1. Companies issue convertible debt in order to obtain financing at a cheaper interest rate.

True
A.

False
B.

2. When convertible preferred stock is exercised, the book value method is used to account for the transaction.

True
A.

False
B.

3. When bonds are issued with detachable stock warrants, and the fair market value is known for both securities, the price is allocated between
the two securities using the proportional method.

True
A.

False
B.

4. Earnings per share is reported for both common and preferred stock.

True
A.

False
B.

5. In a complex capital structure, diluted earnings per share is reported when the securities included in the capital structure are antidilutive.

True
A.

False
B.

6. Nondetachable warrants do not require an allocation of the proceeds between the bonds and the warrants.

True
A.

False
B.

7. In accounting for the exercise of convertible preferred stock for common stock, if the par value of the common stock issued exceeds the book
value of the preferred stock, Retained Earnings is debited for the difference.

True
A.
 False
B.

8. In computing earnings per share, treasury shares reacquired during the year are retroactively adjusted to be reacquired as of the beginning of
the year.

True
A.

False
B.

9. A company with a complex capital structure calculates only basic earnings per share.

True
A.

False
B.

10. Antidilutive securities are securities that upon conversion or exercise decrease earnings per share.

True
A.

False
B.

11. International accounting standards require that the issuer of convertible debt record the liability and equity components separately.

True
A.

False
B.

12. Convertible bonds are usually converted into:

preferred stock.
A.

common stock.
B.

other bonds at a lower interest rate.

C.

stock warrants.
D.

13. The conversion of bonds is recorded using the:

proportional method.
A.
 incremental method.
B.

par value method.

C.

book value method.

D.

14. When only the fair market value of the stock warrants is known, the sales price of bonds with detachable warrants is allocated using the:

proportional method.
A.

book value method.

B.

incremental method.
C.

market value method.

D.

15. Which of the following methods has the FASB historically preferred in accounting for stock-based compensation?

Fair value method.

A.

Intrinsic value method.

B.

Book value method.

C.

Par value method.

D.

16. Which of the following is not one of the commonly used stock compensation plans?

Stock option plans.

A.

Stock appreciation rights plans.

B.

Restricted-stock plans.
C.

Stock conversion plans.

D.

17. Which of the following is the formula for computing EPS?

 (Net income – Preferred dividends) ÷ Average number of shares outstanding
A.

(Net income – Preferred dividends) ÷ Weighted average number of shares outstanding

B.

(Net income + Preferred dividends) ÷ Weighted average number of shares outstanding

C.

Net income ÷ Number of shares outstanding

D.

18. If preferred stock is cumulative, and dividends have not been declared in the past two years or in the current year, what amount should be
deducted from net income in the EPS calculation?

Only the dividends in arrears.

A.

Only the current year's dividend.

B.

Both the current year's dividend and the dividends in arrears.

C.

Nothing should be deducted because no dividends were declared.

D.

19. The if-converted method would apply to which of the following securities?

Preferred stock
A.

Stock options
B.

Warrant
C.

Convertible bonds
D.

20. The treasury stock method would apply to which of the following securities?

Stock options.
A.

Treasury stock.
B.

Preferred stock.
C.

Convertible preferred stock.

D.
21. What will the numerator of the diluted EPS calculation consist of when convertible preferred stock is being included?

Net income + Preferred dividends (Net of tax effect).

A.

Net income + Preferred dividends.

B.

Net income.
C.

Net income – Preferred dividends.

D.

1. Companies issue convertible debt in order to obtain financing at a cheaper interest rate.
True

A.

False

B.

The conversion privilege entices investors to accept a lower interest rate than would normally be the case on a straight debt issue.

2. When convertible preferred stock is exercised, the book value method is used to account for the transaction.
True

A.

False

B.

No gain or loss is recognized on the conversion of preferred stock to common stock.

3. When bonds are issued with detachable stock warrants, and the fair market value is known for both securities, the price is allocated between the two securities using the
proportional method.
True

A.

False

B.

When both fair market values are known, the proportional method is used to allocate the price between the two securities.

4. Earnings per share is reported for both common and preferred stock.

True

A.

False

B.

Earnings per share is reported for common stock only.

5. In a complex capital structure, diluted earnings per share is reported when the securities included in the capital structure are antidilutive.
True

A.

False

B.

If the securities are antidilutive, then diluted earnings per share is not reported.

6. Nondetachable warrants do not require an allocation of the proceeds between the bonds and the warrants.
True

A.

False

B.

Similar to accounting for convertible bonds, companies record the entire proceeds from nondetachable warrants as debt.

7. In accounting for the exercise of convertible preferred stock for common stock, if the par value of the common stock issued exceeds the book value of the preferred stock,
Retained Earnings is debited for the difference.

True

A.

False

B.

In accounting for the conversion of preferred stock, the book value method is used and no gain or loss is recorded.

8. In computing earnings per share, treasury shares reacquired during the year are retroactively adjusted to be reacquired as of the beginning of the year.

True

A.

False

B.

In computing earnings per share, stock dividends and stock splits are treated as if they had occurred at the beginning of the year since stock dividends and stock splits do not
affect the net assets of the company.

9. A company with a complex capital structure calculates only basic earnings per share.

True

A.

False

B.

A company with a complex capital structure calculates both basic and diluted earnings per share.

10. Antidilutive securities are securities that upon conversion or exercise decrease earnings per share.
True

A.
 False

B.

Antidilutive securities are securities that upon conversion or exercise increase earnings per share.

11. International accounting standards require that the issuer of convertible debt record the liability and equity components separately.
True

A.

False

B.

Under international accounting standards, the issuer of convertible debt records the liability and equity components separately.

12. Convertible bonds are usually converted into:

preferred stock.

A.

common stock.

B.

other bonds at a lower interest rate.

C.

stock warrants.

D.

Convertible bonds are usually convertible into a specified number of common shares.

13. The conversion of bonds is recorded using the:

proportional method.

A.

incremental method.

B.

par value method.

C.

book value method.

D.

The most commonly used method to record the conversion of bonds is the book value method.

14. When only the fair market value of the stock warrants is known, the sales price of bonds with detachable warrants is allocated using the:
proportional method.

A.

book value method.

B.

incremental method.

C.
 market value method.

D.

The incremental method is used when only one fair market value is known.

15. Which of the following methods has the FASB historically preferred in accounting for stock-based compensation?
Fair value method.

A.

Intrinsic value method.

B.

Book value method.

C.

Par value method.

D.

The FASB has historically preferred the fair-value method in accounting for stock-based compensation.

16. Which of the following is not one of the commonly used stock compensation plans?

Stock option plans.

A.

Stock appreciation rights plans.

B.

Restricted-stock plans.

C.

Stock conversion plans.

D.

The first three options are all commonly used stock compensation plans.

17. Which of the following is the formula for computing EPS?

(Net income – Preferred dividends) ÷ Average number of shares outstanding

A.

(Net income – Preferred dividends) ÷ Weighted average number of shares outstanding

B.

(Net income + Preferred dividends) ÷ Weighted average number of shares outstanding

C.

Net income ÷ Number of shares outstanding

D.

Option B is the correct formula. EPS is equal to the net income available to common stockholders divided by the weighted average number of shares outstanding.

18. If preferred stock is cumulative, and dividends have not been declared in the past two years or in the current year, what amount should be deducted from net income in the EPS
calculation?
Only the dividends in arrears.

A.
 Only the current year's dividend.

B.

Both the current year's dividend and the dividends in arrears.

C.

Nothing should be deducted because no dividends were declared.

D.

When preferred stock is cumulative and dividends aren't declared in the current year, the amount equal to the dividend that should have been declared for the current year only
should be deducted from net income.

19. The if-converted method would apply to which of the following securities?
Preferred stock

A.

Stock options

B.

Warrant

C.

Convertible bonds

D.

The if-converted method applies to any security that is convertible into common stock.

20. The treasury stock method would apply to which of the following securities?
Stock options.

A.

Treasury stock.

B.

Preferred stock.

C.

Convertible preferred stock.

D.

The treasury stock method applies to both stock options and warrants.

21. What will the numerator of the diluted EPS calculation consist of when convertible preferred stock is being included?
Net income + Preferred dividends (Net of tax effect).

A.

Net income + Preferred dividends.

B.

Net income.

C.

Net income – Preferred dividends.

D.
 Only net income because it is assumed that the convertible preferred shares have been converted and are outstanding as common shares.

1. At the time convertible bonds are converted into stock:

the face value of the bonds is recorded as common stock.

A.

the market value of the bonds is recorded as common stock.

B.

a gain or loss should be recognized.

C.

the book value of the bonds is transferred to paid-in capital accounts.

D.

2. When convertible debt is retired:

only losses on retirement are recognized.

A.

only gains on retirement are recognized.

B.

either a gain or a loss on retirement is recognized.

C.

neither gains nor losses are recognized.

D.

3. When convertible preferred stock is converted into common stock:

the par value of the preferred is recorded as common stock.

A.

the market value of the preferred is recorded as common stock.

B.

a gain or loss is recognized.

C.

the par value of the preferred stock and any additional paid-in capital is transferred to Common Stock and Additional Paid-in
Capital.
D.

4. The issuance of warrants arises under all of the following situations except to:

make different types of securities more attractive to new investors.

A.

give existing stockholders a preemptive right to purchase stock.

B.

provide compensation to executives.

C.
 give bondholders the preemptive right to purchase additional stock.
D.

5. The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the:

face value of the bonds.

A.

fair market value of the bonds.

B.

aggregate fair market value of the bonds and the warrants.

C.

face value of the bonds and market value of the warrants.

D.

6. For which of the following securities is an allocation of the sales proceeds necessary?

Convertible bonds.
A.

Bonds issued with detachable warrants.

B.

Bonds issued with nondetachable warrants.

C.

Bonds issued with either detachable or nondetachable warrants.

D.

7. Accounting for stock option plans must be based on:

the fair value method.

A.

the intrinsic value method.

B.

either the fair value method or the intrinsic value method.

C.

the option-pricing method.

D.

8. Under the fair value method, compensation expense is recorded:

on the date of grant.

A.

on the date of exercise.

B.
 evenly over the service period.
C.

evenly over the period from the grant date to the measurement date.
D.

9. Disclosure for compensation plans should include all of the following except the:

number of shares under option.

A.

weighted average fair value of options granted during the year.

B.

significant assumptions used to estimate the fair values of the stock options.
C.

All of the options are required disclosures.

D.

10. Earnings per share in a simple capital structure is computed by dividing:

net income by the ending number of shares outstanding.

A.

net income by the weighted average number of shares outstanding.

B.

net income less preferred dividends by the ending number of shares outstanding.
C.

net income less preferred dividends by the weighted average number of shares outstanding.
D.

11. The weighted average number of shares outstanding is affected by all of the following except:

the purchase of treasury stock.

A.

stock dividends.
B.

stock splits.
C.

stock warrants.
D.

12. Which earnings per share amounts are reported in a complex capital structure?

Basic EPS only.

A.
 Diluted EPS only.
B.

Basic and diluted EPS.

C.

Basic and simple EPS.

D.

13. The diluted EPS computation considers all of the following except the impact of:

convertible securities.
A.

stock options.
B.

stock warrants.
C.

antidilutive securities.
D.

14. The treasury stock method of computing incremental shares applies to:

convertible bonds only.

A.

convertible preferred stock only.

B.

stock options and warrants.

C.

All convertible securities.

D.

15. Complex capital structures require all of the following disclosures except:

a description of pertinent rights of the various securities outstanding.

A.

a reconciliation of the numerators and denominators of the basic and diluted per share computations.
B.

the effect given preferred dividends in determining income available to common stockholders.
C.

the effect of conversions before year-end.

D.

16. All of the following statements are true regarding international accounting standards and their treatment of financial instruments, including
dilutive securities, except:
 under iGAAP, convertible bonds are bifurcated.
A.

under iGAAP, the fair value of shares and options awarded to employees is recognized over the period to which the employees'
services relate.
B.

a significant difference in iGAAP and U.S. GAAP exists with respect to the accounting for convertible debt.
C.

iGAAP record combined bond issue's debt with equity components.

D.