Question 1

Aster Corp.has $1, 000, 000, 6%, nonconvertible bonds due in 2015 and $1, 500, 000, 3%, convertible bonds due in 2012.The basic earnings per share is $1.25 and the diluted earnings per share is $1.18.Based upon this information, Aster must disclose

Accepted Answer

The company must disclose both basic earnings per share and diluted earnings per share because the convertible bonds are dilutive. The fact that there are nonconvertible bonds does not affect the disclosure requirements. Additionally, while the convertible bonds must be disclosed in the financial statements, they would be included in the liabilities section of the balance sheet, not in the stockholders' equity section.

Question 2

All of the following types of dividends will result in an increase in liabilities as a result of recording the declaration of a dividend except a (Assume the dividends are paid or distributed on a later date.)

Accepted Answer

A stock dividend does not result in an increase in liabilities, as no cash or other asset is being distributed. Rather, the stockholders' equity accounts are affected, as the number of shares outstanding increases while the retained earnings account decreases. The other types of dividends listed all involve the distribution of assets, either cash or property, and therefore will increase liabilities on the company's balance sheet.

Question 3

The Farmer Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $300, 000 and common stock with a total par value of $900, 000.Dividends for one previous year are in arrears.How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $222, 000 are distributed at the end of the current year?

Accepted Answer

The answer of The Farmer Company has issued 10%, fully...

Question 4

Exhibit 17-1 The Zoeller Corporation's stockholders' equity accounts have the following balances as of December 31, 2010:
$\begin{array}{lc}
\text { Common stock, } \$ 10 \text { par }(30,000 \text { sharesissued }\
\text { and outstanding) } & \$ 300,000 \
\text { Additional paid-in capital } & 2,000,000 \
\text { Retained earnings } & \$ 5,700,000 \
\text { Total stockholder's equity } & \$ 8,000,000
\end{array}$

- Refer to Exhibit 17-1.On January 2, 2011, the board of directors of Zoeller declared a 5% stock dividend to be distributed on January 31, 2011.The market price per share of Zoeller's common stock was $30 on January 2 and $32 on January 31.As a result of this stock dividend, the retained earnings account should be decreased by

Accepted Answer

The answer of Exhibit 17-1 The Zoeller Corporation's stockholders' equity...

Question 5

The Stamp Company has issued 10%, partially participating, cumulative preferred stock with a total par value of $200, 000 and common stock with a total par value of $800, 000.The preferred stock participates up to 15% of its par value.No dividends are in arrears.How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $160, 000 are distributed?

Accepted Answer

The answer of The Stamp Company has issued 10%, partially...

Question 6

The Martin Company's stockholders' equity accounts have the following balances as of December 31, 2010:  On January 2, 2011, the board of directors of Martin declared a 10% stock dividend to be distributed on February 15, 2011.The market price of Martin Company's common stock was $65 per share on January 2, 2011.On the date of declaration, the retained earnings account should be decreased by

Accepted Answer

The answer of The Martin Company's stockholders' equity accounts have...

Question 7

The Logan Company does not carry fire insurance for any of its factories.Instead, the company appropriates retained earnings each year for an amount equal to the estimated annual insurance premiums.During the current year, one of its factories is destroyed by fire.Logan should debit which one of the following accounts to record the destruction

Accepted Answer

Since the company does not carry fire insurance, there would be no liability account for fire loss. The loss due to fire account is used to record any losses due to fire, including the loss of the destroyed factory. This account should be debited to record the destruction.

Question 8

If a company makes a prior period adjustment, which of the following describes how it must be reported?

Accepted Answer

When a company makes a prior period adjustment, it must be reported by adjusting the previous years' financial statements presented for comparative purposes. The adjustment is recorded in retained earnings to reflect the correction of errors from prior periods. This approach ensures that the financial statements provide accurate and reliable information for users.

Question 9

If a corporation appropriates retained earnings for treasury stock transactions, the appropriation will affect total amounts for retained earnings and stockholders' equity as $\begin{array}{lll}
&\text { Total } & \text { Total } \
&\text { Retained Earnings } & \text { Stockholders' Equity } \ 
\text { I. } & \text { decrease} & \text { decrease } \
\text { II. } & \text { decrease } & \text { no effect }\
\text { III. } &\text { no effect }& \text {  no effect} \
\text { IV. } &\text { no effect }&\text { decrease } 
\end{array}$

Accepted Answer

Appropriating retained earnings for treasury stock transactions does not decrease the total amount of retained earnings or stockholders' equity; it merely designates a portion of retained earnings for a specific purpose, without changing the total amounts.

Question 10

Which statement best represents the relationship between date of declaration, date of record and ex-dividend date, and date of payment, for a cash dividend.

Accepted Answer

The date of declaration is when the board of directors announces the dividend, and it is at this point that the company records a liability for the dividend amount, hence increasing liabilities.

Question 11

On October 1, 2010, Black Company declared a property dividend payable in the form of marketable equity securities classified as "available for sale" for financial accounting purposes.The marketable equity securities will be distributed to the common stockholders on December 1, 2010.The investment in equity securities originally cost Black $410, 000 on August 1, 2010.The investment's fair value on various dates is as follows: $\begin{array}{ll}
\text { October } 1,2010 & \$ 430,000 \
\text { December } 1,2010 & 435,000 \
\text { December } 31,2010 & 440,000
\end{array}$
 The amount credited to Realized Gain on Disposal of Investments resulting from this dividend transaction should be

Accepted Answer

The amount credited to Realized Gain on Disposal of Investments resulting from this dividend transaction is the difference between the fair value of the securities on the declaration date (October 1, 2010) and their original cost. According to the table provided, the fair value on October 1, 2010 was $430,000, which results in a realized gain of $20,000 ($430,000 - $410,000). Therefore, the correct answer choice is B, $20,000.

Question 12

How will a company's total current liabilities and total stockholders' equity be affected by the declaration of a stock dividend? (Assume the stock dividend is distributed at a later date.) $\begin{array}{lll}
&\text { Total } & \text { Total } \
&\text { Current Liabilities } & \text { Stockholders' Equity } \ 
\text { I. } & \text { increase } & \text { decrease } \
\text { II. } & \text { increase } & \text { no effect }\
\text { III. } &\text { no effect }& \text { decrease } \
\text { IV. } &\text { no effect }&\text { no effect }
\end{array}$

Accepted Answer

The declaration of a stock dividend does not affect total current liabilities or total stockholders' equity. It merely reallocates amounts within the equity section from retained earnings to common stock and additional paid-in capital.

Question 13

During 2010, Omni Corp.had net income of $300, 000.Included in net income was after-tax interest expense of $20, 000 on convertible bonds.The $200, 000 face value of convertible bonds can be converted into common stock at the rate of 200 shares per $1, 000 bond.Prior to the conversion, there were 400, 000 shares of common stock outstanding.The fully diluted earnings per share is

Accepted Answer

To calculate the fully diluted earnings per share, we need to add the potential shares that would be created if the convertible bonds were converted.

Number of shares from convertible bonds = ($200,000 / $1,000) x 200 = 40,000 shares

Total number of shares after conversion = 400,000 + 40,000 = 440,000 shares

Adjusted net income = Net income + (after-tax interest expense x (1 - tax rate))
= $300,000 + ($20,000 x (1 - 0.35)) = $313,000

Fully diluted earnings per share = Adjusted net income / Total number of shares after conversion
= $313,000 / 440,000 shares = $0.7123 or $0.727 (rounded to nearest cent)

Therefore, the best choice is B, $0.727.

Question 14

A dividend that represents a return of capital rather than a distribution of retained earnings is called a

Accepted Answer

A liquidating dividend is a distribution of assets to shareholders that represents a return of capital rather than a distribution of retained earnings. This typically occurs when a company is liquidating and selling off its assets or merging with another company.

Question 15

When a company is determining its dividend policy, the company must adhere to legal requirements.The legal requirements are determined by the

Accepted Answer

The legal requirements for a company's dividend policy are determined by the state in which the company was incorporated. Each state has its own set of laws and regulations that govern corporate actions, including the distribution of dividends.

Question 16

On November 1, 2010, the Metal Construction Company declared a property dividend payable in the form of bonds held for long-term investment purposes.The bonds will be distributed to the common stockholders on December 15, 2010.The bonds to be distributed to the common stockholders originally cost Metal $210, 000.Fair value of the bonds on various dates is as follows: $\begin{array}{ll}
\text { December } 31,2009 & \$ 220,000 \
\text { November } 1,2010 & 225,000 \
\text { December } 15,2010 & 230,000
\end{array}$
 Which one of the following amounts should be used to record the appropriate credit to Property Dividends Payable?

Accepted Answer

The fair value of the bonds on the declaration date should be used to record the appropriate credit to Property Dividends Payable. According to the information provided, the fair value of the bonds on November 1, 2010, was $225,000, which is the amount that should be recorded. Option A is incorrect because it represents the original cost of the bonds, not their fair value. Option B and D are also incorrect because they do not reflect the fair value of the bonds on the declaration date.

Question 17

Exhibit 17-1 The Zoeller Corporation's stockholders' equity accounts have the following balances as of December 31, 2010:
$\begin{array}{lc}
\text { Common stock, } \$ 10 \text { par }(30,000 \text { sharesissued }\
\text { and outstanding) } & \$ 300,000 \
\text { Additional paid-in capital } & 2,000,000 \
\text { Retained earnings } & \$ 5,700,000 \
\text { Total stockholder's equity } & \$ 8,000,000
\end{array}$
 
-Refer to Exhibit 17-1.On January 2, 2011, the board of directors of Zoeller declared a 30% stock dividend to be distributed on January 31, 2011.The market price per share of Zoeller's common stock was $30 on January 2 and $32 on January 31.As a result of this stock dividend, the retained earnings account should be decreased by

Accepted Answer

The answer of Exhibit 17-1 The Zoeller Corporation's stockholders' equity...

Question 18

Which of the following could be a component of other comprehensive income (loss)?

Accepted Answer

Translation adjustments from converting the financial statements of a company's foreign operations into U.S. dollars are included in other comprehensive income or loss. The other options listed are not generally included in other comprehensive income or loss. Realized gains or losses from the sale of investments in available-for-sale securities are recognized in net income, gains or losses on extraordinary items are also recognized in net income, and warranty liability adjustments are recognized as a provision for warranty expenses in net income.

Question 19

The Carol Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $600, 000 and common stock with a total par value of $900, 000.No dividends are in arrears.How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $141, 000 are distributed?

Accepted Answer

Preferred stockholders receive 10% of $600,000, which is $60,000. The remaining $81,000 is distributed between preferred and common stockholders since the preferred stock is fully participating.

Question 20

During 2010, Pesty Co.had net income of $200, 000 including after-tax interest expense of $30, 000 on convertible bonds.The $300, 000 face value of convertible bonds can be converted into common stock at the rate of 300 shares per $1, 000 bond.Prior to the conversion, there were 400, 000 shares of common stock outstanding.The fully diluted earnings per share is

Accepted Answer

To calculate fully diluted earnings per share, we need to add the potential shares that could be created from the conversion of the convertible bonds. In this case, the convertible bonds can be converted into 300 shares per $1,000 bond, so the total number of potential shares that could be created is:

($300,000 / $1,000) x 300 = 90,000 shares

To calculate fully diluted earnings per share, we divide the net income ($200,000) by the total number of shares outstanding after taking into account the potential shares created from the conversion of the convertible bonds:

400,000 + 90,000 = 490,000 shares

$200,000 / 490,000 shares = $0.408 per share

Therefore, the fully diluted earnings per share is $0.469 per share.

Quiz 17: Earnings Per Share and Retained Earnings