Unit 6 Flashcards
A company is buying a patent in exchange for 1,000 shares of common stock in the company at $5 a share. The fair market value of the stock is $10, and the market value of the patent is unknown.
Which journal entry should the company use to account for the purchase of the patent?
Debit Patents for $10,000; Credit Common Stock for $5,000; Credit Paid-in Capital for $5,000
Correct! The entry is made for the exchange of the patent for the value of the common stock.
A company issues 15,000 shares of $1 par value common stock in exchange for a trademark with a fair market value of $20,000. Additionally, the company paid underwriting costs of $5,000.
Debit Trademark for $20,000; Credit Common Stock for $15,000; Credit Cash for $5,000
Correct! The trademark should be valued at the fair market value, and common stock should be recorded at the par value.
A corporation receives a lump sum of $1,010.25 for a $1,000 par value bond with one warrant attached. The warrant is to purchase one share of common stock for $30 within the next five years when the stock is trading at $60. The warrant can be traded separately from the bond. The bond’s market price cannot be determined, but the
market price for the warrant is $30.90.
How much of the bond sale proceeds is allocated to the bonds using the incremental method?
$979.35
Correct! $979.35 = $1,010.25 - $30.90. The company received the $1,010.25 for the bond with the warrant attached. Knowing the warrant has a fair value of $30.90, the remaining is allocated to the bond.
A company currently has stock warrants outstanding. The company needs to determine when these warrants impact its earnings per share.
When the warrants have a dilutive effect on earnings per share
Correct! The warrants that have a dilutive effect on earnings per share are included in the diluted earnings per share calculation.
A company reports net income of $1,000,000 for the year. Shares outstanding during the first three months of the year equal 500,000, and shares outstanding during the final nine months of the year equal 1,000,000. There are $100,000 of preferred dividends.
What is the earnings per share?
$1.03
Correct! $1.03 = ($1,000,000 - $100,000) / ((500,000 x 3/12) + (1,000,000 x 9/12)). Share must be averaged on a weighted basis during the year.
A company has a complex capital structure regarding dilutive securities currently outstanding. The company is making a financial statement disclosure regarding their common stock and may include a note in their financial statements.
Which note must be included, if any?
A description of the rights assigned to the diluted securities
Correct! A disclosure is required in the financial statements describing the rights and privileges of the dilutive securities. This disclosure provides detail useful to the financial statement user regarding the potential effects of the dilutive securities.
A company announces a $500,000 dividend payable to common stockholders. The cash dividend announcements noted that stockholders should consider $400,000 of the dividend as income and the remainder as a return of capital.
Which journal entry should be used to record this dividend?
Debit Retained Earnings for $400,000; Debit Paid-in Capital in Excess of Par - Common Stock for $100,000; Credit Dividends Payable for $500,000
Correct! $100,000 = $500,000 - $400,000. This is a liquidating dividend. The difference between the return of capital should be debited to the Paid-in Capital in Excess of Par - Common Stock account.
A company allows all full-time employees–but no part-time employees–to participate in its employee stock purchase plan. The employees have the option to purchase common stock discounted by 25%, and the plan offers no substantive option feature.
What is one of the three required features that causes the plan to be considered compensatory?
The stock is discounted by 25%.
Correct! Non-compensatory plans can only be discounted for 5% or less.
A company has issued bonds with a total face value of $5,000,000 with a detachable warrant. The fair value of the bonds without the warrants was $4,800,000, and the fair value of the warrants amounted to $100,000.
Which amount should be debited to Discount on Bonds Payable using the proportional method?
$102,041
Correct! $102,041 =$5,000,000 -((($4,800,000 / ($5,000,000 - $100,000)) x $5,000,000)). This shows the amount allocated to the warrants that will be debited to Discount on Bonds Payable.
