1) 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.  treated as an adjustment of additional paid-in capital.

 

C.  reflected currently in income as an extraordinary item.

 

D.  treated as a prior period adjustment.

 

 

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

 

 

A.  incremental method.

 

B.  par value method.

 

C.  book value method.

 

D.  market value 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, but NOT as an extraordinary item.

 

B.  treated as a direct reduction of retained earnings.

 

C.  reflected currently in income as an extraordinary item.

 

D.  treated as a prior period adjustment.

 

 

4) When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

 

A.  market value of the services received.

 

B.  Any of these provides an appropriate basis for recording the transaction.

 

C.  par value of the shares issued.

 

D.  market value of the shares issued.

 

 

5) The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable

method of allocation is the

 

 

A.  pro forma method.

 

B.  either the proportional method or the incremental method.

 

C.  proportional method.

 

D.  incremental method.

 

 

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

 

 

A.  authorized shares

 

B.  outstanding shares

 

C.  issued shares

 

D.  unissued shares

 

 

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 to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise,

 from retained earnings.

 

B.  net income.

 

C.  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.

 

D.  retained earnings.

 

 

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

 

 

A.  As ordinary earnings shown on the income statement.

 

B.  As an extraordinary item shown on the income statement.

 

C.  As paid-in capital from treasury stock transactions.

 

D.  As an increase in the amount shown for common stock.

 

 

9) In January 2007, Castro Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2007,

Castro Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares

 

 

A.  decreased total stockholders' equity.

 

B.  decreased the number of issued shares.

 

C.  increased total stockholders' equity.

 

D.  did NOT change total stockholders' equity.

 

 

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

 the numerator (net earnings)?

 

 

A.  Annual preferred dividend

 

B.  Annual preferred dividend divided by the income tax rate

 

C.  Annual preferred dividend times (one minus the income tax rate)

 

D.  Annual preferred dividend times the income tax rate

 

 

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 diluted earnings per share on a prospective basis.

 

B.  be antidilutive.

 

C.  fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.

 

D.  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.

 

 

12) When computing diluted earnings per share, convertible bonds are

 

A.  ignored.

 

B.  assumed converted whether they are dilutive or antidilutive.

 

C.  assumed converted only if they are antidilutive.

 

D.  assumed converted only if they are dilutive.

 

 

13) 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.  $0.

 

B.  $160,000.

 

C.  $240,000.

 

D.  $400,000.

 

 

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.  $125,800.

 

B.  $133,000.

 

C.  $134,800.

 

D.  $142,000.

 

 

15) A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following? 



Additional Paid-in Capital | Retained Earnings

 

 

A.  Decrease | No effect

 

B.  Decrease | Decrease

 

C.  No effect | Decrease

 

D.  No effect | No effec

 

16) An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as

 

 

A.  an extraordinary item shown as a direct increase to retained earnings.

 

B.  a current gain resulting from holding securities.

 

C.  a note or parenthetical disclosure only.

 

D.  other comprehensive income and included in the equity section of the balance sheet.

 

 

17) An unrealized holding loss on a company's available-for-sale securities should be reflected in the current financial statements as

 

 

A.  an extraordinary item shown as a direct reduction from retained earnings.

 

B.  a current loss resulting from holding securities.

 

C.  a note or parenthetical disclosure only.

 

D.  other comprehensive income and deducted in the equity section of the balance sheet.

 

 

18) A reclassification adjustment is reported in the

 

A.  income statement as an Other Revenue or Expense.

 

B.  stockholders’ equity section of the balance sheet.

 

C.  statement of comprehensive income as other comprehensive income.

 

D.  statement of stockholders’ equity.

 

 

19) Investments in debt securities should be recorded on the date of acquisition at

 

 

A.  lower of cost or market.

 

B.  market value.

 

C.  market value plus brokerage fees and other costs incident to the purchase.

 

D.  face value plus brokerage fees and other costs incident to the purchase.

 

 

20) Pippen Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in

calculating the issue price of the bonds is to multiply the principal by the table value for

 

 

A.  10 periods and 10% from the present value of 1 table.

 

B.  10 periods and 8% from the present value of 1 table.

 

C.  20 periods and 5% from the present value of 1 table.

 

D.  20 periods and 4% from the present value of 1 table.

 

 

21) When an investor's accounting period ends on a date that does NOT coincide with an interest receipt date for bonds held as

an investment, the investor must

 

 

A.  make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the

 last interest receipt date.

 

B.  notify the issuer and request that a special payment be made for the appropriate portion of the interest period.

 

C.  make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received

at the next interest receipt date.

 

D.  do nothing special and ignore the fact that the accounting period does NOT coincide with the bond's interest period.

 

 

22) An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as 



Fair Value Method | Equity Method

 

 

A.  Income | Income

 

B.  A reduction of the investment | A reduction of the investment

 

C.  Income | A reduction of the investment

 

D.  A reduction of the investment | Income

 

 

23) Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

 

 

A.  investor sells the investment.

 

B.  investee declares a dividend.

 

C.  investee pays a dividend.

 

D.  earnings are reported by the investee in its financial statements.

 

 

24) Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method.

 Byner Corporation should ordinarily record a cash dividend received from Yount as

 

 

A.  a reduction of the carrying value of the investment.

 

B.  additional paid-in capital.

 

C.  an addition to the carrying value of the investment.

 

D.  dividend income.

 

 

25) A requirement for a security to be classified as held-to-maturity is

 

 

A.  ability to hold the security to maturity.

 

B.  positive intent.

 

C.  the security must be a debt security.

 

D.  All of these are required.

 

 

26) Debt securities that are accounted for at amortized cost, NOT fair value, are

 

 

A.  held-to-maturity debt securities.

 

B.  available-for-sale debt securities.

 

C.  trading debt securities.

 

D.  never-sell debt securities.

 

 

27) Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or

losses and are included as other comprehensive income and as a separate component of stockholders' equity are

 

 

A.  held-to-maturity debt securities.

 

B.  available-for-sale debt securities.

 

C.  trading debt securities.

 

D.  never-sell debt securities.

 

 

28) The accounting for fair value hedges records the derivative at its

 

 

A.  amortized cost.

 

B.  fair value.

 

C.  carrying value.

 

D.  historical cost.

 

 

29) Gains or losses on cash flow hedges are

 

 

A.  ignored completely.

 

B.  reported directly in net income.

 

C.  recorded in equity, as part of other comprehensive income.

 

D.  reported directly in retained earnings.

 

 

30) All of the following statements regarding accounting for derivatives are correct EXCEPT that

 

 

A.  they should be recognized in the financial statements as assets and liabilities.

 

B.  gains and losses resulting from speculation should be deferred.

 

C.  they should be reported at fair value.

 

D.  gains and losses resulting from hedge transactions are reported in different ways, depending upon the type

 

 

 

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