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Intermediate Accounting Chapter 16
Convertible Bonds: a. have priority over other indebtedness. b. are usually secured by a first or second mortgage. c. pay interest only in the event earnings are sufficient to cover the interest. d. may be exchanged for equity securities. - correct answer D. May be exchanged for equity securities The conversion of bonds is most commonly recorded by the a. incremental method. b. proportional method. c. market value method. d. book value method. - correct answer D. Book Value method When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n) a. extraordinary item. b. expense. c. loss. d. none of these. - correct answer B. Expense Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is a. the ease with which convertible debt is sold even if the company has a poor credit rating. b. the fact that equity capital has issue costs that convertible debt does not. c. that many corporations can obtain financing at lower rates. d. that convertible bonds will always sell at a premium. - correct answer C. That many corporations can obtain financing at lower rates.
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 a. reflected currently in income, but not as an extraordinary item. b. reflected currently in income as an extraordinary item. c. treated as a prior period adjustment. d. treated as an adjustment of additional paid-in capital. - correct answer A. Reflected currently in income but not as an extraordinary item The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be a. reflected currently in income, but not as an extraordinary item. b. reflected currently in income as an extraordinary item. c. treated as a prior period adjustment. d. treated as a direct reduction of retained earnings. - correct answer D. Treated as a direct reduction of retained earnings The conversion of preferred stock may be recorded by the a. incremental method. b. book value method. c. market value method. d. par value method. - correct answer B. Book value method 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 a. additional paid-in capital from stock warrants. b. retained earnings. c. a liability account. d. premium on bonds payable. - correct answer D. Premium on bonds payable
The major difference between convertible debt and stock warrants is that upon exercise of the warrants a. the stock is held by the company for a defined period of time before they are issued to the warrant holder. b. the holder has to pay a certain amount of cash to obtain the shares. c. the stock involved is restricted and can only be sold by the recipient after a set period of time. d. no paid-in capital in excess of par can be a part of the transaction. - correct answer B. The holder has to pay a certain amount of cash to obtain the shares Which of the following is not a characteristic of a noncompensatory stock option plan? a. Substantially all full-time employees may participate on an equitable basis. b. The plan offers no substantive option feature. c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. d. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others. - correct answer C. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee a. is granted the option. b. has performed all conditions precedent to exercising the option. c. may first exercise the option. d. exercises the option. - correct answer A. is granted the option Compensation expense resulting from a compensatory stock option plan is generally a. recognized in the period of exercise. b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. allocated over the periods of the employee's service life to retirement. - correct answer C. Allocated to the periods benefited by the employee's required service.
The date on which total compensation expense is computed in a stock option plan is the date a. of grant. b. of exercise. c. that the market price coincides with the option price. c. that the market price exceeds the option price. - correct answer A. of grant Which of the following is not a characteristic of a noncompensatory stock purchase plan? a. It is open to almost all full-time employees. b. The discount from market price is small. c. The plan offers no substantive option feature. d. All of these are characteristics. - correct answer D. All of these are characteristics Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally a. not recognized because no excess of market price over the option price exists at the date of grant. b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. recognized in the period of exercise. - correct answer C. Allocated to the periods benefited by the employee's required service For stock appreciation rights, the measurement date for computing compensation is the date a. the rights mature. b. the stock's price reaches a predetermined amount. c. of grant. d. of exercise. - correct answer D. of exercise An executive pays no taxes at time of exercise in a(an)
In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the a. preferred dividends in arrears. b. preferred dividends in arrears times (one minus the income tax rate). c. annual preferred dividend times (one minus the income tax rate). d. none of these. - correct answer D. none of these In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are a. weighted by the number of days outstanding. b. weighted by the number of months outstanding. c. considered outstanding at the beginning of the year. d. considered outstanding at the beginning of the earliest year reported. - correct answer D. considered outstanding at the beginning of the earliest year reported. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? a. Decrease and no effect b. Increase and no effect c. Decrease and increase d. Increase and decrease - correct answer C. decrease and increase Due to the importance of earnings per share information, it is required to be reported by all Public Companies Nonpublic Companies a. Yes Yes b. Yes No c. No No d. No Yes - correct answer B. Yes, No
A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is Dilutive ~Antidilutive a. Yes ~Yes b. Yes ~No c. No ~Yes d. No ~No - correct answer B. Yes, No When computing diluted earnings per share, convertible bonds are a. ignored. b. assumed converted whether they are dilutive or antidilutive. c. assumed converted only if they are antidilutive. d. assumed converted only if they are dilutive. - correct answer D. assumed converted only if they are dilutive Dilutive convertible securities must be used in the computation of a. basic earnings per share only. b. diluted earnings per share only. c. diluted and basic earnings per share. d. none of these. - correct answer B. diluted earnings per share only In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)? a. Annual preferred dividend b. Annual preferred dividend times (one minus the income tax rate) c. Annual preferred dividend times the income tax rate d. Annual preferred dividend divided by the income tax rate - correct answer A. annual preferred dividend
b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share. c. include stock options and warrants whose exercise price is less than the average market price of common stock. d. should be ignored in all earnings per share calculations. - correct answer D. should be ignored in all earnings per share calculations Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the a. greater earnings adjustment. b. greater earnings per share adjustment. c. smaller earnings adjustment. d. smaller earnings per share adjustment. - correct answer D. smaller earnings per share adjustment When computing diluted earnings per share, convertible securities are a. ignored. b. recognized only if they are dilutive. c. recognized only if they are antidilutive. d. recognized whether they are dilutive or antidilutive. - correct answer B. Recognized only if they are dilutive In determining diluted earnings per share, dividends on nonconvertible cumulative preferred stock should be a. disregarded. b. added back to net income whether declared or not. c. deducted from net income only if declared. d. deducted from net income whether declared or not. - correct answer D. deducted from net income whether declared or not The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the a. beginning of the earliest period reported (or at time of issuance, if later).
b. beginning of the earliest period reported (regardless of time of issuance). c. middle of the earliest period reported (regardless of time of issuance). d. ending of the earliest period reported (regardless of time of issuance). - correct answer A. beginning of the earliest period reported (or at time of issuance, if later). With regard to recognizing stock-based compensation under iGAAP the fair value of shares and options awarded to employees is recognized a. in the first fiscal period of the employees' service. b. over the fiscal periods to which the employees' services relate. c. in the last fiscal period of the employees' service when the total value can be calculated. d. after last fiscal period of the employees' service when the total value can be calculated. - correct answer b. over the fiscal periods to which the employees' services relate
