Question 1

Norwalk Corporation issued 10,000 shares of $50 par preferred stock at $74 a share. A stock warrant attached to each preferred share allows the holder to buy one share of $10 par common stock for $20. Right after issuance, the preferred stock sells ex-rights for $63 per share. The warrants began selling at $7 per warrant. The amount credited to Common Stock Warrants at issuance of the preferred stock is
A) $ 0
B) $ 70,000
C) $ 74,000
D) $160,000

Accepted Answer

The answer of Norwalk Corporation issued 10,000 shares of $50...

Question 2

Which of the following methods should be used to account for the conversion of preferred stock to common stock? 
A) I
B) II
C) III
D) IV

Accepted Answer

The answer of Which of the following methods should be...

Question 3

Which of the following statements is true regarding preferred stock?
A) shareholders are guaranteed an annual dividend
B) shareholders will receive a dividend if common stockholders are paid
C) dividends in arrears are a current liability
D) dividends in arrears are either a current or long-term liability, depending upon when the corporation last declared a dividend

Accepted Answer

Preferred stockholders have a priority claim on dividends over common stockholders. However, they only receive a dividend if the common stockholders have been paid. Dividends in arrears are not a liability; they represent accumulated dividends that were not paid in previous periods.

Question 4

Budget Leasing issued 500 shares of $20 par value convertible preferred stock at $22 per share. Each preferred share is converted to 7 shares of $4 par value common stock. The entry to record this conversion would include a
A) debit to Additional Paid-in Capital on Preferred Stock for $11,000
B) credit to Common Stock for $11,000
C) debit to Retained Earnings for $3,000
D) credit to Additional Paid-in Capital from Preferred Stock Conversion for $3,000

Accepted Answer

The answer of Budget Leasing issued 500 shares of $20...

Question 5

The accounting method that is used for share appreciation rights (SARs) compensation plans is similar to the accounting procedures that can be used for
A) fixed compensatory share option plans
B) performance-based share option plans
C) noncompensatory share option plans
D) both fixed compensatory and performance-based share option plans

Accepted Answer

The accounting method used for Share Appreciation Rights (SARs) compensation plans is similar to the accounting procedures for both fixed compensatory and performance-based share option plans. This is because SARs, like these share option plans, involve recognizing compensation expense based on the fair value of the equity instruments granted, which can vary over time similar to the way the value of options can change.

Question 6

Exhibit 15-8 On January 1, 2013, Margarita Company granted share appreciation rights (SARs) to the president, which permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000 shares of the company's stock on the exercise date. The service period ends on December 31, 2015, and the rights must be exercised by December 31, 2018. Assume that on December 31, 2016, the president exercises all of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as follows: 
-Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2013?
A) $ 3,333
B) $10,000
C) $30,000
D) $33,333

Accepted Answer

The answer of Exhibit 15-8 On January 1, 2013, Margarita...

Question 7

Dividends in arrears pertain to
A) non cumulative preferred stock
B) non-participating preferred stock
C) cumulative preferred stock
D) convertible preferred stock

Accepted Answer

Dividends in arrears refer to the unpaid dividends on cumulative preferred stocks. Cumulative preferred stocks accumulate unpaid dividends until they are paid in full. Non-cumulative preferred stocks do not accumulate unpaid dividends. Non-participating and convertible preferred stocks do not pertain to the payment of dividends.

Question 8

Preferred stockholders share with common stockholders in any "extra" dividends when the preferred stock is
A) cumulative
B) callable
C) participating
D) convertible

Accepted Answer

Participating preferred stockholders have the right to receive additional dividends beyond their fixed dividend rate if the company declares extra dividends for common stockholders. This means they are able to participate in the extra dividend distribution. Cumulative preferred stockholders have the right to receive any unpaid dividends from previous years before common stockholders receive a dividend, but this does not necessarily guarantee they will receive extra dividends. Callable and convertible preferred stock do not necessarily have any rights to extra dividends.

Question 9

When recording the conversion of preferred stock into common stock, if the total contributed capital eliminated in regard to the preferred stock is less than the common stock par value, the difference is debited to
A) Additional Paid-in Capital on Preferred Stock
B) Additional Paid-in Capital on Common Stock
C) Stockholders Equity
D) Retained Earnings

Accepted Answer

The difference is debited to Retained Earnings when the total contributed capital eliminated is less than the common stock par value during the conversion of preferred stock into common stock.

Question 10

Exhibit 15-8 On January 1, 2013, Margarita Company granted share appreciation rights (SARs) to the president, which permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000 shares of the company's stock on the exercise date. The service period ends on December 31, 2015, and the rights must be exercised by December 31, 2018. Assume that on December 31, 2016, the president exercises all of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as follows: 
-Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2016?
A) $ 0
B) $ 8,000
C) $11,500
D) $15,333

Accepted Answer

The answer of Exhibit 15-8 On January 1, 2013, Margarita...

Question 11

For a stock appreciation rights (SAR) compensation plan, the measurement date is the date
A) on which the options (SARs) are granted to the employees
B) when the employees may first exercise the options (SARs)
C) on which the options (SARs) are exercised
D) of the adoption of the plan

Accepted Answer

The measurement date for a SAR compensation plan is the date on which the options (SARs) are exercised by the employees. This is because the amount of compensation expense recognized by the company is based on the increase in the stock price from the exercise date to the measurement date. The grant date and adoption date are not relevant for determining the compensation expense, and the date when the employees may first exercise the options (SARs) is simply a vesting date.

Question 12

Wally, Inc. issued 500 shares of $10 par preferred stock at $83 a share. Each share had a warrant attached that allowed the holder to purchase one share of $5 par common stock for $15. Soon after the preferred stock was issued, the preferred stock was selling ex-rights for $64 a share and the warrants for $16 each. The entry to record the issuance of the preferred stock would include a
A) debit to Retained Earnings for $8,300
B) credit to Additional Paid-in Capital on Preferred Stock for $28,200
C) debit to Common Stock Warrants for $8,300
D) credit to Additional Paid-in Capital on Common Stock for $8,300

Accepted Answer

The entry to record the issuance of the preferred stock would include a credit to Preferred Stock for ($83 x 500) = $41,500 and a credit to Additional Paid-in Capital on Preferred Stock for ($16 x 500) = $8,000 (the value of the warrants). The total credit to be recorded is $49,500, which is equal to the cash received from the issuance of the preferred stock.

Question 13

Exhibit 15-8 On January 1, 2013, Margarita Company granted share appreciation rights (SARs) to the president, which permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000 shares of the company's stock on the exercise date. The service period ends on December 31, 2015, and the rights must be exercised by December 31, 2018. Assume that on December 31, 2016, the president exercises all of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as follows: 
-Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2015?
A) $11,333
B) $12,667
C) $13,333
D) $38,000

Accepted Answer

The compensation expense related to the SARs for the year ending December 31, 2015 is $11,333. This is calculated by multiplying the number of SARs granted (100,000) by the fair value of the SARs at the grant date ($0.1133).

Question 14

For share appreciation rights (SARs) compensation plans where the employee is expected to receive cash on the exercise date, the account that is credited in the year-end adjusting journal entry to recognize the compensation expense is
A) Deferred Compensation
B) SAR Compensation Payable
C) Common Stock Option Warrants: SARs
D) Compensation Expense

Accepted Answer

SAR Compensation Payable should be credited in the year-end adjusting entry to recognize the compensation expense for SARs because it represents the liability owed to employees for their right to receive cash upon exercising the SARs. Deferred Compensation, Common Stock Option Warrants: SARs, and Compensation Expense are not appropriate accounts to credit for SARs compensation plans where the employee is expected to receive cash on the exercise date.

Question 15

When callable preferred stock is recalled, if the recall price exceeds the total of the par value in the preferred stock account and the additional paid-in capital associated with the recalled preferred stock, the difference is
A) credited to Retained Earnings
B) credited to Additional Paid-in Capital on Preferred Stock
C) debited to Retained Earnings
D) credited to Loss from Recall of Preferred Stock

Accepted Answer

The difference between the recall price and the total of the par value and additional paid-in capital associated with the recalled preferred stock represents a loss to the company. This loss is recorded by debiting retained earnings, which is the account used to absorb losses and maximize shareholder value. Therefore, the correct choice is C.

Question 16

Exhibit 15-7 On January 1, 2013, 70 executives were granted a performance-based share option plan that would award them each a maximum of 300 shares of $5 par common stock for $12 a share based on the increase in sales over the next three years. The fair value per option on the grant date was $16. The award table is as follows: 
 The company estimates that the sales increase will be 22% and that the annual employee turnover rate will be 2%.
-Refer to Exhibit 15-7. In 2014 the actual sales increase was determined to be 18%, and the overall turnover rate was exactly 2%. The compensation expense for 2014 is (to the nearest dollar)
A) $210,828
B) $140,552
C) $ 70,276
D) $ 35,138

Accepted Answer

The answer of Exhibit 15-7 On January 1, 2013, 70...

Question 17

Exhibit 15-8 On January 1, 2013, Margarita Company granted share appreciation rights (SARs) to the president, which permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000 shares of the company's stock on the exercise date. The service period ends on December 31, 2015, and the rights must be exercised by December 31, 2018. Assume that on December 31, 2016, the president exercises all of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as follows: 
-Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2014?
A) $13,333
B) $16,667
C) $26,667
D) $40,000

Accepted Answer

The compensation expense for the year ending December 31, 2014, will be calculated as ($18 - $12) * 2,000/3 = $12,000. Therefore, the compensation expense related to the SARs for the year ending December 31, 2014, is $16,667 ($12,000/9 * 12).

Question 18

The preference to dividends that preferred stockholders have is
A) the right to receive the appropriate dividend before common stockholders are paid any dividends when dividends are declared
B) the right to accumulate dividends that have not been declared
C) the right to share dividends equally with common stockholders when dividends are declared
D) the right to be paid a minimum dividend each year

Accepted Answer

Preferred stockholders have the preference to receive their dividends before common stockholders when dividends are declared. This is known as the right of priority.

Question 19

Which of the following is not a reason for a corporation to acquire treasury stock?
A) to reduce the likelihood of being acquired by another company
B) to maintain the market price of the company's stock
C) to reduce the earnings per share
D) to be used in the acquisition of other companies

Accepted Answer

Acquiring treasury stock would not reduce earnings per share but in fact, increase it. Therefore, option C is not a valid reason for a corporation to acquire treasury stock.

Question 20

Mars Corp. has 15,000 shares of $5 par, cumulative, 8% preferred stock and 15,000 shares of common stock outstanding since being organized at the beginning of 2014. It declared its first dividend of $40,000 at the end of 2016. This means that
A) all of the $40,000 dividends available are paid to the preferred stockholders
B) all of the $40,000 dividends available are paid to the common stockholders
C) an equal dollar amount is paid to each class of shareholder
D) 3 years' worth of dividends will be paid to preferred stockholders prior to paying anything to common stockholders

Accepted Answer

The preferred stock is cumulative, which means any unpaid dividends accumulate and must be paid before any dividends can be paid to common stockholders. Since Mars Corp. has not paid any dividends in the past three years, the preferred stockholders are entitled to receive the accumulated dividends for all three years first, which will be $360,000 (15,000 shares x $5 par value x 8% dividend rate x 3 years). After paying the preferred stockholders this amount, any remaining dividends will be paid to the common stockholders. Therefore, choice D is correct.

Quiz 15: Contributed Capital

Which of the following methods should be used to account for the conversion of preferred stock to common stock?

Which of the following statements is true regarding preferred stock?

Budget Leasing issued 500 shares of $20 par value convertible preferred stock at $22 per share. Each preferred share is converted to 7 shares of $4 par value common stock. The entry to record this conversion would include a

The accounting method that is used for share appreciation rights (SARs) compensation plans is similar to the accounting procedures that can be used for

Dividends in arrears pertain to

Preferred stockholders share with common stockholders in any "extra" dividends when the preferred stock is

When recording the conversion of preferred stock into common stock, if the total contributed capital eliminated in regard to the preferred stock is less than the common stock par value, the difference is debited to

For a stock appreciation rights (SAR) compensation plan, the measurement date is the date

For share appreciation rights (SARs) compensation plans where the employee is expected to receive cash on the exercise date, the account that is credited in the year-end adjusting journal entry to recognize the compensation expense is

When callable preferred stock is recalled, if the recall price exceeds the total of the par value in the preferred stock account and the additional paid-in capital associated with the recalled preferred stock, the difference is

The preference to dividends that preferred stockholders have is

Which of the following is not a reason for a corporation to acquire treasury stock?

Mars Corp. has 15,000 shares of $5 par, cumulative, 8% preferred stock and 15,000 shares of common stock outstanding since being organized at the beginning of 2014. It declared its first dividend of $40,000 at the end of 2016. This means that