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900515FARTH-FA)
Treasury stock was acquired for cash at a price in excess of its original issue price. The
treasury stock was subsequently reissued for cash at a price in excess of its acquisition
price.
Assuming that the par value method of accounting for treasury stock transactions is used,
what is the effect on total stockholders' equity of each of the following events?
Acquisition
of treasury
stock
Decrease
No effect
Decrease
Increase
Acquisition of treasury stock causes owners' equity to be reduced by the amount paid
because the accounts other than cash affected by the transaction are all owners'
equity accounts. The firm is reducing its assets to acquire its own stock. Ownership of
its stock, and therefore owners' equity, is reduced.
Reissuance causes the opposite effect. Owners' equity is increased by the amount paid
because the accounts other than cash affected by the transaction are all owners'
equity accounts. The firm is increasing its assets while increasing ownership in its
stock.
Increase
Decrease
No effect
No effect
Question #2 (AICPA051176FAR
-FA)
Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the
current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share and
recorded the transaction using the cost method on April 15. Murphy reissued the 30,000
shares at $20 per share and recognized a $50,000 gain on its income statement on May 20.
Which of the following statements is correct?
A. Murphy's comprehensive income for the current year is correctly
stated.
B. Murphy's net income for the current year is overstated.
Transactions in treasury stock never cause an income effect.
Transactions with owners acting as owners are not recorded
in income. The "gain" is recorded as a direct increase on
owners' equity - contributed capital from treasury stock.
C. Murphy's net income for the current year is understated.
D. Murphy should have recognized a $50,000 loss on its income
statement for the current year.
Question #3 (AICPA.911136FARP1-FA)
On January 1, 2005, Celt Corp. issued 9% bonds in the face amount of $1,000,000, which
mature on January 1, 2015.
The bonds were issued for $939,000 to yield 10%, resulting in a bond discount of $61,000.
Celt uses the effective interest method of amortizing bond discount. Interest is payable
annually on December 31.
At December 31, 2005, Celt's unamortized bond discount should be
A. $51,000
B. $51,610
C. $52,000
D. $57,100
The December 31, 2005 entry:
Interest expense (.10)$939,000
Bond discount
Cash $1,000,000(.09)
93,900
3,900
90,000
Question #4 (AICPA.911152FARP1-FA)
In 2000, May Corp. acquired land by paying $75,000 down and signing a note with a
maturity value of $1,000,000. On the note's due date, December 31, 2005, May owed
$40,000 of accrued interest and $1,000,000 principal on the note. May was in financial
difficulty and was unable to make any payments. May and the bank agreed to amend the
note as follows:
The $40,000 of interest due on December 31, 2005 was forgiven.
The principal of the note was reduced from $1,000,000 to $950,000 and the maturity
date extended 1 year to December 31, 2006.
May would be required to make one interest payment totaling $30,000 on December
31, 2006.
As a result of the troubled debt restructuring, May should report a gain, before taxes, in its
2005 income statement of
A. $40,000
B. $50,000
C. $60,000
The sum of restructured payments is $980,000 ($950,000 +
Universe Co. issued 500,000 shares of common stock in the current year. Universe declared
a 30% stock dividend. The market value was $50 per share, the par value was $10, and the
average issue price was $30 per share. By what amount will Universe decrease
stockholders' equity for the dividend?
A. $0
Stock dividends do not reduce owners' equity. Rather, a
stock dividend permanently capitalizes a portion of retained
earnings to contributed capital. A stock dividend in excess of
20-25% is capitalized at par value (smaller stock dividends
are capitalized at market value). The amount capitalized in
this case is $1,500,000 = (500,000 shares)(.30)($10). The
journal entry for this stock dividend is: dr. Retained Earnings
1,500,000, cr. Common Stock 1,500,000. There is no change
in total owners' equity.
B. $1,500,000
C. $4,500,000
D. $7,500,000
Question #6 (AICPA.910555FARP1-FA)
On July 1, 2005, Day Co. received $103,288 for $100,000 face amount, 12% bonds, a price
that yields 10%. Interest expense for the six months ended December 31, 2005 should be
A. $6,197
This answer applies the stated rate to the carrying value on
July 1. The yield rate should be used because that rate is the
actual effective rate paid on the bonds given the amount
received for the bonds.
B. $6,000
C. $5,164
Interest expense = (.10)(1/2)($103,288) = $5,164
The yield rate is used for 1/2 a year, the period from July 1
to December 31. It is applied to the carrying value on July 1
because that is the net liability at that date.
D. $5,000
Question #7 (AICPA.920508FARP2-FA)
On July 1, 2005, Vail Corp. issued rights to stockholders to subscribe to additional shares of
its common stock. One right was issued for each share owned. A stockholder could
purchase one additional share for 10 rights plus $15 cash. The rights expired on September
30, 2005. On July 1, 2005, the market price of a share with the right attached was $40,
4,000
$100,000
60,000
Retained earnings
80,000
By what amount should Vail's retained earnings decrease as a result of issuance of the
stock rights on July 1, 2005?
A. $0
When stock rights are issued to current shareholders
pursuant to an additional stock issue or for subscription,
there is no exchange of resources and no journal entry is
recorded.
Similarly, when the rights expire, there is no exchange of
resources and again no journal entry is required. The
issuance of rights is simply an offer to purchase stock. At
expiration, that offer has not been accepted.
B. $5,000
C. $8,000
D. $10,000
Question #8 (AICPA.901125FARP1-FA)
On January 1, 2005, Wolf Corp. issued its 10% bonds in the face amount of $1,000,000,
which mature on January 1, 2015.
The bonds were issued for $1,135,000 to yield 8%, resulting in bond premium of $135,000.
Wolf uses the effective interest method of amortizing bond premium. Interest is payable
annually on December 31.
At December 31, 2005, Wolf's adjusted unamortized bond premium should be
A. $135,000
B. $125,800
The December 31, 2005 entry:
Interest expense ($1,135,000 x .08)
Bond premium
90,800
9,200
Cash $1,000,000(.10)
The unamortized bond premium at the end of 2005 is
$125,800 ($135,000 - $9,200).
C. $121,500
D. $101,500
100,000
Question #9 (AICPA.910506FARP2-FA)
Earl was engaged by Farm Corp. to perform consulting services. Earl's compensation for
these services consisted of 1,000 shares of Farm's $10 par value common stock, to be
issued to Earl on completion of Earl's services.
On the execution date of Earl's employment contract, Farm's stock had a market value of
$40 per share.
Six months later, when Earl's services were completed and the stock issued, the stock's
market value was $50 per share. Farm's management estimated that Earl's services were
worth $100,000 in cost savings to the company.
As a result of this transaction, additional paid-in capital should increase by
A. $100,000
B. $90,000
C. $40,000
D. $30,000
The date the contract is executed sets the total value of the
compensation. That is the date the firm has committed to
compensating Earl with stock. The value of the stock was
considered as the value of the sacrifice to the firm at that
date and affected the decision as to the amount of
compensation. The firm has no control over market price
changes after that date.
Thus the total compensation cost is $40(1,000) = $40,000.
The total par value of the 1,000 shares is $10,000 (1,000 x
$10). Therefore additional paid in capital should increase
by $30,000 ($40,000 - $10,000).
During 2005, Eddy Corp. incurred the following costs in connection with the issuance of
bonds:
Printing and engraving
$ 30,000
Legal fees
160,000
Fees paid to independent accountants for registration information
20,000
Commissions paid to underwriter
300,000
What amount should be recorded as a deferred charge to be amortized over the term of the
bonds?
A. $510,000
Each of the four costs listed is included in the deferred
charge, often called bond issue costs. Each of these costs is
for an activity that is associated with the issuance of
bonds. The sum of the four costs is $510,000.
B. $480,000
C. $300,000
D. $210,000
Clay Corp. had $600,000 of convertible 8% bonds outstanding at June 30, 2005. Each
$1,000 bond was convertible into 10 shares of Clay's $50 par value common stock.
On July 1, 2005, the interest was paid to bondholders and the bonds were converted into
common stock, which had a fair market value of $75 per share. The unamortized premium
on these bonds was $12,000 at the date of conversion.
Under the book value method, this conversion increased the following elements of the
stockholders' equity section by
Common
stock
$300,000
The book value method transfers the book value of the bonds to the common stock
accounts. The journal entry is:
Bonds payable
Premium on bonds
Common stock (600 bonds)(10 shares/bond)($50 par)
Additional paid-in capital (remaining amount)
$306,000
$306,000
$450,000
$162,000
$600,000
$12,000
600,000
12,000
300,000
312,000
On December 31, 2003, Moss Co. issued $1,000,000 of 11% bonds at 109.
Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitled the
bondholder to purchase one share of $5 par common stock for $25. Immediately after
issuance, the market value of each warrant was $4.
On December 31, 2003, what amount should Moss record as discount or premium on
issuance of bonds?
A. $40,000 premium.
B. $90,000 premium.
C. $110,000 discount.
The amount of proceeds allocated to warrants is first
determined. The remaining amount is allocated to the
bonds, which enables the determination of the discount or
premium:
Total bond proceeds: 1.09 x $1,000,000
Less amount allocated to warrants:
$1,090,000
(200,000)
890,000
During 2005, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110
per share.
One share of preferred stock can be converted into three shares of Brad's $25 par common
stock at the option of the preferred shareholder. On December 31, 2006, when the market
value of the common stock was $40 per share, all of the preferred stock was converted.
What amount should Brad credit to Common Stock and to Additional Paid-in Capital -Common Stock as a result of the conversion?
Common
stock
$375,000
500,000
50,000
375,000
175,000
The market value of the common stock is not used in accounting for the conversion.
The balances in the owners' equity accounts are simply changed to common stock
accounts. The total par value of the common stock is credited first; the remainder is
$225,000
$500,000
$50,000
$600,000
$0
A company declared a cash dividend on its common stock on December 15, 2003, payable
on January 12, 2004.
How would this dividend affect stockholders' equity on the following dates?
December
December
January 12, 2004
15, 2003
31, 2003
Decrease
No effect
Decrease
Decrease
No effect
No effect
xx
xx
At payment, the payable is reduced but owners' equity has already been reduced.
No effect
Decrease
No effect
No effect
No effect
Decrease
Incorrect for December 15 and January 12. A dividend decreases owners' equity at
declaration only. This occurred on December 15. January 12 is the payment date.
Dividends payable is reduced but owners' equity has already been reduced at
declaration.
Question #16 (AICPA.930502FAR
-P2-FA)
Beck Corp. issued 200,000 shares of common stock when it began operations in 2003 and
issued an additional 100,000 shares in 2004. Beck also issued preferred stock convertible to
100,000 shares of common stock. In 2005, Beck purchased 75,000 shares of its common
stock and held it in Treasury. At December 31, 2005, how many shares of Beck's common
stock were outstanding?
A. 400,000
B. 325,000
C. 300,000
D. 225,000
225,000 = 200,000 + 100,000 - 75,000.
Outstanding shares exclude those in the treasury. The
preferred stock has yet to be converted to common and
thus these shares are also excluded from outstanding
common shares. Outstanding common stock equals total
shares issued less shares in the treasury. Treasury shares
On January 2, 2005, Nast Co. issued 8% bonds with a face amount of $1,000,000 that
mature on January 2, 2011. The bonds were issued to yield 12%, resulting in a discount of
$150,000. Nast incorrectly used the straight-line method instead of the effective interest
method to amortize the discount.
How is the carrying amount of the bonds affected by the error?
At
December
31, 2005
At January 2, 2011
Overstated
Understated
Overstated
No effect
Early in the bond term, the net liability is the smallest for bonds issued at a discount,
regardless of amortization method. Interest expense under the effective interest
method is therefore smaller than later in the term because each previous amortization
reduces the unamortized discount thus raising the book value.
Amortization of bond discount is the difference between interest expense and cash
interest paid.
Thus, the amortization of discount is small early in the term relative to later in the
term for the effective interest method. The book value then is small early in the term
relative to later in the term under the effective interest method.
The straight-line method recognizes the same amount of interest expense each period,
which is equal to the average amount of interest expense per period under the
effective interest method. Thus, the straight-line method amortizes more bond
discount early in the term than does the effective interest method (which starts out
amortizing only a relatively small amount). Therefore, the bonds' book value is greater
under the SL method (overstated relative to the effective interest method) because
more of the discount is amortized early in the term. The smaller the remaining
unamortized discount, the larger the book value.
At maturity (1/2/2011), the book value under both methods is the same -- face value.
Understated
Overstated
Understated
No effect
Deb Co. records all sales using the installment method of accounting. Installment sales
contracts call for 36 equal monthly cash payments.
According to the FASB's conceptual framework, the amount of deferred gross profit relating
to collections 12 months beyond the balance sheet date should be reported in the
A. Current liability section as a deferred revenue.
B. Noncurrent liability section as a deferred revenue.
C. Current asset section as a contra account.
Deferred gross profit on installment receivables is a
valuation account or contra account which reduces the
related net installment receivable to cost.
Installment accounts receivable
$40,000
Less deferred gross profit
(10,000)
$30,000
Mirr, Inc. was incorporated on January 1, 2005, with proceeds from the issuance of
$750,000 in stock and borrowed funds of $110,000.
During the first year of operations, revenues from sales and consulting amounted to
$82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared
a $3,000 cash dividend, payable to stockholders on January 15, 2006.
No additional activities affected owners' equity in 2005. Mirr's liabilities increased to
$120,000 by December 31, 2005.
On Mirr's December 31, 2005 balance sheet, total assets should be reported at
A. $885,000
Using the accounting equation with end of year known
balances and changes, assets can be derived:
Assets = liabilities + owners' equity Assets
= $120,000 + owners' equity
= $120,000 + $750,000 (stock)
+ $82,000 (revenue)
- $64,000 (expense)
- $3,000 (dividends)
= $885,000