Test Bank Chapter 16 Dilutive Securities and Earnings Per Share.

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Test Bank Chapter 16 Dilutive Securities and Earnings Per Share CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE IFRS questions are available at the end of this chapter. ... TRUe-FALSe—Dilutive Securities—Conceptual Answer No. Description T 1. Accounting for convertible bond issue. F 2. Reporting gain/loss on convertible debt retirement. T 3. Reporting additional payment to encourage conversion. F 4. Exercise of convertible preferred stock. F 5. Convertible preferred stock exercise. T 6. Allocating proceeds between debt and detachable warrants. F 7. Allocating proceeds from nondetachable warrants. T 8. Intrinsic value of a stock option. F 9. Compensation expense in fair value method. T 10. Service period in stock option plans. F 11. Accounting for nonexercise of stock options. F 12. Accounting for stock option forfeiture. T 13. Cumulative preferred stock and EPS. F 14. Restating shares for stock dividends and stock splits. T 15. Stock dividend and weighted-average shares outstanding. F 16. Preferred dividends and income before extraordinary items. T. 17. Reporting EPS in complex capital structure. F. 18. Dilutive stock options. T 19. Contingent issue shares. F 20. Reporting EPS for income from continuing operations. Multiple Choice—Dilutive Securities, Conceptual Answer No. Description d 21. Nature of convertible bonds. d 22. Recording conversion of bonds. b 23. Classification of early extinguishment of convertible bonds. c S24. Reasons for issuing convertible debt. a S25. Reporting gain/loss on conversion of bonds. d S26. Accounting for conversion of preferred stock. b 27. Recording conversion of preferred stock. d 28. Bonds issued with detachable stock warrants. d 29. Debt equity features of debt issued with stock warrants. d 30. Classification of stock warrants outstanding. d P31. Bonds issued with detachable stock warrants. c P32. Distribution of stock rights. b S33. Difference between convertible debt and stock warrants. c S34. Characteristics of noncompensatory stock option plan. a 35. Measurement of compensation in stock option. c 36. Recognition of compensation expense in a stock option plan. a 37. Compensation expense in a stock option plan. d 38. Characteristics of noncompensatory stock purchase plan. a *39. Compensation expense in an incentive stock option plan. Multiple Choice—Dilutive Securities, Conceptual (cont.) Answer No. Description d *40. Stock appreciation rights plan. b *41. Incentive stock option plan. b *42. Share-based liability awards. Multiple Choice—Dilutive Securities, Computational Answer No. Description a 43. Conversion of convertible bonds. b 44. Conversion of convertible bonds. a 45. Exercise of stock purchase rights. c 46. Conversion of convertible bonds. b 47. Amortization of bond discount. b 48. Unamortized bond discount related to converted bonds. b 49. Conversion of convertible bonds. d 50. Conversion of convertible preferred stock. b 51. Bonds issued with detachable stock warrants. c 52. Bonds issued with detachable stock warrants. c 53. Bonds issued with detachable stock warrants. c 54. Bonds issued with detachable stock warrants. c 55. Recording paid-in capital from stock warrants. b 56. Bonds issued with detachable stock warrants. b 57. Exercise of stock purchase rights. b 58. Bonds issued with detachable stock warrants. c 59. Bonds issued with detachable stock warrants. b 60. Recording paid-in capital from stock warrants. b 61. Determine compensation expense in a stock option plan. c 62. Determine compensation expense in a stock option plan. c 63. Impact of stock options on net income. b 64. Determine compensation expense in a stock option plan. b 65. Determine compensation expense in a stock option plan. d 66. Determine compensation expense in a stock option plan. d 67. Determine paid-in capital amount in a stock option plan. c 68. Determine compensation expense in a stock option plan. c 69. Net income effect in a stock option plan. c 70. Determine compensation expense in a stock option plan. c 71. Impact of stock options on stockholders’ equity. b 72. Determine compensation expense in a stock option plan. a 73. Determine compensation expense in a stock option plan. c 74. Issuance of treasury stock in a stock option plan. b *75. Compensation expense recognized in first year in an SAR plan. b *76. Compensation expense recognized in second year in an SAR plan. a *77. Compensation expense recognized in third year in an SAR plan. P These questions also appear in the Problem-Solving Survival Guide. S These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter. Multiple Choice—Dilutive Securities, CPA Adapted Answer No. Description d 78. Cash proceeds from issuance of convertible bonds. a 79. Bond issue with detachable stock warrants. c 80. Compensation expense in a stock option plan. c *81. Compensation expense recognized in an SAR plan. Multiple Choice—Earnings Per Share, Conceptual Answer No. Description c 82. Simple capital structure. d 83. Computing EPS for a simple capital structure. d 84. Computation of weighted-average shares outstanding. c 85. Effect of treasury stock on EPS. b S86. Reporting EPS by companies. b P87. Diluted EPS and conversion of bonds. d 88. Diluted EPS. b 89. Dilutive convertible securities. a 90. Cumulative convertible preferred stock income adjustment. d 91. Treasury stock method. a 92. Treasury stock method. b 93. Treasury stock method. d 94. Antidilutive securities. d *95. EPS calculation with two dilutive convertible securities. Multiple Choice—Earnings Per Share, Computational Answer No. Description c 96. Weighted average number of common shares outstanding. c 97. Weighted average number of common shares outstanding. b 98. Weighted average number of common shares outstanding. b 99. Weighted average number of shares outstanding. c 100. Determination of shares used in computing EPS. a 101. Computation of earnings per share. c 102. Basic EPS with convertible preferred stock. c 103. EPS and a stock split. d 104. Weighted average number of common shares outstanding. b 105. Diluted EPS and the treasury stock method. b 106. Diluted EPS with convertible bonds. c 107. Diluted EPS and contingent issuances. d 108. Basic EPS. c 109. Diluted EPS with convertible bonds and preferred stock. d 110. Number of shares in computing diluted EPS. c 111. Diluted EPS. c 112. EPS and contingent issuances. b 113. Diluted EPS with convertible bonds. c 114. Diluted EPS with convertible bonds. b 115. Diluted EPS with convertible bonds. b 116. Diluted EPS. d 117. Basic EPS with convertible bonds and convertible preferred stock. Multiple Choice—Earnings Per Share, Computational (cont.) Answer No. Description c 118. Diluted EPS. b 119. Denominator in computing basic EPS and DEPS with convertible bonds. b 120. Shares outstanding for basic EPS and DEPS. b 121. Basic EPS with convertible preferred stock. c 122. Diluted EPS with convertible bonds. a 123. Basic EPS and DEPS with convertible bonds issued during year. c 124. Basic EPS with convertible preferred stock and convertible bonds. b 125. DEPS with convertible preferred stock and convertible bonds. c 126. DEPS and the treasury stock method. d 127. DEPS using the treasury stock method. Multiple Choice—Earnings Per Share, CPA Adapted Answer No. Description b 128. Determine earnings per common share. b 129. Determine earnings per common share. d 130. Determine diluted EPS. b 131. Number of shares to calculate diluted EPS. b 132. DEPS with convertible securities. d 133. Effect of dividends on nonconvertible preferred stock. a 134. "If converted" method. Exercises Item Description E16-135 Convertible bonds. E16-136 Convertible bonds (essay). E16-137 Convertible debt and debt with warrants (essay). E16-138 Stock options. E16-139 Weighted average shares outstanding. E16-140 Earnings per share (essay). E16-141 Earnings per share. E16-142 Diluted earnings per share. *E16-143 Stock appreciation rights. PROBLEMS Item Description P16-144 Convertible bonds and stock warrants. P16-145 Earnings per share. P16-146 Basic and diluted earnings per share. P16-147 Basic and diluted earnings per share. P16-148 Basic and diluted earnings per share. CHAPTER LEARNING OBJECTIVES 1. Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. Explain the accounting for convertible preferred stock. 3. Contrast the accounting for stock warrants and stock warrants issued with other securities. 4. Describe the accounting for stock compensation plans under generally accepted accounting principles. 5. Discuss the controversy involving stock compensation plans. 6. Compute earnings per share in a simple capital structure. 7. Compute earnings per share in a complex capital structure. *8. Explain the accounting for stock-appreciation rights plans. *9. Compute earnings per share in a complex situation. SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Item Type Item Type Item Type Item Type Item Type Item Type Item Type Learning Objective 1 1. TF 21. MC S24. MC 44. MC 47. MC 78. MC 144. P 2. TF 22. MC S25. MC 45. MC 48. MC 135. E 3. TF 23. MC 43. MC 46. MC 49. MC 136. E Learning Objective 2 4. TF 5. TF S26. MC 27. MC 50. MC Learning Objective 3 6. TF 29. MC S33. MC 54. MC 58. MC 137. E 7. TF 30. MC 51. MC 55. MC 59. MC 144. P 8. TF P31. MC 52. MC 56. MC 60. MC 28. MC P32. MC 53. MC 57. MC 79. MC Learning Objective 4 9. TF S34. MC 38. MC 64. MC 68. MC 72. MC 138. E 10. TF 35. MC 61. MC 65. MC 69. MC 73. MC 11. TF 36. MC 62. MC 66. MC 70. MC 74. MC 12. TF 37. MC 63. MC 67. MC 71. MC 80. MC Learning Objective 6 13. TF 82. MC S86. MC 99. MC 103. MC 139. E 14. TF 83. MC 96. MC 100. MC 128. MC 140. E 15. TF 84. MC 97. MC 101. MC 129. MC 146. P 16. TF 85. MC 98. MC 102. MC 130. MC 147. P Learning Objective 7 17. TF 90. MC 106. MC 113. MC 120. MC 127. MC 142. E 18. TF 91. MC 107. MC 114. MC 121. MC 131. MC 145. P 19. TF 92. MC 108. MC 115. MC 122. MC 132. MC 146. P 20. TF 93. MC 109. MC 116. MC 123. MC 133. MC 147. P P87. MC 94. MC 110. MC 117. MC 124. MC 134. MC 148. P 88. MC 104. MC 111. MC 118. MC 125. MC 140. E 89. MC 105. MC 112. MC 119. MC 126. MC 141. E Learning Objective 8* 39. MC 41. MC 75. MC 77. MC 143. E 40. MC 42. MC 76. MC 81. MC Learning Objective 9* 95. MC Note: TF = True-False MC = Multiple Choice E = Exercise P = Problem TRUE-FALSE—Conceptual 1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues. 2. Companies recognize the gain or loss on retiring convertible debt as an extraordinary item. 3. The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense. 4. The market value method is used to account for the exercise of convertible preferred stock. 5. Companies recognize a gain or loss when stockholders exercise convertible preferred stock. 6. A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values. 7. Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants. 8. The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options at the grant date. 9. Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise. 10. The service period in stock option plans is the time between the grant date and the vesting date. 11. If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense. 12. If an employee forfeits a stock option because of failure to satisfy a service requirement, the company should record paid-in capital from expired options. 13. If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share. 14. When stock dividends or stock splits occur, companies must restate the shares outstand-ing after the stock dividend or split, in order to compute the weighted-average number of shares. 15. If a stock dividend occurs after year-end, but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year. 16. Preferred dividends are subtracted from net income but not income before extraordinary items in computing earnings per share. 17. When a company has a complex capital structure, it must report both basic and diluted earnings per share. 18. In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price. 19. In a contingent issue agreement, the contingent shares are considered outstanding for computing diluted EPS when the earnings or market price level is met by the end of the year. 20. A company should report per share amounts for income before extraordinary items, but not for income from continuing operations. True-False Answers—Conceptual Item Ans. Item Ans. Item Ans. Item Ans. 1. T 6. T 11. F 16. F 2. F 7. F 12. F 17. T 3. T 8. T 13. T 18. F 4. F 9. F 14. F 19. T 5. F 10. T 15. T 20. F MULTIPLE CHOICE—Dilutive Securities, Conceptual 21. 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. 22. The conversion of bonds is most commonly recorded by the a. incremental method. b. proportional method. c. market value method. d. book value method. 23. 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. S24. 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. S25. 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. S26. 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. 27. 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. 28. 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. 29. Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when a. the market value of the warrants is not readily available. b. exercise of the warrants within the next few fiscal periods seems remote. c. the allocation would result in a discount on the debt security. d. the warrants issued with the debt securities are nondetachable. 30. Stock warrants outstanding should be classified as a. liabilities. b. reductions of capital contributed in excess of par value. c. assets. d. none of these. P31. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably a. zero. b. calculated by the excess of the proceeds over the face amount of the bonds. c. equal to the market value of the warrants. d. based on the relative market values of the two securities involved. P32. The distribution of stock rights to existing common stockholders will increase paid-in capital at the Date of Issuance Date of Exercise of the Rights of the Rights a. Yes Yes b. Yes No c. No Yes d. No No S33. 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. S34. 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. 35. 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. 36. 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. 37. 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. 38. 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. *39. 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. r [Show More]

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