Financial Reporting II

Fall 2021 – Exam 4

Version 1

Name: __________________________________

Clearly indicate your answer to each question by writing it to the left of the response choices.

1. Based on the following, what are the number of shares issued, unissued, and outstanding?
Common stock, $2 par, 50,000 shares authorized $8,000
Paid-in capital in excess of par 52,000
Retained earnings 220,000
Treasury stock, 500 shares (6,000)
Total stockholders' equity $424,000

Issued Unissued Outstanding

a. 4,000 46,000 3,500
b. 4,000 46,000 4,500
c. 8,000 42,000 7,500
d. 8,000 42,000 8,500

2. At December 31, 2021, a company reported the following:

Cash dividends payable $ 20,000

Treasury stock 600,000
Paid-in capital–Treasury Stock 20,000
Common stock and other paid-in capital accounts 4,000,000
Retained earnings 3,000,000

If, during 2022, half of the treasury stock was resold for $240,000; net income was $600,000;
cash dividends declared were $500,000; and small stock dividends declared and distributed
were $400,000, what would shareholders' equity be as of December 31, 2022?

a. $6,760,000.
b. $6,820,000.
c. $7,220,000.
d. $7,760,000.

1
3. A company issued 50,000 shares of common stock, $1 par, for cash of $18 per share on
January 1, 2020, incurring $10,000 in stock issue costs, paid in cash. The entry to record the
issuance would include:

a. A debit to Stock Issuance Costs for $10,000.

b. A debit to Stock Issuance Expense for $10,000.
c. A credit to Paid-in Capital in Excess of Par—Common Stock for $840,000.
d. A credit to Paid-in Capital in Excess of Par—Common Stock for $850,000.

4. A company, organized on January 3, 2021, was authorized to issue 100,000 shares of $5 par
common stock. During 2021, the company issued 30,000 shares of common stock for $7 per
share and another 20,000 shares of common stock for $8 per share. If the company reported net
income of $100,000 and paid dividends of $50,000 in 2021, what is total paid-in capital at the
end of 2021?

a. $420,000.
b. $370,000.
c. $470,000.
d. $320,000.

5. On January 1, 2020, a company issued in one combined offering, 5,000 shares of common
stock, $1 par, and 1,000 shares of preferred stock, $15 par. The total combined selling price was
$100,000. Separately however, the common stock is selling at $20 per share, and the preferred
stock at $25 per share. Of the total cash received of $100,000, how much will be allocated to
Paid-In Capital in Excess of Par–Common Stock and to Paid-in Capital in Excess of Par–
Preferred Stock?

Paid-in Capital in Excess of Par

Common Stock Preferred Stock
a. $60,000 $20,000
b. $75,000 $5,000
c. $80,000 $20,000
d. $90,000 $10,000

6. On January 1, 2020, a company issued 4,500 of its 400,000, $1 par, common shares in
exchange for land. The company’s common stock shares are frequently and widely traded on a
public exchange. On January 1, the common shares were trading for $35 per share. However, a
recent appraisal indicates that the land is valued at $155,000. Upon issuance of the common
stock, the company would record a credit to Paid-in Capital in Excess of Par–Common Stock for:

a. $150,500.
b. $153,000.
c. $155,000.
d. $157,500.

2
7. Which of the following is not correct regarding treasury stock accounted for under the cost
method?

a. Treasury stock is deducted in the stockholders’ equity section of the balance sheet.
b. If a company decides to sell treasury stock, the Treasury Stock account is credited for the
original cost of acquiring the treasury stock.
c. When treasury stock is sold for more than its acquisition cost, the difference is credited to
either Paid-in Capital—Treasury Stock or Retained Earnings.
d. When a company has multiple purchases of treasury stock, it may use any of the cost flow
assumptions used in inventory including LIFO, FIFO or the weighted average method to
measure the cost of treasury shares.

8. A company retires shares that it buys back. In its first share repurchase transaction, the
company purchased stock for more than the price at which the stock was originally issued. What
is the effect of the purchase of the stock on each of the following?

Total Paid-In Capital Retained Earnings

a. No effect No effect
b. Decrease No effect
c. Decrease Decrease
d. No effect Decrease

9. On January 1, a company issued 100,000 shares of $1 par common stock for $10 per share. On
February 6, the company reacquired 70,000 of those shares for the treasury at $12 per share.
On March 17, the company sold 20,000 shares of the treasury stock for $14 per share. And on
May 17, the company sold another 25,000 shares of the treasury stock for $8 per share.
Assuming the company accounts for repurchases of its common stock using the treasury stock
method, the entry on May 17 to account for the reissuance of stock would include a debit to:

a. Treasury Stock for $300,000.

b. Retained Earnings for $60,000.
c. Paid-in Capital—Treasury Stock for $60,000.
d. Paid-in Capital—Treasury Stock for $100,000.

10. A company has issued and outstanding $300,000 of $1 par common stock and $600,000 par
value of 6% cumulative preferred stock. If the company’s board of directors declared cash
dividends of $70,000 in 2021 after the company paid $30,000 in cash dividends in 2020 and
$50,000 in cash dividends in 2019, what is the amount of dividends the common shareholders
will receive in 2021?

a. $0.
b. $14,000.
c. $28,000.
d. $42,000.

3
11. A company with 100,000 shares of $1 par common stock issued and outstanding declared a 5%
common stock dividend on October 1, 2020 when the market price of the common stock was
$15 per share. The stock dividend will be distributed on October 15, 2020 to shareholders on
record on October 10, 2020. On October 1, 2020, the company would record a:

a. Debit to Retained Earnings for $5,000.

b. Credit to Dividends Payable for $70,000.
c. Credit to Retained Earnings for $75,000.
d. Credit to Paid-In Capital in Excess of Par–Common Stock for $70,000.

12. A company with 200,000 shares of $2 par common stock issued and outstanding declared a
50% common stock dividend on October 1, 2020 when the market price of the common stock
was $10 per share. The stock dividend will be distributed on October 15, 2020 to shareholders
on record on October 10, 2020. On October 1, 2020, the company would record a:

a. Debit to Retained Earnings for $200,000.

b. Credit to Dividends Payable for $200,000.
c. Credit to Retained Earnings for $1,000,000.
d. Credit to Paid-In Capital in Excess of Par–Common Stock for $800,000.

4
Use the following information to answer questions 13, 14 and 15.

In late 2020, a new company was formed. The corporate charter authorizes the issuance of
5,000,000 shares of $1 par common stock and 1,000,000 shares of $5 par, noncumulative,
nonparticipating preferred stock. On January 2, 2021, 3,000,000 shares of the common stock are
issued for cash at an average price of $10 per share and all 1,000,000 shares of preferred stock are
issued at $20 per share.

During the year-ended December 31, 2021, the company had the following transactions:

 June 30: Reacquired 200,000 treasury shares at a price of $12 per share.
 July 31: Reissued 50,000 treasury shares at $15 per share.
 September 30: Reissued 50,000 treasury shares at $10 per share.
 October 1, 2021: Completed a 2-for-1 stock split.
 November 1: Declared a $0.05 per common share cash dividend and a $0.25 per preferred share
cash dividend. Payment is scheduled for December 1 to shareholders of record on November 15.
 December 2: Declared a 1% stock dividend payable on December 28 to shareholders of record on
December 14. On December 2, the common stock was selling for $10 per share.
 Net income for 2021 was $6 million.

13. After recording the above transactions, the balance in the Common Stock account on
December 31, 2021 would be:

a. $2,856,000.
b. $3,029,000.
c. $4,980,000.
d. $5,670,000.

14. After recording the above transactions, the balance in the Additional Paid-In Capital account on
December 31, 2021 would be:

a. $41,555,000.
b. $42,601,000.
c. $43,823,000.
d. $44,648,000.

15. After recording the above transactions, total stockholders’ equity on December 31, 2021 would
be:

a. $46,510,000.
b. $48,240,000.
c. $52,460,000.
d. $54,810,000.

5
16. On September 30, 2020, a company issued a total of 2,000 shares of $1 par, restricted common
stock to five executives. The fair value of the shares of stock on September 30 is $200,000. The
restricted shares require a vesting period of 2 years, which is the requisite service period, and
no forfeitures are anticipated. On December 31, 2021, half of the restricted shares were forfeited
due to executive resignations. Assume that forfeitures are recognized as incurred. What is the
amount of compensation expense recognized in 2021?

a. $25,000.
b. $37,500.
c. $62,000.
d. $75,000.

17. A company awards stock options to executives as part of their compensation package. Which of
the following statements is not correct regarding the accounting for the stock option plan?

a. The total cost of the compensation is measured at the date of grant.

b. An option-pricing model used to measure the fair value of stock options, takes into account
prospective information.
c. If a stock option award is based on a company’s sales target, compensation is recognized
when it is probable that the condition will be met.
d. If a stock option award is based on a company’s target stock price, compensation is
recognized when it is probable that the condition will be met.

18. Under its executive stock option plan, a company granted options on January 1, 2021, that
permit executives to purchase 15 million of the company's $1 par common shares within the
next eight years, but not before December 31, 2023 (the vesting date). The exercise price is the
market price of the shares on the date of grant, $18 per share. The fair value of the options,
estimated by an appropriate option pricing model, is $4 per option. No forfeitures were
anticipated; however, unexpected turnover during 2022 caused the forfeiture of 5% of the stock
options. Ignoring taxes, what is the effect on earnings in 2022?

a. $18 million.
b. $18.5 million.
c. $19 million.
d. $20 million.

19. A company has an employee stock purchase plan for all eligible employees. Under the plan,
shares of the company’s $1 par value common stock may be purchased at a discounted amount
of the fair value of the stock on the last day of each quarterly period. The company records
compensation expense for the discount granted on the employee stock purchases if:

a. The discount is greater than 5%.

b. Employees may enroll in the plan up to 31 days after each quarter-end.
c. Substantially all (but not 100%) employees of the company may participate in the plan.
d. Employees are able to cancel participation in the plan before the purchase date of the stock.

20. All other things being equal, what is the effect on earnings per share when a corporation
acquires shares of its own stock on the open market?

a. Increase.
b. Decrease.
c. No effect if the shares are held as treasury shares.
d. Increase only if the shares are considered to be retired.

6
21. On January 1, a company had 2 million shares of common stock outstanding. On April 1, an
additional 100,000 shares were sold and issued, and on September 30, the company declared a
2-for-1 stock split. If net income for the year was $10 million, earnings per share (rounded) would
be reported as:

a. $2.38.
b. $2.41.
c. $4.76.
d. $4.82.

22. Given the following information, what is earnings per share for the year?

Jan. 1 Number of common share issued and outstanding 100,000

March 1 Number of common shares purchased for the treasury 13,000
July 31 Number of common shares purchased for the treasury 5,000
Nov. 30 Reverse two-for-one stock split
Dec. 31 Reported net income $88,000

a. $1.05.
b. $1.56.
c. $2.00.
d. $2.02.

23. A company paid dividends of $10,000 in in January of the current year to its preferred
shareholders. If the preferred stock is nonconvertible and noncumulative, the dividend:

a. Might not affect earnings per share, depending on the declaration date.
b. Will be added to the numerator of the earnings per share fraction for the current year.
c. Will be added to the denominator of the earnings per share fraction for the current year.
d. Will be subtracted from the numerator of the earnings per share fraction for the current year.

24. A company has 100,000 shares of $1 par common stock and 20,000 shares of noncumulative
6% $15 par preferred stock issued and outstanding for the year. If net income for the year is
$168,000 and no dividends were declared, what is earnings per share for the year?

a. $1.14.
b. $1.32.
c. $1.50.
d. $1.68.

25. The if-converted method of computing earnings per share assumes conversion of convertible
securities as of the:

a. End of the earliest period reported regardless of time of issuance.

b. Middle of the earliest period reported regardless of time of issuance.
c. Beginning of the earliest period reported regardless of time of issuance.
d. Beginning of the earliest period reported or at the time of issuance if later.

7
26. Given the following information, what is earnings per share for the year?
Jan. 1 Number of common share issued and outstanding 200,000
Feb. 1 Number of new common shares issued 8,000
July 31 100% common stock dividend
Dec. 31 Reported net income $560,000

a. $1.03.
b. $1.35.
c. $1.45.
d. $1.90.

27. If a company’s convertible debt is dilutive in determining earnings per share, what would be the
effect of considering the convertible debt in calculating basic and diluted earnings per share?

Basic EPS Diluted EPS

a. No effect Decrease
b. Increase No effect
c. Decrease Increase
d. Decrease Decrease

28. When determining basic earnings per share, annual dividends on convertible noncumulative
preferred stock should:

a. Result in no net effect on the numerator.

b. Be deducted from net income only if declared.
c. Be added back to net income whether declared or not.
d. Be deducted from net income whether declared or not.

29. A company had 8 million shares of common stock outstanding during the current calendar year.
On July 1, the company issued ten thousand $1,000 face value, convertible bonds. Each bond is
convertible into 50 shares of common stock. The bonds were issued at face amount and pay
interest semiannually for 20 years. They have a stated rate of 12%. If the company had income
before tax of $24 million and a net income of $18 million, diluted earnings per share (rounded)
would be reported as:

a. $2.12.
b. $2.16.
c. $2.24.
d. $2.38.

30. A company had 80,000 shares of common stock outstanding during 2020 and 2,000 shares of
$100 par, 6% cumulative preferred stock, each convertible into 5 shares of common stock with
$1 par value per share. The company’s tax rate is 25%. During 2020, the company declared and
paid $5,000 in preferred dividends and no common stock dividends. If the company reported net
income of $318,000 in 2020, what is basic and diluted earnings per share for 2020?

Basic EPS Diluted EPS

a. $3.83 $3.40
b. $3.83 $3.53
c. $3.91 $3.48
d. $3.91 $3.53
8