incorrect. The requirement to present a statement of comprehensive income does not apply to a company that has no items of other comprehensive income.

Question 10

Noshima, a Japanese company, exports goods to Jacobs, a U.S. company. If the transaction is to be settled in yen, which of the following statements is correct?

A.	 Noshima will book a gain if the U.S. dollar appreciates versus the Japanese yen

B.	 Jacobs will book a gain if the Japanese yen appreciates versus the U.S. dollar.

C.	 Noshima will book a gain if the Japanese yen depreciates versus the U.S. dollar.

D.	 Jacobs will book a gain if the U.S. dollar appreciates versus the Japanese yen.

Answer 10

Choice “D” is correct. If the U.S. dollar appreciates versus the Japanese yen, this implies that it will take fewer dollars to purchase one yen. As a result, when the transaction is ultimately settled, Jacobs will need fewer dollars to convert into yen to pay Noshima. This will therefore result in a gain.

Choice “A” is incorrect. An appreciation of the U.S. dollar is the same as a depreciation of the Japanese yen, which will result in a loss to Noshima.

Choice “B” is incorrect. The Japanese yen appreciating versus the U.S. dollar is the same as the U.S. dollar depreciating versus the Japanese yen. And if the dollar depreciates, this implies that Jacobs will need more dollars to convert into yen, which will result in the company booking a loss.

Choice “C” is incorrect. The Japanese yen depreciating versus the U.S. dollar is the same thing as the dollar appreciating versus the yen. If this happens, Jacobs will book a gain and Noshima will book a loss.

Question 11

On October 1 of the current year, a U.S. company sold merchandise on account to a British company for 2,000 pounds (exchange rate, 1 pound = $1.43). At the company’s December 31 fiscal year end, the exchange rate was 1 pound = $1.45. The exchange rate was 1 pound = $1.50 on collection in January of the subsequent year. What amount would the company recognize as a gain(loss) from foreign currency transactions when the receivable is collected?

A.	 $0

B.	 ($140)

C.	 $140

D.	 $100

Question 12

Question
Which of the following items is not classified as “other comprehensive income?”

A.	 Foreign currency translation adjustments.

B.	 Gains from extinguishment of debt.

C.	 Minimum pension liability equity adjustment for a defined-benefit pension plan.

D.	 Unrealized gains for the year on available-for-sale debt securities.

Answer 12

Choice “B” is correct. Gains from extinguishment of debt are a component of net income, not a component of other comprehensive income. Comprehensive income is the sum of net income plus other comprehensive income. Other comprehensive income include changes in the funded status of a pension plan, unrealized gains and losses on available-for-sale debt securities and derivative instruments designated as cash flow hedges, foreign currency items, and instrument-specific credit risk.

Choice “A” is incorrect. Foreign currency translation adjustments are a component of other comprehensive income.

Choice “C” is incorrect. The minimum pension liability adjustment is no longer required under U.S. GAAP.

Choice “D” is incorrect. Unrealized gains (and losses) on available-for-sale debt securities are included in other comprehensive income.

Question 13

Question
Fay Corp. had a realized foreign exchange loss of $15,000 for the year ended December 31, Year 1, and must also determine whether the following items will require year-end adjustment:

Fay had an $8,000 loss resulting from the translation of the accounts of its wholly owned foreign subsidiary for the year ended December 31, Year 1.
Fay had an account payable to an unrelated foreign supplier payable in the supplier’s local currency. The U.S. dollar equivalent of the payable was $64,000 on the October 31, Year 1 invoice date, and it was $60,000 on December 31, Year 1. The invoice is payable on January 30, Year 2.
In Fay’s Year 1 consolidated income statement, what amount should be included as foreign exchange loss?

Answer 13

Explanation
Choice “B” is correct. $11,000 foreign exchange loss.

Foreign exchange loss before adjustment

$15,000

Account payable:

U.S. Equivalent at invoice date

$64,000

U.S. Equivalent at payment date

60,000

Payable exchange gain

4,000

Foreign exchange loss included in
consolidated income statement

$11,000

Choice “A” is incorrect, per explanation above.

Choice “C” is incorrect. The $4,000 gain on the invoice transaction must be included.

Choice “D” is incorrect. The $8,000 translation loss from its wholly owned foreign subsidiary is not included in net income as it does not impact cash flows. It would be included in other comprehensive income in shareholders’ equity.

Question 14

Preferred shaares are not

Answer 14

included in eps calculations

Question 15

Forms and info

Answer 15

Choice “A” is correct. Form 10-Q is the quarterly report filed by U.S. registered companies that contains unaudited financial statements prepared using U.S. GAAP, interim period MD&A, and certain disclosures.

Choice “B” is incorrect. Form 10-K is the annual report filed by U.S. registered companies that contains audited financial statements prepared using U.S. GAAP, MD&A, and financial disclosures.

Choice “C” is incorrect. A 14A proxy statement is a statement required of a firm when soliciting shareholder votes. This statement is filed in advance of the annual meeting and is filed with the U.S. Securities and Exchange Commission.

Choice “D” is incorrect. Form S-1 is the form used for the registration under the Securities Act of 1933 of securities of all registrants.

Question 16

For interim financial reporting, the computation of a company’s second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated:

Foreign tax rates
Available tax
planning alternatives
A.
Yes

No

B.	 No

Yes

C.	 Yes

Yes

D.	 No

No

Question 17

The senior accountant for Carlton Co., a public company with a complex capital structure, has just finished preparing Carlton’s income statement for the current fiscal year. While reviewing the income statement, Carlton’s finance director noticed that the earnings per share data has been omitted. What changes will have to be made to Carlton’s income statement as a result of the omission of the earnings per share data?

A.	 No changes will have to be made to Carlton's income statement. The income statement is complete without the earnings per share data.

B.	 Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's net income for the past two years was greater than $5,000,000.

C.	 Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's market capitalization is greater than $5,000,000.

D.	 Carlton's income statement will have to be revised to include the earnings per share data.

Answer 17

Choice “D” is correct. All public entities must present earnings per share on the face of the income statement. In a simple capital structure, basic EPS for income from continuing operations and net income are presented. In a complex capital structure, basic and diluted EPS must be presented for income from continuing operations and net income.

Question 18

A U.S. public company with a worldwide public float of $800 million at the end of the second quarter of the fiscal year is required to file its annual report with the U.S. SEC on:

Answer 18

Choice “A” is correct. A large accelerated filer is defined by the SEC as an issuer with a worldwide market value of outstanding common equity held by nonaffiliates of $700 million or more as of the last business day of the issuer’s most recently completed second fiscal quarter. Large accelerated filers are required to file Form 10-K (annual report) within 60 days after the end of the fiscal year.

Choice “B” is incorrect. The 10-Q is the quarterly report, whereas the questions asks for the annual report.

Choice “C” is incorrect. The 10-Q is the quarterly report, whereas the questions asks for the annual report.

Choice “D” is incorrect. The filing deadline for accelerated filers is 75 days after the end of the fiscal year. Based on the public float value of the company exceeding $700 million, the company qualifies as a large accelerated filer and, therefore, must file the annual report within 60 days of the end of the fiscal year.

Question 19

A company is an accelerated filer that is required to file Form 10-K with the United States Securities and Exchange Commission (SEC). What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?

A.	 90 days.

B.	 120 days.

C.	 75 days.

D.	 60 days.

Answer 19

Choice “C” is correct. In 2002, the SEC approved a deadline of 75 days for Form 10-K “accelerated filers.” An accelerated filer is an issuer:

with a public float of greater than or equal to $75 million;
subject to the Securities Exchange Act’s reporting requirements for greater than or equal to 12 months;
that previously filed at least one report;
which is not eligible to file quarterly and annual reports on Forms 10-QSB and 10-KSB.
Smaller reporting companies, which are entities with annual revenues of less than $100 million, are excluded from the definition of large accelerated filers or accelerated filers.

Choice “D” is incorrect. This is the correct filing period for “large accelerated filers” (those with floats over $700 million).

Choice “A” is incorrect. This is the time period for non-accelerated filers.

Choice “B” is incorrect. This answer is not applicable.

Question 20

Which one of the following is not considered contingent shares for purposes of computing EPS?

A.	 Shares issuable upon achieving a specific net income target.

B.	 Shares issuable upon exercise of a stock option.

C.	 Shares issuable upon the passage of a specific period of time.

D.	 Shares issuable upon the issuance of a patent.

Answer 20

Choice “B” is correct. Shares issuable upon the exercise of a stock option are not considered contingent shares as the option holder is required to pay the strike price to exercise the options.

Choices “A”, “C”, and “D” are incorrect. These shares are contingent shares as they are issuable for no cash consideration after the occurrence of the specified condition.

Question 21

The definition of a smaller reporting company with respect to market value, as established by the U.S. Securities and Exchange Commission, includes companies with less than exactly what amount in public equity float?

Answer 21

Choice “D” is correct. As defined by the SEC, a large accelerated filer has worldwide market value of outstanding common equity held by nonaffiliates of $700 million or more, and an accelerated filer has worldwide market value of $75 million or more, but less than $700 million. Therefore, a smaller reporting company has worldwide market value of outstanding common equity held by nonaffiliates of less than $75 million. Entities with annual revenues of less than $100 million are also considered smaller reporting companies and are excluded from the definition of large accelerated filers or accelerated filers.

Choice “A” is incorrect. $150 million in public equity float would qualify the company as an accelerated filer.

Choice “B” is incorrect. $125 million in public equity float would qualify the company as an accelerated filer.

Choice “C” is incorrect. $100 million in public equity float would qualify the company as an accelerated filer.

Question 22

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?

A.	 $2.50

B.	 $2.42

C.	 $2.48

D.	 $2.45

Answer 22

Explanation
SkillBuilder Video
Choice “D” is correct. $2.45 earnings per share.

Year 1 Year 2
Net income

?

500,000

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

(10,000)

(10,000)

Income available to common shares

490,000

Divide by average common shares O/S

÷ 200,000

Basic earnings per common share

2.45

Note: Because the preferred stock dividends are cumulative, when they are declared or paid is not relevant.

Choice “A” is incorrect. This amount is equal to net income divided by the average common shares outstanding. When calculating basic earnings per share, preferred dividends accumulated during the period on cumulative preferred stock or preferred dividends declared during the period on noncumulative preferred stock must be subtracted from net income to calculate the income available to common shareholders, which is then divided by the average common shares outstanding.

Choice “B” is incorrect. This answer is calculated by incorrectly subtracting the $16,000 preferred dividend paid in Year 2. When preferred stock is cumulative, the dividend accumulated during the period must be subtracted to calculate basic earnings per share.

Choice “C” is incorrect. This amount is calculated by incorrectly subtracting preferred dividends of $4,000. This amount is not supported by the question facts.

Question 23

A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period?

Answer 23

Choice “C” is correct. Form 10-Q is a quarterly report filed within 40 days for large corporations and 45 days for small corporations after the end of the first three quarters of each fiscal year. It must contain reviews of interim financial information by an independent CPA.

Choice “A” is incorrect. Form 10-Q is due 45 days after the end of the quarter for small corporations.

Choice “B” is incorrect. Form 10-K, an annual report, is due 60 days after the end of the fiscal year for large corporations.

Choice “D” is incorrect. There is no 30 day requirement. Form 10-Q is due 40 days after the end of the quarter for large corporations.

Question 24

On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third quarter interim financial statements for the three months ended September 30?

A.	 $0

B.	 $15,000

C.	 $95,000

D.	 $75,000

Answer 24

Choice “C” is correct. For interim reporting purposes, costs that benefit multiple periods should be allocated equally to those periods. The $60,000 in property taxes will benefit the entire calendar year and therefore must be allocated equally to each calendar quarter:

$60,000 / 4 quarters = $15,000 per quarter

The $240,000 in equipment repairs will benefit the company from April - December and therefore should be allocated equally to each the three quarters contained in that period:

$240,000 / 3 quarters = $80,000 per quarter

Therefore, the total of these expenses to be recognized in the quarter ended September 30 is $95,000 ($15,000 allocated property taxes + $80,000 allocated equipment repairs).

Choice “A” is incorrect. This answer choice does not incorporate the $15,000 in allocated property taxes per quarter or the $80,000 in equipment repairs allocated to the three quarters between April and December.

Choice “B” is incorrect. This answer choice does not account for the allocated equipment repair costs.

Question 25

The following information is relevant to the computation of Chan Co.’s earnings per share to be disclosed on Chan’s income statement for the year ending December 31:

Net income for 2002 is $600,000.
$5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount which is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is convertible into 20 shares of Chan’s common stock.
Chan’s corporate income tax rate is 25%.
Chan has no preferred stock outstanding, and no other convertible securities. What amount should be used as the numerator in the fraction used to compute Chan’s diluted earnings per share assuming that the bonds are dilutive securities?

A.	 $247,500

B.	 $1,070,000

C.	 $130,000

D.	 $952,500

Answer 25

Choice “D” is correct. The numerator in the diluted EPS computation is equal to income available to common shareholders plus the after-tax interest expense that would not have been incurred if the bonds had been converted. Note that the company is using straight-line amortization rather than effective interest amortization. Under straight-line amortization, interest expense of $470,000 is reported each period. The interest expense is equal to the interest payment of $450,000 ($5,000,000 face x 9% stated rate) plus the discount amortization of $20,000. Therefore, the numerator is calculated as:

Income available to common shareholders + Interest of dilutive securities

= $600,000 + [$470,000 x (1 - 25%)] = $600,000 + $352,500 = $952,500

Choice “A” is incorrect. This answer choice subtracts (rather than adds) the interest from the dilutive securities.

Choice “B” is incorrect. This choice does not account for the tax impact of the interest from dilutive securities.

Choice “C” is incorrect. This answer choice subtracts the interest from the dilutive securities, without accounting for the tax impact.

Question 26

Anson Company had 8,000,000 shares of common stock outstanding on December 31, Year 11. An additional 1,200,000 shares of common stock were issued on April 1, Year 12 and 1,000,000 more on July 1, Year 12. On October 1, Year 12, Anson issued 50,000 $1,000 face value 4% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in Year 12. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively in Year 12?

A.	 8,000,000 and 8,000,000

B.	 9,400,000 and 9,400,000

C.	 7,500,000 and 8,500,000

D.	 9,400,000 and 9,650,000

Question 27

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.	 Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.

B.	 Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.

C.	 Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.

D.	 Cumulative 8%, $50 par preferred stock.

Answer 27

Choice “C” is correct. A dilutive security will produce an earnings per share number below basic earnings per share. The formula for basic earnings per share is income available to common shareholders divided by the weighted average number of common shares outstanding. Basic earnings per share is $1.29, and a dilutive security will result in a lower earnings per share number. If the seven percent convertible bonds are converted, the company will save $49 on each bond ($1,000 x .07 x (1 - .30)), but 40 new shares of stock will be issued. This equates to $1.225 per 1 new share, which is a lower ratio than $1.29 per share. So these securities will be dilutive.

Choice “A” is incorrect. If the ten percent convertible bonds are converted, the company will save $70 on each bond ($1,000 x .10 x (1 - .30)) and 20 new shares of stock will be issued. This equates to $3.50 per 1 new share, which is a higher ratio than $1.29 per share. So these securities will be anti-dilutive.

Choice “B” is incorrect. If the convertible preferred stock is converted, the company’s earnings per share will increase in the numerator by the $6 dividend that will no longer be paid, while the denominator will increase by 4 for the new shares of common stock issued. That equates to $1.50 per share, which is higher than $1.29.

Choice “D” is incorrect. There is no indication given that the shares are convertible, so they will not be dilutive.

Question 27

45

MCQ-00243
Application
On June 30, Mill Corp. incurred a $100,000 net loss from disposal of a component of a business. Also, on June 30, Mill paid $40,000 for property taxes assessed for the calendar year. What amount of the foregoing items should be included in the determination of Mill’s net income or loss for the six-month interim period ended June 30?

A.	 $90,000

B.	 $140,000

C.	 $120,000

D.	 $70,000

Answer 27

Choice “C” is correct. $120,000 expense included in the determination of net income or loss for the six-month interim period ended June 30.

Rules:

The net loss on disposal of a component is recorded in the interim period incurred

100,000

Property taxes should be allocated over the periods ($40,000 ÷ 2)

20,000

Expenses for six-month interim period

120,000

Question 27

Simpson Corporation computed its diluted earnings per share for the current year ended September 30. The company had 200,000 shares outstanding at the beginning of the year, issued 60,000 shares at April 1, and reacquired 2,000 shares to be held in its treasury on July 1. The company also had 2,000 options outstanding exercisable at $40 per share. The average market price of Simpson’s shares during the year was $50. The common stock equivalents added to the company’s weighted average shares outstanding used for basic earnings per share was computed using the treasury stock method. How many additional shares would Simpson include in its diluted earnings per share calculation?

A.	 0

B.	 400

C.	 1,200

D.	 1,600

Answer 27

Choice “B” is correct. The treasury stock method presumes that option proceeds can be used to reacquire shares on the open market and that any option requirement will be satisfied by the issuance of new shares to be held in the treasury. Treasury shares themselves do not have an impact on the calculation. Compute the dilutive effect of options using the following formula:

Image d94c0b9c54578a1de8867284d7b34448
Choices “A”, “C”, and “D” are incorrect, per the calculation and discussion above.

Question 28

ABC Co. is a public company that is required to file financial reports with the United States Securities and Exchange Commission (SEC). ABC acquired a significant related business, Bauer Co., through the registration and issuance of additional shares of common stock to the former stockholders of Bauer. Which of the following forms should ABC file with the SEC as a result of the acquisition of Bauer?

A.	 Form 8-K

B.	 Form 10-K

C.	 Form 10-Q

D.	 Form S-1

Answer 28

Choice “A” is correct. Form 8-K is used for major corporate events, such as acquisitions.

Choice “B” is incorrect. Form 10-K is the annual financial report. Although it is likely that this acquisition will be mentioned in the 10-K, the 8-K is specifically used to report an acquisition.

Choice “C” is incorrect. Form 10-Q is the quarterly financial report.

Choice “D” is incorrect. Form S-1 (the registration statement) is the initial registration form required by the SEC for public companies that want to issue new securities.

Question 29

Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

A.	 The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should not be included in the calculation.

B.	 The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation.

C.	 The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.

D.	 Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

Answer 29

Choice “C” is correct. Income available to common shareholders is determined by deducting dividends declared in the period on non-cumulative preferred stock (regardless of whether they have been paid) and dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been declared).

Choice “A” is incorrect. Current year dividends on cumulative preferred stock are added to the net loss since the company is obligated to pay these dividends before distributions are made to common shareholders. Dividends in arrears were subtracted from income in the year that they first were an obligation of the company.

Choice “B” is incorrect. Dividends on noncumulative preferred stock are added to the net loss since the dividend was declared in the current period. Additionally, only the current period dividends and not the dividends in arrears on the cumulative preferred stock are added to the net loss. Dividends in arrears were subtracted from income in the year that they first were an obligation of the company.

Choice “D” is incorrect. Income available to common shareholders is determined by deducting dividends declared in the period on non-cumulative preferred stock (regardless of whether they have been paid) and dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been declared).

Question 30

Kell Corp.’s $95,000 U.S. GAAP net income for the quarter ended September 30, Year 1, included the following after-tax items:

A $60,000 gain on sale of equipment, realized on April 30, Year 1, was allocated equally to the second, third, and fourth quarters of Year 1.
A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized on August 2, Year 1.
In addition, Kell paid $48,000 on February 1, Year 1, for Year 1 calendar year property taxes. Of this amount, $12,000 was allocated to the third quarter of Year 1.

For the quarter ended September 30, Year 1, Kell should report net income of:

A.	 $103,000

B.	 $111,000

C.	 $115,000

D.	 $91,000

Answer 30

Choice “D” is correct. Kell Corp. should report net income of $91,000 for the third quarter ended September 30, Year 1.

Rules: The entire amount of the gain on sale of equipment should be reported during the period incurred.

A “cumulative effect” type accounting change is not included in the net income of the period of change; instead, the beginning of the year retained earnings is restated.

Expenses that benefit more than one interim period, such as property taxes, are allocated among the periods benefited. The $60,000 gain was allocated equally over 3 quarters. Therefore, each quarterly income statement would have a $20,000 gain. However, this gain should be reported during the period incurred (in the second quarter) because it was realized on April 30. As a reminder, the quarterly income statements are not cumulative. In quarter 3, the $20,000 gain reported ($60,000 × 1/3 = $20,000) should be subtracted from net income because this gain belongs to quarter #2.

The cumulative effect of the change in accounting principle would impact the retained earnings at the beginning of the year and should not be included as part of net income. However, the $16,000 loss was recognized (recorded) on August 2, which reduced the net income of the 3rd quarter. Therefore, an adjustment is needed to add the loss back to net income because the loss should be an adjustment to beginning retained earnings.

The total property taxes paid were $48,000, which means that $12,000 of property taxes should be allocated to each of the four quarters. However, the fact pattern states that $12,000 was allocated to the third quarter, which means that the $12,000 expense was already included in the calculation of the $95,000 GAAP income, and no further adjustment is needed.

Third quarter income as originally calculated

95,000

Less: 1/3 of second quarter gain

(20,000)
Subtotal

75,000
Plus: Cumulative effect of accounting change

16,000
Corrected third quarter net income

91,000

Choice “A” is incorrect. The $12,000 in property taxes for the third quarter are already accounted for in the $95,000 in GAAP net income, so there is no need to adjust for them.

Choice “B” is incorrect. This answer choice does not account for the removal of the second quarter $20,000 allocated gain from the equipment sale.

Choice “C” is incorrect. This answer choice adds the second quarter gain instead of subtracting it and does not account for the cumulative effect of the accounting change.

Question 31

Time weight the interest on the convertible bonds only do not time weight the converted bonds

Answer 31

if it says the first two quarters but issued in second and it is dividends use the dividends for both quarters

Question 32

To test dilution

Answer 32

Convert the numertator and the denominator aand divide by one another
for instance a dividend for 2 quarters that’s 30,000*2 =60,000 and converts into 600000 stock =0.10
same thing if you had bonds divide the numerator effect by the denominator to test for dilution

Question 33

Division Corporation has 20,000 shares of $5.00 participating 9 percent cumulative preferred stock and 100,000 shares of $2.00 common stock. On July 1, the board of Division declared a $30,000 dividend at the time the common stock was selling for $25 per share and the preferred stock was selling for $30. The total dividends paid to each class of stock on the payment date was:

Preferred
Common
A.
$12,500

$17,500

B.	 $10,000

$20,000

C.	 $16,000

$14,000

D.	 $9,500

$20,500

Answer 33

Choice “B” is correct. Participating preferred stock splits dividend distributions with common shareholders only after the common shareholders have received percentage dividends equivalent to preferred shareholders. The remaining dividend is shared in relation to relative capitalization. The following calculation illustrates the distribution of dividends by share classification.

Preferred
Common
Capitalization
Dividends
Dividends

Total dividends declared

$30,000

Shares

20,000

100,000

Par value

$5.00

$2.00

Total capitalization

$100,000

$200,000

$300,000

Preferred dividend rate

9%

9%

Dividends

$9,000

$18,000

$27,000

Relative capitalization

33.3%

66.7%

Undistributed dividends subject to participation

$1,000

$2,000

$3,000

Total dividends per class

$10,000

$20,000

$30,000

Choice “A” is incorrect. This answer presumes no distribution to common shareholders prior to application of participation features and allocates the dividends based upon the number of shares rather than relative capitalization.

Choice “C” is incorrect. This answer presumes no distribution to common shareholders prior to application of participation features.

Choice “D” is incorrect. This answer presumes allocation of the dividends based upon the number of shares in each classification rather than relative capitalization.

Question 34

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

Increase
Assets

89,000

Liabilities

27,000

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.	 $4,000

B.	 $13,000

C.	 $9,000

D.	 $17,000

Answer 34

Explanation
Balance sheet changes:

Assets

89

Liabilities

27

Capital stock

60

Additional paid-in capital

6

Retained earnings (squeeze)

(4)

Total liabilities and equity

89

Retained earnings changes

Begin R/E

0

Add net income (squeeze)

9

Less dividends paid

(13)

Ending R/E

(4)

Choice “C” is correct. $9,000 net income for the current year.

Question 35

On December 1, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock’s market value was $35 per share. The stock was originally issued for $25 per share. By what amount would this donation cause total stockholders’ equity to decrease?

A.	 $70,000

B.	 $20,000

C.	 $50,000

D.	 $0

Answer 35

Explanation
Choice “D” is correct. $0 decrease in total stockholders’ equity due to donation of its own stock from a stockholder because there is no cost to the corporation. The entry would be:

Debit (Dr) Credit (Cr)
Donated treasury stock (@ FMV)
XX

Additional paid-in capital (@ FMV)
XX

Both accounts enter into total stockholders’ equity; therefore, there is no change in total stockholders’ equity. When (if) the shares are reissued, the entry would be:

Debit (Dr) Credit (Cr)
Cash (@ sales price)
XX

Additional paid-in capital (for sp < carrying value)
XX

Donated treasury stock (@ carrying value) additional paid-in capital (for sp > carrying value)
XX

Question 36

20

MCQ-14829
Application
LLA Inc. was capitalized through the issuance of 10,000 shares of $30 par common stock that was sold at $50 per share. LLA had net income as follows:

Year 1 $100,000
Year 2 200,000
If, during Year 2, LLA paid dividends to its shareholders at $25 per share, what amount was LLA’s retained earnings balance and shareholders’ equity balance at the end of Year 2?

Retained
Earnings Shareholders’
Equity
A.
$300,000
$550,000
B.
$50,000
$800,000
C.
$300,000
$800,000
D.
$50,000
$550,000

Answer 36

Explanation
Choice “D” is correct. Shareholders’ equity consists of capital stock, additional paid-in capital (APIC), and retained earnings. Treasury stock and noncontrolling interests also impact shareholders’ equity but are not relevant to this question.

Calculations for each of the three components are shown below:

Capital stock: $300,000 (10,000 shares × $30 par per share).
APIC: $200,000 [10,000 shares × ($50 sale price – $30 par)].
Retained earnings: $50,000 [Year 1 net income of $100,000 + Year 2 net income of $200,000 – Year 2 dividends paid of $250,000 (10,000 shares × $25 per share)].
Shareholders’ equity is, therefore, equal to $300,000 (capital stock) + $200,000 (APIC) + $50,000 (retained earnings) = $550,000.

Choice “A” is incorrect. The total for shareholders’ equity is correct, but the total for retained earnings needs to be reduced by the dividends paid.

Choice “B” is incorrect. The total for retained earnings is correct, but shareholders’ equity needs to be reduced by the dividends paid.

Choice “C” is incorrect. Dividends paid impact both retained earnings and shareholders’ equity (which includes retained earnings).

Question 37

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book value per common share?

Total stockholders’
equity
Book value
per share
A.
Increase

Increase

B.	 Decrease

Decrease

C.	 Decrease

Increase

D.	 Increase

Decrease

Answer 37

Choice “C” is correct. Decrease - Increase.
The acquisition of treasury stock at a price less than their book value will:

Decrease stockholders’ equity in total. All treasury stock transactions decrease total equity.
Increase book value per share. Book value per share is based on the number of outstanding common shares, which is reduced by the acquisition of treasury stock (the denominator is reduced). The numerator (book value) is also reduced by the cost to purchase the shares, but the overall effect on the ratio is an increase in book value per share. For example, if book value were $1,000 and there were 100 common shares, the book value per common share would be $10. If 10 shares were repurchased for $8 (which is less than the original book value per share), the new book value would be $920 and the reduced number of shares would be 90, thus, resulting in a new book value per common share of $10.22, which is larger than the original $10.

Question 38

Dont forget in a tbs

Answer 38

for reacuired treasury stock if retained earnings is debited in ending column put it as a negative of SHE

Question 39

A company has 10,000 shares of common stock issued and 2,000 shares of treasury stock. The par value of the stock is $10 per share. On January 1, Year 1, the company declared a 5 percent dividend to be paid in cash on June 30, Year 1. What journal entry should the company record on the declaration date?

A.	 Debit dividends expense for $4,000 and credit dividends payable for $4,000.

B.	 Debit retained earnings for $4,000 and credit dividends payable for $4,000.

C.	 Debit retained earnings for $5,000 and credit dividends payable for $5,000.

D.	 Debit dividends expense for $5,000 and credit dividends payable for $5,000.

Answer 39

Choice “B” is correct. The accounting treatment of a cash dividend involves a debit to retained earnings and a credit to dividends payable. Dividends are not paid on treasury stock, so the number of shares receiving the cash dividend are 10,000 − 2,000 = 8,000. 8,000 shares × $10 par × 5% = $4,000.

DR Retained earnings $4,000
CR
Dividends payable

$4,000

Choice “A” is incorrect. Debiting retained earnings is the right entry, not dividends expense.

Choice “C” is incorrect. Dividends are not paid on treasury stock.

Choice “D” is incorrect. Debiting retained earnings is the right entry, not dividends expense. Also, dividends are not paid on treasury stock.

Question 40

Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders’ equity for the dividend?

A.	 $7,500,000

B.	 $0

C.	 $1,500,000

D.	 $4,500,000

Answer 40

Choice “B” is correct. The net effect on Universe’s stockholders equity is zero, as the reduction to retained earnings is offset by an equal increase in common stock.

Journal Entry:

Debit (Dr) Credit (Cr)
Retained earnings (.30 x 500,000 x $10)
1,500,000

Common stock ($10 per value)
1,500,000

Choices “C”, “D”, and “A” are incorrect, per the above.