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C249 CH16
Dilutive Securities
| Question | Answer |
|---|---|
| How should the difference between the cash acquisition price of retired convertible debt and the carrying amount of the debt be recorded by the issuer? | It should be recorded currently in income, but not as an extraordinary item. |
| When using the book value method to report conversion of bonds or preferred stock to common stock, all the journal entries are based on the ________ of the security being converted. | carrying amount |
| A convertible bond has characteristics similar to | Equity and Debt |
| Which method is used to record the conversion of bonds? | Book value method |
| True or False: When recording the issue of convertible bonds, an accountant should use the same rules as when recording the issue of straight debt. | True |
| Convertible securities are also called ________ securities because they reduce earnings per share when they are converted. | dilutive |
| Which of the following are recognized when convertible debt is retired? | either a gain or a loss on retirement |
| How is a sweetener accounted for when paid to convertible bondholders to induce conversion? | As an expense. |
| Barlow Upholstery recorded a debit of $280,000 to Debt Conversion Expense. The reason for this transaction is likely that they used a(n) | sweetener to induce conversion of bonds to common stock. |
| Barlow Upholstery recorded a debit of $280,000 to Debt Conversion Expense. The reason for this transaction is likely that they used a(n) | sweetener to induce conversion of bonds to common stock. |
| Dilutive securities are another name for _____________ securities. | convertible |
| When classifying convertible securities, a ________ is considered a liability and a ________ is considered equity. | convertible bond; convertible preferred stock |
| If a preferred stockholder expects to receive a fixed number of shares of common stock at some point in the future, the preferred stock must be | convertible |
| At the time of conversion of convertible preferred stock to common stock, if the par value of the common shares exceeds the carrying amount of the preferred shares, the issuer must | directly reduce retained earnings for the amount of the difference. |
| True or False: When accounting for the exercise of convertible preferred stock, companies are required to use the market value method. | False, book method |
| Which of the following methods is used to record the conversion of preferred stock? | book value method |
| How should detachable stock warrants outstanding be classified? | As paid-in capital |
| Accounting for which of the following is similar to that for convertible bonds? | nondetachable warrants |
| True or False: A company should allocate the proceeds from the sale of stock with detachable stock warrants to the stock based on its market value. | False |
| Several of Merlin Corporation’s employees have forfeited their stock options because they failed to satisfy the associated service requirements. How should Merlin adjust its books to reflect this forfeiture? | It should debit Paid-in Capital—Stock Options and credit Compensation Expense for the amount of cumulative compensation expense recorded to date. |
| Satsuma Incorporated’s employees exercise only 20,000 of their 40,000 stock options before the options’ expiration date. As of that date, Satsuma has a balance of $500,000 in its Paid-in Capital—Stock Options account. At this point, Satsuma should | transfer this balance to a more properly titled paid-in capital account. |
| One advantage of a restricted-stock plan is that | restricted stock never becomes completely worthless. |
| How do warrants issued to grant a preemptive right to purchase common stock first differ from warrants purchased with other securities? | They are shorter in duration than those issued with other securities |
| How should detachable stock warrants outstanding be classified? | As paid-in capital |
| When a company issues bonds with detachable warrants, how should the amount recorded as paid-in capital be determined? | It should be based on the relative market values of the two securities involved. |
| It should be based on the relative market values of the two securities involved. | |
| True of False: A company must restate the weighted-average number of shares outstanding for the year if a stock dividend occurs after year-end, but before issuing the financial statements. | True |
| ______________ accounting is being worked on for improvement by the FASB and the IASB. | Medium |
| Which type of stockholders must companies calculate available income for? | common stockholders |
| A corporation’s capital structure is ________ if it consists only of common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share. | Simple |
| _______ companies are granted an exception from reporting their earnings per share information on the income statement face. | Nonpublic |
| True or False: For both common and preferred stock, earnings per share are reported. | False, only common |
| True or False: Earnings per share indicates the amount earned for preferred stock. | False, income per common stock share |
| Companies need to report the per share amounts for discontinued operations and ___________ items either on the face of the income statement or in the notes. | Extraordinary |
| In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, which of the following is the amount that should be deducted as an adjustment to the numerator (earnings)? | Annual preferred dividends |
| The effect the acquisition of treasury stock will have on stockholders' equity and earnings per share, respectively is | Decrease and increase |
| Which of the following can be determined by multiplying the outstanding shares by the fraction of the year for which they were outstanding? | Weighted average shares outstanding |
| The earnings per share can be found with which of the following equations? | net income / weighted average number of shares |
| Net income, preferred stock dividends, and weighted-average number of shares outstanding are all needed to determine ________ per share. | earnings |
| True or false: Capital structure is referred to as simple if there is no chance that potential common stock could dilute earnings when converted. | True |
| A company uses the treasury stock method to account for outstanding stock options and warrants. If the average market price of common stock for the period is lower than the exercise price of the options or warrants, the EPS computation would | be antidilutive. |
| If a company assumes that bonds were converted at the beginning of the period and that no bond interest was paid during the period, they are likely using th __________________ method for including convertible bonds in the diluted EPS calculation. | if-converted |
| If convertible, cumulative preferred stock is used to compute diluted earnings per share, how will the numerator of the diluted EPS equation need to be adjusted compared to the numerator of the basic EPS equation? | It should add back the annual preferred dividend associated with the convertible stock. |
| A company uses the treasury stock method to account for stock options and warrants when calculating dilutive EPS. How would they treat the proceeds assumed to be received upon exercise of the options and warrants in the dilutive EPS calculation? | |
| When computing diluted EPS, the if-converted method assumes that securities are converted as of the | beginning of the earliest period reported (or at time of issuance, if later). |
| In 2017, Grigsby Linens restated their EPS calculations for their first two quarters’ financial statements when they prepared their third quarter financial statements. What is the likely reason for this? | Stock split in the third quarter |
| When using the if-converted method for including convertible bonds in the diluted EPS calculation, what assumptions will you need to make? | The bonds were converted at the beginning of the period, so no interest was paid during the period. |
| If a company wants to provide common stockholders with the worst-case scenario for earnings per share, they should include the ____________ earnings per share calculation in their financial statements. | diluted |
| True or False: Stock options that have an option price greater than the market price are considered dilutive when computing diluted earnings per share. | Not Dilutive |
| If a company has issued nonconvertible cumulative preferred stock, how should they treat the dividends from these preferred stocks when computing diluted earnings per share? | They should deduct then from net income whether declared or not. |
| True or False: Both basic and diluted earnings per share must be reported if a company has a complex capital structure. | True |
| Convertible bonds, convertible preferred stock, stock warrants, and stock options should all be considered in the calculation for | |
| On January 1, Summit Enterprises issues 5,000 shares of restricted stock to its CEO. To reflect issuance of these shares, Summit records a $15,000 credit to Common Stock. This entry tells us that | Summit’s stock has a par value of $3 per share. |
| Several of Merlin Corporation’s employees have forfeited their stock options because they failed to satisfy the associated service requirements. How should Merlin adjust its books to reflect this forfeiture? | It should debit Paid-in Capital—Stock Options and credit Paid-in Capital—Expired Stock Options for the amount of cumulative compensation expense recorded to date. |
| Which of the following pieces of information does not need to be included in the disclosure for a compensation plan? | |
| On January 1, Summit Enterprises issues 5,000 shares of restricted stock to its CEO. To reflect issuance of these shares, Summit records a $15,000 credit to Common Stock. This entry tells us that | Summit’s stock has a par value of $3 per share. |
Created by:
tbeeche
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