CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE IFRS questions are available at the end of this chapter WITH CORRECT ANSWERS

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11. If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense. Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analyt... ic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 16 - 7 Test Bank for Intermediate Accounting, Sixteenth Edition 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. Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 13. If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share. Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 14. When stock dividends or stock splits occur, companies must restate the shares outstanding after the stock dividend or split, in order to compute the weighted-average number of shares. Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 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. Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 16. Preferred dividends are subtracted from net income but not income from continuing operations in computing earnings per share. Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 17. When a company has a complex capital structure, it must report both basic and diluted earnings per share. Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA, IFRS: None 18. In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price. Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 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. Ans: T, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: FSA, IFRS: None 20. A company should report per share amounts for Net income, but not for income from continuing operations. Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: FSA, IFRS: None 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 16 - 8 Dilutive Securities and Earnings per Share 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. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 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. Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 23. If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an): a. forced conversion. b. sweetener. c. additional conversion. d. end conversion. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 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 debt financing at lower rates. d. that convertible bonds will always sell at a premium. Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None 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. b. reflected currently in income as a discontinued operations item. c. treated as a prior period adjustment. d. treated as an adjustment of additional paid-in capital. Ans: A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 16 - 9 Test Bank for Intermediate Accounting, Sixteenth Edition S26. The conversion of preferred stock into common stock 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. b. reflected currently in income as a discontinued operations item. c. treated as a prior period adjustment. d. treated as a direct reduction of retained earnings. Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 27. The conversion of preferred stock is recorded by the a. incremental method. b. book value method. c. market value method. d. par value method. Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 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 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. Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 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. Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 30. Stock warrants outstanding should be classified as a. liabilities. b. reductions of capital contributed in excess of par value. c. assets. d. Paid-in capital-stock warrants Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Reporting, AICPA PC: Communication, IMA: Reporting, IFRS: None P31. A corporation issues bonds with detachable warrants. The amount to be recorded as paidin 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. Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 16 - 10 Dilutive Securities and Earnings per Share 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 Ans: C, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 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. Ans: B, LO: 2, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Analytic, AICPA BB: None, AICPA FN: Measurement, AICPA PC: Problem Solving, IMA: Reporting, IFRS: None 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 i [Show More]

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