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Week
10 Quiz 8: Chapters 15 and 16
Chapter 15
Multiple Choice
1. For
a compensatory stock option plan for which the date of grant and measurement
date are the same, compensation cost
should be recognized in the income statement
a. At the date of retirement
b. Of each period in which services are rendered
c. At the exercise date
d. At the adoption date of the plan
Answer
2. Payment of a dividend in stock
a.
Increases the current ratio
b.
Decreases the amount of working capital
c.
Increases total stockholders’ equity
d. Decreases book value per share of
stock outstanding
Answer
3.
The directors of Corel Corporation, whose $40 par value common stock is
currently selling at $50 per share, have decided to issue a stock dividend. The
corporation has an authorization for 200,000 shares of common, has issued
110,000 shares of which 10,000 shares are now held as treasury stock, and
desires to capitalize $400,000 of the retained earnings balance. To accomplish
this, the percentage of stock dividend that the directors should declare is
a.
10
b.
8
c.
5
d.
2
Answer
4. When
a stock dividend is small, for example a 10% stock dividend,
a. Retained
earnings is not reduced because the dividend is immaterial .
b. Retained
earnings is reduced by the fair value of the stock.
c. Retained
earnings is reduced to the par value of the stock.
d. Paid-in
capital in excess of par value is unaffected.
Answer
5.
The par value method of reporting a
treasury stock transaction
a. Will
be reported in the balance sheet as a reduction of total stockholders’ equity.
b. Results
in no change to total stockholders’ equity.
c. Results
in a reduction in the number of shares that are available to be sold to
prospective investors.
d. Assumes
constructive retirement of the treasury shares.
Answer
6. On December 31, 2010, when the Conn Company’s
stock was selling at $36 per share, its capital accounts were as follows
Capital stock (par value $20,
100,000 shares issued) $2,000,000
Premium on capital stock 800,000
Retained Earnings 4,550,000
If a 100 percent stock dividend were
declared and the par value per share remained at
$20
a. No entry would need to be made to record the
dividend
b. Capital stock would increase to $5,600,000
c. Capital stock would increase to $4,000,000
d. Total capital would decrease
Answer
7. A company has not paid dividends on its
cumulative nonvoting preferred stock for 20 years.
Healthy earnings have been reported each
year, but they have been retained to support the growth of the company. The
board of directors appropriately authorized management to offer the preferred
shareholders an exchange of bonds and common stock for all the preferred stock.
The exchange is about to be consummated. Which of the following best describes
the effect of the exchange on the company?
a. The
statute of limitations applies; hence, cumulative dividends of only seven years
need to be paid on the preferred stock exchanged.
b. The
company should record an extraordinary gain for income determination purposes
to the extent that dividends in arrears do not have to be paid in the exchange
transaction.
c. Gain
or loss should be recognized on the exchange by the company, and the exchange
would have to be approved by the Securities and Exchange Commission.
d. Regardless of the market value of the bonds
and common stock, no gain or loss should be recognized by the company on the
exchange, and no dividends need to be paid on the preferred stock exchanged.
Answer
8.
A
restriction of retained earnings is most likely to be required by the
a. Exhaustion of potential benefits
of the investment credit
b. Purchase of treasury stock
c. Payment of last maturing series
of a serial bond issue
d. Amortization of past service
costs related to a pension plan
Answer
9. A
feature common to both stock splits and stock dividends is
a.
A reduction in total capital of a corporation
b.
A transfer from earned capital to paid-in capital
c.
A reduction in book value per share
d.
Inclusion in conventional statement of source and application of funds
Answer
10. Assuming the issuing company has only one
class of stock, a transfer from retained earnings to capital stock equal to the market value of
the shares issued is ordinarily a characteristic of
a. Either a stock dividend or a stock split
b. Neither a stock dividend nor a stock split
c. A stock split but not a stock dividend
d. A stock dividend but not a stock split
Answer
11. When a stock option plan for employees is
compensatory, the measurement date for determining compensation cost is the
a. Date
the option plan is adopted, provided it precedes the date on which the options
may first be exercised by less than one operating cycle
b. Date
on which the options may first be exercised (if the first actual exercise is
within the same operating period) or the date on which a recipient first
exercises any of his options
c. First
date on which are known both the number of shares than an individual employee
is entitled to receive and the option or purchase price, if any
d. Date each option is granted
Answer
12. As
a minimum, how large in relation to total outstanding shares may a stock
distribution be before it should be accounted for as a stock split instead of a
stock dividend?
a. No less than 2 to 5 percent
b. No less than 10 to 15 percent
c. No less than 20 to 25 percent
d. No less than 45 to 50 percent
Answer
13. The
dollar amount of total stockholders’ equity remains the same when there is a
(an)
a. Issuance of preferred stock in exchange for
convertible debentures
b. Issuance of nonconvertible bonds with
detachable stock purchase warrants
c. Declaration of a stock dividend
d. Declaration of a cash dividend
Answer
14. A
company with a substantial deficit undertakes
a quasi-reorganization. Certain assets will be written down to their
present fair market value. Liabilities will remain the same. How would the
entries to record the quasi-reorganization affect each of the following?
Contributed Capital Retained Earnings
a.
Increase
Decrease
b.
Decrease
No effect
c.
Decrease
Increase
d.
No effect
Increase
Answer
15. What
is the most likely effect of a stock split on the par value per share and the
number of shares outstanding?
Par Value
Number of shares
Per shareoutstanding
a.
Decrease
Increase
b.
Decrease No effect
c.
Increase
Increase
d.
No
effect
No effect
Answer
16. Gilbert
Corporation issued a 40percent stock split-up of its common stock that had a
par value of $10 before and after the
split-up. At what amount should retained earnings be capitalized for the
additional shares issued?
a. There should be no capitalization of retained
earnings
b. Par value
c. Market value on the declaration date
d. Market value on the payment date
Answer
17. How
would the declaration and subsequent issuance of a 10 percent stock dividend by
the issuer affect each of the following when the market value of the shares
exceeds the par value of the stock?
Common Stock Additional Paid-in Capital
a.
No effect No
effect
b.
No effect Increase
c.
Increase No effect
d.
Increase Increase
Answer
18. A
company with a $2,000,000 deficit undertakes a quasi-reorganization on November
1, 2010. Certain assets will be written
down by $400, 000 to their present fair market value. Liabilities will remain
the same. Capital stock was $3,000,000 and additional paid-in capital was
$1,000,000 before the quasi-reorganization. How would the entries to accomplish
these changes on November 1, 2010, affect each of the following?
Capital
Stock Total
Stockholders’ Equity
a.
No
effect No
effect
b.
No
effect Decrease
c.
Decrease Decrease
d.
Decrease No
effect
Answer
19. How
would a stock split affect each of the following?
Total
Stockholders’ Additional
AssetsEquityPaid-in Capital
a.
Increase Increase No effect
b.
No effect No effect No effect
c.
No effect No effect Increase
d.
Decrease Decrease Decrease
Answer
11. The purchase of treasury stock
a. Decreases common stock authorized
b. Decreases common stock issued
c. Decreases common stock outstanding
d. Has no effect on common stock outstanding
Answer
12. The
equation, assets = equities, expresses which of the following theories of
equity?
a. Proprietary
theory.
b. Commander
theory.
c. Entity
theory.
d. Enterprise
theory.
Answer
22. Under
the residual equity theory
a. A
business is viewed as a social institution.
b. Management
is responsible for maximizing the wealth of common stockholders.
c. A
manager’s goals are considered as important as those of the common
stockholders.
d. Equities
are viewed as restrictions on assets..
Answer
23. Under
which of the theories of equity is a manager’s goals considered as important as
those of the common stockholder.
a. Proprietary
theory.
b. Commander
theory.
c. Entity
theory.
d. Enterprise
theory.
Answer
24. Which
of the theories of equity is consistent with the definition of equity that is
found in Statement of Financial
Accounting ConceptsNo. 6?
a. Proprietary
theory.
b. Commander
theory.
c. Entity
theory.
d. Enterprise
theory.
Answer
25. Which
of the following securities must be reported as a liability because they have
the characteristics of both liabilities and equity, but the liability
characteristic is dominant?
a. Redeemable
preferred stock.
b. Stock
options issued with a debt security .
c. Detachable
stock options.
d. Mandatorily
redeemable preferred stock.
Answer
26. When
a dividend paid to stockholders who own mandatorily redeemable preferred stock,
the company must report the dividend
a. As
an adjustment to retained earnings in its statement of owners’ equity .
b. As
an expense in the income statement.
c. As
a reduction to other comprehensive income.
d. In
the financing activities section of the statement of cash flows.
Answer
27. When
preferred stock is converted to common stock
a. The
debt-to-equity ratio decreases.
b. The
debt-to-equity ratio increases.
c. The
debt-to-equity ratio is unchanged.
d. A
gain or loss is reported in earnings for the difference between the fair value
of the common stock and the book value of the preferred stock that was
converted .
Answer
28. When
employees are granted options as part of a compensatory stock option plan,
a. Total
compensation is measured using a fair value method.
b. Total
compensation is measured using the intrinsic method.
c. Total
compensation is measured when the options are in the money.
d. Total
compensation is measured using the difference between the strike price and the
fair value of the options on the grant date.
Answer
Essay
1.
Discuss the following theories of
equity:
a. Proprietary
b. Entity
c. Fund
d. Commander
e. Enterprise
f. Residual
equity
2. What
is mandatorily redeemable preferred stock and how is it accounted for under the
provisions of SFAS No. 150 (FASB ASC 480-10)?
3. List
and discuss four advantages of the
corporate form of organization..
4. Discuss
the components of a corporation’s balance sheet capital section.
5. Discuss
the following special features of preferred stock:
a. Convertible
b.
Call
c. Cumulative
d. Participating
e. Redemption
6. How
did SFAS No. 123R change accounting for stock options?
7. Define
and discuss accounting for stock warrants.
8. Discuss
the difference between a stock dividend and a stock split. Include in your
discussion, the reasons a company might issue either a stock dividend or a
stock split.
9. Define
and discuss the two methods of accounting for treasury stock.
10.
Obtain the financial statements of a company
and ask the students to compute the:
a. Return
on common stockholders’ equity.
b. Financial
structure ratio
EXAMPLE
TEST QUESTIONS
Chapter
16
Multiple
Choice
1. Consolidated
statements are proper for Neely, Inc., Randle, Inc., and Walker, Inc., if
a. Neely
owns 80 percent of the outstanding common stock of Randle and 40 percent of
Walker; Randle owns 30 percent of Walker.
b. Neely
owns 100 percent of the outstanding common stock of Randle and 90 percent of
Walker; Neely bought the stock of Walker one month before the balance sheet
date and sold it seven weeks later.
c. Neely
owns 100 percent of the outstanding common stock of Randle and Walker; Walker
is in legal reorganization.
d. Neely
owns 80 percent of the outstanding common stock of Randle and 40 percent of
Walker; Reeves, Inc., owns 55 percent of Walker.
Answer
2. On
October 1, Company X acquired for cash all of the outstanding common stock of
Company Y. Both companies have a December 31 year end and have been in business
for many years. Consolidated net income for the year ended December 31 should
include net income of
a. Company
X for3 months and Company Y for 3 months
b. Company
X for 12 months and Company Y for 3 months
c. Company
X for 12 months and Company Y for 12 months
d. Company
X for 12 months, but no income from Company Y until Company Y distributed a
dividend
Answer
3. Arkin,
Inc., owns 90 percent of the outstanding stock of Baldwin Company. Curtis,
Inc., owns 10 percent of the outstanding stock of Baldwin Company. On the consolidated
financial statements of Arkin, Curtis should be considered as
a. A holding company
b. A subsidiary not to be consolidated
c. An affiliate
d. A noncontrolling interest
Answer
4. A
sale of goods, denominated in a currency other than the entity’s functional
currency, resulted in a receivable that was fixed in terms of the amount of
foreign currency that would be received. Exchange rates between the functional
currency and the currency in which the transaction was denominated changed. The
resulting gain should be include as a (an)
a. Other comprehensive income
b. Deferred credit
c. Component of income from continuing
operations
d. Extraordinary item
Answer
5. Which
of the following is not a consideration in segment reporting for diversified
enterprises?
a. Allocation of joint costs
b. Transfer pricing
c. Defining the segments
d. Consolidation policy
Answer
6. Which
of the following is the appropriate basis for valuing fixed assets acquired in
a business combination carried out by exchanging cash for common stock?
a. Historic cost
b. Book value
c. Cost plus any excess of purchase price over
book value of asset acquired
d. Fair value
Answer
7. Goodwill
represents the excess of the cost of an acquired company over the
a. Sum of the fair values assigned to
identifiable assets acquired less liabilities assumed
b. Sum of the fair values assigned to tangible
assets acquired less liabilities assumed
c. Sum of the fair values assigned to intangible
assets acquired less liabilities assumed
d. Book value of an acquired company
Answer
8. The
theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet is
a. As a separate item with the deferred credits
section
b. As a reduction from (contra to) goodwill from
consolidation, if any
c. By means of notes or footnotes to the balance
sheet
d. As a separate item within the stockholders’
equity section
Answer
9. Meredith
Company and Kyle Company were combined in an acquisition transaction. Meredith
was able to acquire Kyle at a bargain price. The sum of the market or appraised
values of identifiable assets acquired less the fair value of liabilities
assumed exceeded the cost to Meredith. After revaluing noncurrent assets to
zero there was still some of the bargain purchase amount remaining (formerly
termed negative goodwill). Proper
accounting treatment by Meredith is to report the amount as
a. An extraordinary item
b. Part of current income in the year of
combination
c. A deferred credit and amortize it
d. Paid-in capital
Answer
10. When
translating foreign currency financial statements, which of the following
accounts would be translated using current exchange rates?
Property,
Plant, and Inventories
Equipment carried at
cost
a.
Yes
Yes
b.
No
No
c.
Yes
No
d.
No Yes
Answer
11. In
financial reporting for segments of a business enterprise, the operating profit
or loss of a segment should include
Reasonably
allocated
Common Traceable
Operating costs operating costs
a. No
No
b. No
Yes
c. Yes
No
d. Yes
Yes
Answer
12. The
profitability information that should be reported for each reportable segment
of a business enterprise consists of
a. An operating profit-or-loss figure consisting
of segment revenues less traceable costs and allocated common costs
b. An
operating profit-or-loss figure consisting of segment revenues less traceable
costs but not allocated common costs
c. An
operating profit-or-loss figure consisting of segment revenues less allocated
common costs but not traceable costs
d. Segment
revenues only
Answer
13. A
foreign subsidiary’s function currency is its local currency that has not
experienced significant inflation. The weighted average exchange rate for the
current year would be the appropriate exchange rate for translating
Sales to
Wages
expense Customers
a. Yes Yes
b. Yes No
c. No No
d. No Yes
Answer
14. A
subsidiary’s functional currency is the local currency that has not experienced
significant inflation. The appropriate exchange rate for translating the
depreciation on plant assets in the income statement of the foreign subsidiary
is the
a. Exit exchange rate
b. Historical exchange rate
c. Weighted average exchange rate over the
economic life of each plant asset
d. Weighted average exchange rate for the
current year
Answer
15. In
a business combination that is accounted for under the acquisition method the
entity that obtains control over one or more businesses and establishes the
acquisition date that control was achieved is called the
a. Controller.
b. Acquirer.
c. Proprietor.
d. Controlling
interest.
Answer
16. Under
the acquisition method for a business combination, the cost incurred to effect
the business combination, such as finders and legal fees are
a. Considered
part of the historical cost of the business.
b. Expensed
as incurred.
c. Allocated,
along with the purchase price of the acquired company’s stock to the assets of
the acquiree company.
d. Deferred
until a full accounting of all costs to acquire the acquire company are known.
Answer
17. Under
which of the theories of equity is a manager’s goals considered as important as
those of the common stockholder.
a. Proprietary
theory.
b. Commander
theory.
c. Entity
theory.
d. Enterprise
theory.
Answer
18. For
a business combination, we measure all assets and liabilities of an acquired
company at fair value. Fair value
a. Is
an exit value.
b. Is
an entry value.
c. Is
an appraisal value.
d. Can
be either an exit value or an entry value depending on the circumstances.
Answer
19. Under
the acquisition method of accounting for a business combination, restructuring
costs are
a. Capitalized
and amortized over a period not exceeding ten years.
b. Fees
paid to lawyers and accountants to bring about the business combination .
c. Costs
incurred to effect the business combination.
d. Treated
as post acquisition expenses.
Answer
20. Under
the acquisition method of accounting for
a business combination, goodwill is equal to
a. The
acquired company’s ability to generate excess profits .
b. The
excess of the cost of the acquisition plus the fair value of the noncontrolling
interest over the fair value of the acquiree’s net assets.
c. The
excess of the cost of the acquisition over the fair value of the acquiree’s net
assets.
d. The
excess of the fair value of acquiree’s net assets over the cost of acquisition.
Answer
21. Under
the acquisition method of accounting for a business combination, a bargain
purchase is
a. Reported
as goodwill in the balance sheet.
b. Tested
annually for impairment.
c. Reported
as a gain in the income statement.
d. Reported
as an adjustment to other comprehensive
income.
Answer
22. The
acquisition method of accounting for a business combination is consistent
with
a. Entity
theory.
b. Proprietary
theory.
c. Parent
company theory.
a. Residual
interest theory.
Answer
23. Under
the acquisition method of accounting for a business combination when the parent
company has acquired only 90% of the voting stock of a subsidiary,
a. 10%
of the goodwill will be reported in a separate section of the balance sheet
because it belongs to the noncontrolling interest .
b. The
consolidated balance sheet will report 100% of the value of goodwill.
c. The
consolidated balance sheet will report 90% of the value of goodwill.
d. Goodwill
will be amortized over its useful life or 40 years whichever comes first.
Answer
24. The
noncontrolling interest in a subsidiary is reported in the consolidated balance
sheet
a. As
an investment.
b. As
a liability.
c. At
fair value, as determined on the acquisition date.
d. As
an element of stockholders’ equity.
Answer
Essay
1.
List and explain three reasons why
businesses combine.
2. Discuss
the issues that are to be addressed in an acquisition method business combination
effected by an exchange of equity shares.
3.
How is the recorded cost determined in
an acquisition business combination?
4.
What are the two principles that are
used to guide the preparation of consolidated financial statements?
5.
Explain the concept of control as it
applies to recording consolidated financial statement.
6.
Discuss the following two theories of
consolidation:
a. Entity
b. Patent
company
7.
Define noncontrolling interest.
Historically, how has noncontrolling interest been disclosed on corporate balance sheets
8.
According to SFAS No. 131(FASB ASC
280-10-50-20 to 25), what information should be disclosed for each operating
segment?
9.
How are operating segments defined by
SFAS No. 131 (FASB ASC 280-10-50-1)?
10.
Discuss the criteria used to determine
if an operating segment is a reportable
segment.
11.
Discuss how foreign currency translation
occurs under each of the following methods
a. Current
– noncurrent
b. Monetary
– nonmonetary
c. Current
d. Temporal
12. How
does SFAS No. 52 (FASB ASC 830) define functional currency?
13. What are the two
situations in which the local currency would not be the functional currency:?
14.
Discuss the difference between
translation and remeasurement.
15.
Describe the four general procedures
involved in the foreign currency translation process when the local currency is
defined as the functional currency.
16.
How
are noncontrolling interested defined in IAS No. 27 and where are they to be
disclosed?
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