Question 1

A stock split is a monetary transaction. Consequently, a company that splits its stock must make several financial statement adjustments.

Accepted Answer

A stock split does not involve a monetary transaction; it simply changes the number of shares outstanding and the per-share price, without affecting the company's balance sheet values or the overall market capitalization.

Question 2

When there is a purchase and sale of stock, or a payment of dividends, there is never any gain or loss recorded.

Accepted Answer

When there is a purchase or sale of stock, or a payment of dividends, there is no gain or loss recorded because these transactions do not affect the company's net assets.

Question 3

Kimberly-Clark recently repurchased 6.198 million shares of common stock at a cost of $778 million. One plausible reason for this is that the company feels that its stock is overvalued at the current market price.

Accepted Answer

A company typically repurchases its own shares when it believes the stock is undervalued, indicating that it thinks the shares are worth more than the current market price.

Question 4

When Kimberly-Clark recently repurchased its stock, this action "downsized" the company. This has the opposite financial statement effects as stock issuance.

Accepted Answer

Repurchasing stock reduces the number of shares outstanding, which can increase earnings per share and return equity to shareholders, opposite to stock issuance which increases shares and raises capital.

Question 5

If Home Depot loses its dominance in the retail home improvement market and eventually becomes bankrupt, its preferred shareholders carry senior positions as claimants in bankruptcy vis-à-vis common shareholders.

Accepted Answer

In the event of bankruptcy, preferred shareholders have a higher claim on assets and earnings than common shareholders, meaning they are paid out before common shareholders in the liquidation process.

Question 6

Retained earnings and accumulated other comprehensive income (AOCI) can be found in the contributed capital section of stockholders' equity.

Accepted Answer

Retained earnings and accumulated other comprehensive income (AOCI) are part of stockholders' equity but are not classified under contributed capital. Contributed capital typically includes amounts received from shareholders in exchange for stock, while retained earnings and AOCI represent earnings and other comprehensive income that have been retained or accumulated by the company over time.

Question 7

When stock options are granted, the contributed capital increase is equal to the number of options granted multiplied by the estimated fair-value of the stock on the grant date.

Accepted Answer

When stock options are granted, the contributed capital increase (recorded in additional paid-in capital) is based on the fair value of the options themselves, not the fair value of the stock on the grant date. The valuation of the options typically involves using models such as the Black-Scholes or binomial models to estimate their worth at the time of grant.

Question 8

Mayhill Inc. reports 4,287,000 stock options granted during fiscal 2017 at a weighted-average fair-value of $23.10. The average vesting period for these options is four years. Mayhill should record a $99,029,700 expense on its income statement related to this option grant.

Accepted Answer

The correct expense calculation for the stock options should be the number of options (4,287,000) multiplied by the weighted-average fair value ($23.10), which equals $99,029,700. However, since the options vest over four years, this total expense should be recognized over the vesting period, not all at once. Therefore, the annual expense recorded on the income statement would be one-fourth of $99,029,700, assuming straight-line expense recognition.

Question 9

A re-issuance of treasury stock at a price lower than what it was repurchased for results in a loss on the income statement.

Accepted Answer

The re-issuance of treasury stock at a price lower than its repurchase price does not result in a loss on the income statement. Instead, it affects the equity section of the balance sheet, typically reducing additional paid-in capital or retained earnings.

Question 10

Stockholders' equity is not accounted for at current fair value.

Accepted Answer

Stockholders' equity is primarily recorded at historical cost, not at current fair value, reflecting the original transaction values rather than current market values.

Question 11

A company is worse off by paying cash dividends because it must record a loss for this transaction in its income statement.

Accepted Answer

Paying cash dividends does not result in a loss on the income statement; it is a distribution of retained earnings reflected in the balance sheet and statement of changes in equity.

Question 12

In 2017, Macy's paid $459 million of cash dividends. These dividends reduced assets and reduced retained earnings.

Accepted Answer

Paying cash dividends reduces a company's cash balance (an asset) and also reduces retained earnings (a component of shareholders' equity), reflecting the distribution of profits to shareholders.

Question 13

A company with outstanding in-the money employee stock options will report a diluted EPS that is lower than basic EPS.

Accepted Answer

Diluted EPS takes into account the potential dilution that could occur if all in-the-money options and other dilutive securities were exercised or converted into common stock, thereby increasing the total number of shares outstanding and typically resulting in a lower EPS than the basic EPS, which does not consider such potential dilution.

Question 14

Because diluted EPS include dilutive securities such as convertible securities and employee stock options, it must always be less than or equal to basic EPS.

Accepted Answer

Diluted EPS accounts for the potential dilution that could occur if convertible securities and options were exercised, which increases the number of shares outstanding, typically leading to a lower EPS than the basic EPS, which does not consider such potential dilution.

Question 15

Why might a company repurchase its own stock?

Accepted Answer

A company might repurchase its own stock for several reasons: it may believe its shares are undervalued (A), want to offset the dilutive effects of stock options (B), potentially sell the shares later for a profit (C), and improve its earnings per share by reducing the number of shares outstanding (D).

Question 16

In June 2017, Newcastle Inc. announced a 3-for-1 stock split. On the split date, Newcastle had about 81.9 million shares outstanding.
After the split the number of shares outstanding was:

Accepted Answer

In a 3-for-1 stock split, each share is divided into three shares, so the total number of shares outstanding is multiplied by three. Therefore, 81.9 million shares outstanding before the split would become 81.9 million * 3 = 245.7 million shares after the split.

Question 17

If a company issues 2,500 shares of common stock at a market price of $48 per share, which of the following is the correct balance sheet effect?

Accepted Answer

Issuing 2,500 shares at $48 each results in $120,000 (2,500 * $48) in cash, increasing both cash and contributed capital (equity) by this amount on the balance sheet.

Question 18

eBay's footnote regarding employee stock compensation details the grant of 2 million options during the year of 2015, the fair-value of which was computed as $6.84.
If the options have, on average, a four-year vesting schedule and the company faces a 35% tax rate on income, what affect would this option grant have on eBay's accounts in 2015?

Accepted Answer

The total fair value of the options is $6.84 * 2,000,000 = $13,680,000. With a four-year vesting schedule, the expense recognized in 2015 is $13,680,000 / 4 = $3,420,000. The tax effect is $3,420,000 * 35% = $1,197,000, leading to a $1,197,000 increase in deferred tax asset and a corresponding decrease in tax expense.

Question 19

During the fiscal year ended January 28, 2017, Abercrombie & Fitch reported the exercise of 2,000 shares at a weighted-average exercise price of $22.87.
If Abercrombie's stock was trading at $11.36 on January 27, 2017 and $12.00 on December 30,2016, which of the following details an impact of this transaction on Abercrombie's accounts?

Accepted Answer

The exercise of 2,000 shares at a weighted-average exercise price of $22.87 results in an increase of $45,740 to cash (2,000 shares * $22.87 per share).

Question 20

Buffalo Co. compensates its executives with restricted stock. During 2017, the company granted 14,250 shares of $1 par value restricted common stock that will vest over ten (10) years. The market value of the shares was $9 at the time of the grant.
What is the impact of this transaction on additional paid-in capital?

Accepted Answer

The additional paid-in capital is increased by the difference between the market value and the par value of the shares. The market value is $9, and the par value is $1, so the difference is $8 per share. For 14,250 shares, this results in an increase of $114,000 (14,250 shares * $8).

Quiz 8: Stock Transactions, Dividends, and EPS