1. ACC/423 Final Exam
ANSWERS ARE HERE
Quality and inexpensive:
1) Proceeds from an issue of debt securities having stock warrants should NOT be allocated
between debt and equity features when
A. the allocation would result in a discount on the debt security
B. the warrants issued with the debt securities are nondetachable
C. exercise of the warrants within the next few fiscal periods seems remote
D. the market value of the warrants is NOT readily available
2) The conversion of preferred stock may be recorded by the
A. market value method
B. par value method
C. book 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. treated as a prior period adjustment
B. treated as a direct reduction of retained earnings
C. reflected currently in income as an extraordinary item
D. reflected currently in income, but NOT as an extraordinary item
4) A primary source of stockholders' equity is
A. contributions by stockholders
B. both income retained by the corporation and contributions by stockholders
C. appropriated retained earnings
D. income retained by the corporation
5) Stockholders' equity is generally classified into two major categories:
A. retained earnings and unappropriated capital
B. earned capital and contributed capital
C. appropriated capital and retained earnings
D. contributed capital and appropriated capital

2. 6) 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 shares issued
B. Any of these provides an appropriate basis for recording the transaction
C. par value of the shares issued
D. market value of the services received
7) Treasury shares are
A. shares held as an investment by the treasurer of the corporation
B. issued but NOT outstanding shares
C. shares held as an investment of the corporation
D. issued and outstanding shares
8) "Gains" on sales of treasury stock (using the cost method) should be credited to
A. paid-in capital from treasury stock
B. other income
C. capital stock
D. retained earnings
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 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
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
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) When computing diluted earnings per share, convertible bonds are
A. ignored
B. assumed converted only if they are dilutive
C. assumed converted whether they are dilutive or antidilutive
D. assumed converted only if they are antidilutive
12) What effect will the acquisition of treasury stock have on stockholders' equity and earnings
per share, respectively?

3. A. Decrease and no effect
B. Increase and decrease
C. Increase and no effect
D. Decrease and increase
13) On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend. Prior to
this dividend, Kent had 100,000 shares of $1 par value common stock issued and outstanding.
The fair value of Kent 's common stock was $20 per share on May 1, 2007. As a result of this
stock dividend, Kent's total stockholders' equity
A. did NOT change
B. increased by $200,000
C. decreased by $10,000
D. decreased by $200,000
14) 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. Increase | Increase
B. No effect | No effect
C. Increase | No effect
D. No effect | Increase
15) At its date of incorporation, Wilson, Inc. issued 100,000 shares of its $10 par common stock
at $11 per share. During the current year, Wilson acquired 20,000 shares of its common stock
at a price of $16 per share and accounted for them by the cost method. Subsequently, these
shares were reissued at a price of $12 per share. There have been no other issuances or
acquisitions of its own common stock. What effect does the reissuance of the stock have on the
following accounts?
Retained Earnings | Additional Paid-in Capital
A. No effect | No effect
B. Decrease | Decrease
C. Decrease | No effect
D. No effect | Decrease
16) Which of the following is correct about the effective-interest method of amortization?
A. The effective-interest method produces a constant rate of return on the book value of the
investment from period to period.
B. The effective interest method applied to investments in debt securities is different from that
applied to bonds payable.
C. Amortization of a premium decreases from period to period.
D. Amortization of a discount decreases from period to period
17) An unrealized holding loss on a company's available-for-sale securities should be reflected
in the current financial statements as

4. A. other comprehensive income and deducted in the equity section of the balance sheet.
B. an extraordinary item shown as a direct reduction from retained earnings
C. a note or parenthetical disclosure only
D. a current loss resulting from holding securities
18) An unrealized holding gain on a company's available-for-sale securities should be reflected
in the current financial statements as
A. other comprehensive income and included in the equity section of the balance sheet.
B. an extraordinary item shown as a direct increase to retained earnings
C. a note or parenthetical disclosure only
D. a current gain resulting from holding securities
19) Investments in debt securities should be recorded on the date of acquisition at
A. face value plus brokerage fees and other costs incident to the purchase
B. lower of cost or market
C. market value plus brokerage fees and other costs incident to the purchase
D. market value
20) Securities which could be classified as held-to-maturity are
A. warrants
B. redeemable preferred stock
C. municipal bonds
D. treasury stock
21) Which of the following is NOT a debt security?
A. Commercial paper
B. Convertible bonds
C. Loans receivable
D. All of these are debt securities
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. A reduction of the investment | A reduction of the investment
B. Income | Income
C. Income | A reduction of the investment
D. A reduction of the investment | Income
23) When a company holds between 20% and 50% of the outstanding stock of an investee,
which of the following statements applies?
A. The investor should use the equity method to account for its investment unless circum-
stances indicate that it is unable to exercise "significant influence" over the investee
B. The investor should always use the equity method to account for its investment
C. The investor must use the fair value method unless it can clearly demonstrate the ability to

5. exercise "significant influence" over the investee
D. The investor should always use the fair value method to account for its investment
24) Bista Corporation declares and distributes a cash dividend that is a result of current
earnings. How will the receipt of those dividends affect the investment account of the investor
under each of the following accounting methods?
Fair Value Method | Equity Method
A. Increase | Decrease
B. No Effect | Decrease
C. No Effect | No Effect
D. Decrease | No Effect
25) Debt securities that are accounted for at amortized cost, NOT fair value, are
A. trading debt securities
B. held-to-maturity debt securities
C. available-for-sale debt securities
D. never-sell debt securities
26) Equity securities acquired by a corporation which are accounted for by recognizing
unrealized holding gains or losses as other comprehensive income and as a separate
component of stockholders' equity are
A. trading securities where a company has holdings of less than 20%
B. available-for-sale securities where a company has holdings of less than 20%
C. securities where a company has holdings of between 20% and 50%
D. securities where a company has holdings of more than 50%
27) Use of the effective-interest method in amortizing bond premiums and discounts results in
A. a smaller amount of interest income over the life of the bond issue than would result from use
of the straight-line method
B. a greater amount of interest income over the life of the bond issue than would result from use
of the straight-line method
C. a varying amount being recorded as interest income from period to period
D. a variable rate of return on the book value of the investment
28) All of the following are characteristics of a derivative financial instrument EXCEPT the
instrument
A. All of these are characteristics
B. has one or more underlyings and an identified payment provision
C. requires a large investment at the inception of the contract
D. requires or permits net settlement
29) The accounting for fair value hedges records the derivative at its
A. historical cost
B. amortized cost
C. carrying value

6. D. fair value
30) All of the following statements regarding accounting for derivatives are correct EXCEPT that
A. gains and losses resulting from hedge transactions are reported in different ways, depending
upon the type of hedge
B. they should be recognized in the financial statements as assets and liabilities
C. they should be reported at fair value
D. gains and losses resulting from speculation should be deferred