Proceeds from an issue of debt securities having stock

Solution Summary

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1) Proceeds from an issue of debt securities having stock warrants should NOT be allocated between debt and equity features when

A. exercise of the warrants within the next few fiscal periods seems remote.
B. the warrants issued with the debt securities are nondetachable.
C. the allocation would result in a discount on the debt security.
D. the market value of the warrants is NOT readily available.

2) The conversion of preferred stock may be recorded by the

A. book value method.
B. par value method.
C. market value method.
D. incremental method.

3) 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 as an extraordinary item.
B. treated as a direct reduction of retained earnings.
C. treated as a prior period adjustment.
D. reflected currently in income, but NOT as an extraordinary item.

4) Total stockholders' equity represents

A. the maximum amount that can be borrowed by the enterprise.
B. only the amount of earnings that have been retained in the business.
C. a claim against a portion of the total assets of an enterprise.
D. a claim to specific assets contributed by the owners.

5) Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?

A. issued shares
B. outstanding shares
C. unissued shares
D. authorized shares

6) A primary source of stockholders' equity is

A. appropriated retained earnings.
B. both income retained by the corporation and contributions by stockholders.
C. contributions by stockholders.
D. income retained by the corporation.

7) Wilson Corp. purchased its own par value stock on January 1, 2007 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from

A. additional paid-in capital without regard as to whether or NOT there have been previous net "gains" from sales of the same class of stock included therein.
B. net income.
C. retained earnings.
D. additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings.

8) "Gains" on sales of treasury stock (using the cost method) should be credited to

A. capital stock.
B. other income.
C. retained earnings.
D. paid-in capital from treasury stock.

9) How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

A. As paid-in capital from treasury stock transactions.
B. As an extraordinary item shown on the income statement.
C. As an increase in the amount shown for common stock.
D. As ordinary earnings shown on the income statement.

10) 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 times (one minus the income tax rate)
B. Annual preferred dividend divided by the income tax rate
C. Annual preferred dividend times the income tax rate
D. Annual preferred dividend

11) 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 the maximum potential dilution of diluted earnings per share on a prospective basis.
B. be antidilutive.
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. fairly present diluted earnings per share on a prospective basis.

12) What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?

A. Increase and no effect
B. Increase and decrease
C. Decrease and increase
D. Decrease and no effect

13) How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock?

Additional Common Stock | Paid-in Capital

A. No effect | Increase
B. Increase | Increase
C. Increase | No effect
D. No effect | No effect

14) On December 31, 2006, the stockholders' equity section of Clark, Inc., was as follows: Common stock, par value $10; authorized 30,000 shares.

Issued and outstanding 9,000 shares $ 90,000
Additional paid-in capital 116,000
Retained earnings 174,000
Total stockholders' equity $380,000

On March 31, 2007, Clark declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2007, Clark sustained a net loss of $32,000. The balance of Clark's retained earnings as of March 31, 2007, should be

A. $133,000.
B. $142,000.
C. $134,800.
D. $125,800.

15) Palmer Corp. owned 20,000 shares of Dixon Corp. purchased in 2003 for $240,000. On December 15, 2006, Palmer declared a property dividend of all of its Dixon Corp. shares on the basis of one share of Dixon for every 10 shares of Palmer common stock held by its stockholders. The property dividend was distributed on January 15, 2007. On the declaration date, the aggregate market price of the Dixon shares held by Palmer was $400,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of

A. $160,000.
B. $0.
C. $400,000.
D. $240,000.