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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 share outstanding
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
Assets Equity Paid-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
20. 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
21. 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 Concepts No. 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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Acc 563 week 10 quiz – strayer new

  • 1. ACC 563 Week 10 Quiz – Strayer NEW Click On The Link Below to Purchase A+ Graded Material Instant Download http://budapp.net/ACC-563-Week-10-Quiz-Strayer-NEW-ACC563W10Q.htm 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
  • 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
  • 3. 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
  • 4. 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
  • 5. 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 share outstanding 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
  • 6. 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 Assets Equity Paid-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 20. 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 21. 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.
  • 7. 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 Concepts No. 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.
  • 8. 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)?
  • 9. 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
  • 10. 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
  • 11. 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
  • 12. 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
  • 13. 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.
  • 14. 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 .
  • 15. 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.
  • 16. 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
  • 17. 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?