Question;1. Companies issue;convertible debt in order to obtain financing at a cheaper interest rate.;A.;True;B.;False;4.;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.;5.;Convertible bonds are usually;converted into;A.;preferred stock.;B. common;stock.;C. other bonds;at a lower interest rate.;D. stock;warrants.;6. Firehouse;Co. has $4,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is;convertible into 30 shares of $30 par value common stock. The bonds pay;interest on January 31 and July 31. On July 31, 2012, the holders of $1,000,000;bonds exercised the conversion privilege. On that date the market price of the;bonds was 105 and the market price of the common stock was $36. The total;unamortized bond premium at the date of conversion was $225,000. Firehouse;should record, as a result of this conversion, a;A. credit of;$156,250 to Paid-in Capital in Excess of Par.;B. credit of;$843,750 to Paid-in Capital in Excess of Par.;C. credit of;$56,250 to Premium on Bonds Payable.;D. loss of;$1,080,000.;7.;When convertible debt is retired;A. only losses;on retirement are recognized.;B. only gains;on retirement are recognized.;C. either a;gain or a loss on retirement is recognized.;D. neither;gains nor losses are recognized.;8.;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.;C H;1 6, P a g e|2;9. In;accounting for the exercise of convertible preferred stock for common stock, if;the par value of the common stock issued exceeds the book value of the;preferred stock, Retained Earnings is debited for the difference.;A.;True;B.;False;10. When;convertible preferred stock is exercised, a gain or loss is recognized on the;conversion of preferred stock to common. The book value method is used to;account for the transaction.;A.;True;B.;False;11.;On June 30, 2012, an interest;payment date, $100,000 of Summers Co. bonds were converted into 2,500 shares of;Summers Co. common stock each having a par value of $5 and a market value of;$54. There is $3,500 unamortized discount on the bonds. Using the book value;method, Summers would record;A.;no change in paid-in capital;in excess of par.;B.;an $84,000 increase in;paid-in capital in excess of par.;C. a $135,000;increase in paid-in capital in excess of par.;D. a $3,500;increase in paid-in capital in excess of par.;13.;What will the numerator of the diluted EPS;calculation consist of when convertible preferred stock is being included?;A. Net income;+ Preferred dividends (Net of tax effect).;B. Net income;+ Preferred dividends.;C. Net income.;D. Net income;? Preferred dividends.;14. In;2012, Gamekeeper, Inc., issued for $103 per share, 60,000 shares of $100 par;value convertible preferred stock. One share of preferred stock can be;converted into three shares of Gamekeeper's $25 par value common stock at the;option of the preferred stockholder. In August 2013, all of the preferred stock;was converted into common stock. The market value of the common stock at the;date of the conversion was $30 per share. What total amount should be credited;to additional paid-in capital from common stock as a result of the conversion;of the preferred stock into common stock?;A. $1,020,000.;B. $780,000.;C. $1,500,000.;D. $1,680,000.;16.;Nondetachable warrants do not require an;allocation of the proceeds between the bonds and the warrants.;A. True;B. False;17. When;bonds are issued with detachable stock warrants, and the fair market value is;known for both securities, the price is allocated between the two securities;using the incremental method.;A. True;B. False;C H;1 6, P a g e|3;18. Lakeside;Corporation offered detachable 5-year warrants to buy one share of common stock;(par value $5) at $20 (at a time when the stock was selling for $32). The price;paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The;market price of the Lakeside bonds without the warrants was $180,000, and the;market price of the warrants without the bonds was $20,000. What amount should;be allocated to the warrants?;A.;$20,000;B.;$20,500;C.;$24,000;D.;$25,000;19.;The treasury stock method;would apply to which of the following securities?;A.;Stock options.;B.;Treasury stock.;C.;Preferred stock.;D.;Convertible preferred stock.;21.;Detachable stock warrants outstanding should;be classified as;A. contingent;liabilities.;B. reductions;of capital contributed in excess of par value.;C. prepaid;expenses.;D. paid-in;capital.;22.;The issuance of warrants arises under all of;the following situations except to;A. make;different types of securities more attractive to new investors.;B. give;existing stockholders a preemptive right to purchase stock.;C. provide;compensation to executives.;D. give;bondholders the preemptive right to purchase additional stock.;23. The;proceeds from the sale of debt with detachable stock warrants should be allocated;between the two securities based on the;A. face value;of the bonds.;B. fair market;value of the bonds.;C. aggregate;fair market value of the bonds and the warrants.;D.;face value of the bonds and;market value of the warrants.;24.;Which of the following methods has the FASB;historically preferred in accounting for stock-based compensation?;A. Fair value;method.;B. Intrinsic;value method.;C. Book value;method.;D. Par value;method.;25.;For which of the following securities is an;allocation of the sales proceeds necessary?;A.;Convertible bonds.;B.;Bonds issued with detachable;warrants.;C.;Bonds issued with;nondetachable warrants.;D.;Bonds issued with either;detachable or nondetachable warrants.;C H;1 6, P a g e|4;26. On;January 1, 2012, Andover Company granted Alvaro Martinelli, an employee, an;option to buy 2,000 shares of Andover Co. stock for $25 per share, the option;exercisable for 5 years from date of grant. Using a fair value option pricing;model, total compensation expense is determined to be $15,000. Martinelli;exercised his option on September 1, 2012, and sold his 2,000 shares on;December 1, 2012. Quoted market prices of Andover Co. stock during 20102 were;January 1;$25 per share;September;1;$30 per;share;December;1;$34 per;share;The;service period is for three years beginning January 1, 2012. As a result of the;option granted to Martinelli, using the fair value method, Andover should;recognize compensation expense for 2012 on its books in the amount of;A.;$18,000.;B.;$15,000.;C.;$3,000.;D.;$1,500.;ADDITIONAL;SELF-STUDY QUESTIONS;1.;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.;4.;Accounting for stock option plans must be;based on;A. the fair;value method.;B. the;intrinsic value method.;C. either the;fair value method or the intrinsic value method.;D. the;option-pricing method.;5.;Under the fair value method, compensation;expense is recorded;A. on the date;of grant.;B. on the date;of exercise.;C.;evenly over the service;period.;D. evenly over;the period from the grant date to the measurement date.;8. In;computing earnings per share, treasury shares reacquired during the year are;retroactively adjusted to be reacquired as of the beginning of the year.;A. True;B. False;9.;Earnings per share is reported for both;common and preferred stock.;A.;True;B.;False;C H;1 6, P a g e|5;10. 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.;11.;Which of the following is the;formula for computing EPS?;A.;(Net income ? Preferred;dividends) ? Average number of shares outstanding;B.;(Net income ? Preferred;dividends) ? Weighted average number of shares outstanding;C.;(Net income + Preferred;dividends) ? Weighted average number of shares outstanding;D.;Net income ? Number of shares;outstanding;12. At;December 31, 2012, Pearl River Company had 450,000 shares of common stock;issued and outstanding, 350,000 of which had been issued and outstanding;throughout the year and 100,000 of which were issued on October 1, 2012. Net;income for the year ended December 31, 2012, was $2,320,000. What should be;Pearl River's 2012 earnings per common share, rounded to the nearest penny?;A. $5.16;B. $5.45;C. $6.19;D. $6.63;15. In;a complex capital structure, diluted earnings per share is not reported when;the securities included in the capital structure are antidilutive.;A. True;B. False;16.;Antidilutive securities are securities that;upon conversion or exercise increase earnings per share.;A. True;B. False;17. In;the diluted earnings per share computation, the treasury stock method is used;for options and warrants to reflect assumed reacquisition of common stock at;the average market price during the period. If the exercise price of the;options or warrants exceeds the average market price, the computation would;A. fairly;present diluted earnings per share on a prospective basis.;B. fairly;present the maximum potential dilution of diluted earnings per share on a;prospective basis.;C. reflect;the excess of the number of shares assumed issued over the number of shares;assumed reacquired as the potential dilution of earnings per share.;D. be antidilutive.;18.;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.;C H;1 6, P a g e|6;19. If;preferred stock is cumulative, and dividends have not been declared in the past;two years or in the current year, what amount should be deducted from net;income in the EPS calculation?;A.;Only the dividends in;arrears.;B.;Only the current year's;dividend.;C.;Both the current year's;dividend and the dividends in arrears.;D.;Nothing should be deducted;because no dividends were declared.;20. Como;Inc. had 400,000 shares of common stock issued and outstanding at December 31;2011. On July 1, 2012 an additional 200,000 shares were issued for cash. Como;also had stock options outstanding at the beginning and end of 2012 which allow;the holders to purchase 60,000 shares of common stock at $28 per share. The;average market price of Como's common stock was $35 during 2012. The number of;shares to be used in computing diluted earnings per share for 2012 is;A.;512,000;B.;600,000;C.;612,000;D.;660,000;21.;Which earnings per share amounts are reported;in a complex capital structure?;A. Basic EPS;only.;B. Diluted EPS;only.;C. Basic and;diluted EPS.;D. Basic and;simple EPS.;22.;The diluted EPS computation considers all of;the following except the impact of;A. convertible;securities.;B. stock;options.;C. stock;warrants.;D. antidilutive;securities.;23.;The treasury stock method of computing;incremental shares applies to;A. convertible;bonds only.;B. convertible;preferred stock only.;C.;stock options and warrants.;D. All;convertible securities.;24.;Complex capital structures require all of the;following disclosures except;A. a;description of pertinent rights of the various securities outstanding.;B. a;reconciliation of the numerators and denominators of the basic and diluted per;share computations.;C. the effect;given preferred dividends in determining income available to common;stockholders.;D. the effect;of conversions before year-end.
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