Stockholders Equity,Dilutive Securities, Share-Based Payments,

Book Value per share, and Earnings per share

Test I. MC - Conceptual (20 items)
Instructions: Choose the letter of the best answer. Put your answer on the answer sheet
provided.
Strictly NO ERASURES!
1. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
2. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred
stockholders.
3. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate
over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and
Exchange Commission.
4.When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.
5. How should a "gain" from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.
6. Which of the following best describes a possible result of treasury stock transactions by
a corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
7. Which of the following is not a legal restriction related to profit distributions by a
corporation?
a. The amount distributed to owners must be in compliance with the state laws
governing corporations.
b. The amount distributed in any one year can never exceed the net income reported
for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to
preferences and participation.
8.The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par
value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par
value of the stock and receive the stock in place of the cash dividends.
9. The declaration and issuance of a stock dividend larger than 25% of the shares
previously outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total
stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.
10. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders equity heading.
d. included as a contra item in stockholders equity.

11. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease
12. Younger Company has outstanding both common stock and nonparticipating, non-
cumulative preferred stock. The liquidation value of the preferred is equal to its par
value. The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the
market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when
the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.
13.Proceeds from an issue of debt securities having stock warrants should not be allocated
between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.
14.Compensation expense resulting from a compensatory stock option plan is generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee's required service.
d. allocated over the periods of the employee's service life to retirement.
15.When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.
16. In the diluted earnings per share computation, the treasury stock method is used for
options and warrants to reflect assumed reacquisition of common stock at the average
market price during the period. If the exercise price of the options or warrants exceeds
the average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a
prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of
shares assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.
17. In applying the treasury stock method to determine the dilutive effect of stock options
and warrants, the proceeds assumed to be received upon exercise of the options and
warrants
a. are used to calculate the number of common shares repurchased at the average
market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per
share.
c. are disregarded in the computation of earnings per share if the exercise price of the
options and warrants is less than the ending market price of common stock.
d. none of these.
18. When convertible debt is retired by the issuer, any material difference between the cash
acquisition price and the carrying amount of the debt should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.

19.The major difference between convertible debt and stock warrants is that upon exercise of
the warrants
a. the stock is held by the company for a defined period of time before they are issued
to the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the stock involved is restricted and can only be sold by the recipient after a set period
of time.
d. no paid-in capital in excess of par can be a part of the transaction.
20. The conversion of preferred stock into common requires that any excess of the par value
of the common shares issued over the carrying amount of the preferred being converted
should be
a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.
Test II. MC Problems / Computational (60 points), 1.25 pts per number.
Instructions: Choose the letter of the correct answer. Put your answer on the answer sheet
provided. Show your solutions. No solution, No point. Strictly NO ERASURES!

Use the following information for questions 21 and 22
Presented below is information related to Hale Corporation:
Common Stock, $1 par $4,300,000
Paid-in Capital in Excess of ParCommon Stock 550,000
Preferred 8 1/2% Stock, $50 par 2,000,000
Paid-in Capital in Excess of ParPreferred Stock 400,000
Retained Earnings 1,500,000
Treasury Common Stock (at cost) 150,000
21. The total stockholders' equity of Hale Corporation is
a. $8,600,000. c. $7,100,000.
b. $8,750,000. d. $7,250,000.
22. The total paid-in capital (cash collected) related to the common stock is
a. $4,300,000. c. $5,250,000.
b. $4,850,000. d. $4,700,000.
23. Norton Company issues 4,000 shares of its $5 par value common stock having a market
value of $25 per share and 6,000 shares of its $15 par value preferred stock having a
market value of $20 per share for a lump sum of $192,000. What amount of the
proceeds should be allocated to the preferred stock?
a. $172,000 c. $104,727
b. $120,000 d. $90,000


24. At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common
stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its
common stock at a price of $16 per share and accounted for them by the cost method.
Subsequently, these shares were reissued at a price of $12 per share. There have been
no other issuances or acquisitions of its own common stock. What effect does the
reissuance of the stock have on the following accounts?
Retained Earnings Additional Paid-in Capital
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect
25. Berry Corporation has 50,000 shares of $10 par common stock authorized. The
following transactions took place during 2010, the first year of the corporations
existence:
Sold 5,000 shares of common stock for $18 per share.
Issued 5,000 shares of common stock in exchange for a patent valued at
$100,000.
At the end of the Berrys first year, total paid-in capital amounted to
a. $40,000. c. $100,000.
b. $90,000. d. $190,000.
26. Gannon Company acquired 6,000 shares of its own common stock at $20 per share on
February 5, 2010, and sold 3,000 of these shares at $27 per share on August 9, 2011.
The market value of Gannon's common stock was $24 per share at December 31, 2010,
and $25 per share at December 31, 2011. The cost method is used to record treasury
stock transactions. What account(s) should Gannon credit in 2011 to record the sale of
3,000 shares?
a. Treasury Stock for $81,000.
b. Treasury Stock for $60,000 and Paid-in Capital from Treasury Stock for $21,000.
c. Treasury Stock for $60,000 and Retained Earnings for $21,000.
d. Treasury Stock for $72,000 and Retained Earnings for $9,000.
27. Long Co. issued 100,000 shares of $10 par common stock for $1,200,000. Long
acquired 8,000 shares of its own common stock at $15 per share. Three months later
Long sold 4,000 of these shares at $19 per share. If the cost method is used to record
treasury stock transactions, to record the sale of the 4,000 treasury shares, Long should
credit
a. Treasury Stock for $76,000.
b. Treasury Stock for $40,000 and Paid-in Capital from Treasury Stock for $36,000.
c. Treasury Stock for $60,000 and Paid-in Capital from Treasury Stock for $16,000.
d. Treasury Stock for $60,000 and Paid-in Capital in Excess of Par for $16,000.
28. Sosa Co.'s stockholders' equity at January 1, 2010 is as follows:
Common stock, $10 par value; authorized 300,000 shares;
Outstanding 225,000 shares $2,250,000
Paid-in capital in excess of par 900,000
Retained earnings 2,190,000
Total $5,340,000
During 2010, Sosa had the following stock transactions:
Acquired 6,000 shares of its stock for $270,000.
Sold 3,600 treasury shares at $50 a share.
Sold the remaining treasury shares at $41 per share.
No other stock transactions occurred during 2010. Assuming Sosa uses the cost method
to record treasury stock transactions, the total amount of all additional paid-in capital
accounts at December 31, 2010 is
a. $891,600. c. $908,400.
b. $870,000. d. $927,600.

29. Presented below is the stockholders' equity section of Oaks Corporation at December
31, 2010:
Common stock, par value $20; authorized 75,000 shares;
issued and outstanding 45,000 shares $ 900,000
Paid-in capital in excess of par value 250,000
Retained earnings 500,000
$1,650,000
During 2011, the following transactions occurred relating to stockholders' equity:
3,000 shares were reacquired at $28 per share.
3,000 shares were reacquired at $35 per share.
1,800 shares of treasury stock were sold at $30 per share.
For the year ended December 31, 2011, Oaks reported net income of $450,000.
Assuming Oaks accounts for treasury stock under the cost method, what should it report
as total stockholders' equity on its December 31, 2011, balance sheet?
a. $1,965,000. c. $1,957,800.
b. $1,961,400. d. $1,515,000.
30. On December 1, 2010, Abel Corporation exchanged 20,000 shares of its $10 par value
common stock held in treasury for a used machine. The treasury shares were acquired
by Abel at a cost of $40 per share, and are accounted for under the cost method. On the
date of the exchange, the common stock had a market value of $55 per share (the
shares were originally issued at $30 per share). As a result of this exchange, Abel's total
stockholders' equity will increase by
a. $200,000. c. $1,100,000.
b. $800,000. d. $900,000.
31. Colson Inc. declared a $160,000 cash dividend. It currently has 6,000 shares of 7%,
$100 par value cumulative preferred stock outstanding. It is one year in arrears on its
preferred stock. How much cash will Colson distribute to the common stockholders?
a. $76,000. c. $118,000.
b. $84,000. d. None.
32. Pierson Corporation owned 10,000 shares of Hunter Corporation. These shares were
purchased in 2007 for $90,000. On November 15, 2011, Pierson declared a property
dividend of one share of Hunter for every ten shares of Pierson held by a stockholder.
On that date, when the market price of Hunter was $14 per share, there were 90,000
shares of Pierson outstanding. What gain and net reduction in retained earnings would
result from this property dividend?
Gain Net Reduction in
Retained Earnings
a. $0 $126,000
b. $0 $ 81,000
c. $45,000 $ 81,000
d. $45,000 $ 36,000
33. Winger Corporation owned 900,000 shares of Fegan Corporation stock. On December
31, 2010, when Winger's account "Investment in Common Stock of Fegan Corporation"
had a carrying value of $5 per share, Winger distributed these shares to its stockholders
as a dividend. Winger originally paid $8 for each share. Fegan has 3,000,000 shares
issued and outstanding, which are traded on a national stock exchange. The quoted
market price for a Fegan share was $7 on the declaration date and $9 on the distribution
date.
What would be the reduction in Winger's stockholders' equity as a result of the above
transactions?
a. $3,600,000.
b. $4,500,000.
c. $7,200,000.
d. $8,100,000.


34. The stockholders' equity section of Gunkel Corporation as of December 31, 2010, was
as follows:
Common stock, par value $2; authorized 20,000 shares;
issued and outstanding 10,000 shares $ 20,000
Paid-in capital in excess of par 30,000
Retained earnings 75,000
$125,000
On March 1, 2011, the board of directors declared a 15% stock dividend, and
accordingly 1,500 additional shares were issued. On March 1, 2011, the fair market
value of the stock was $6 per share. For the two months ended February 28, 2011,
Gunkel sustained a net loss of $10,000.
What amount should Gunkel report as retained earnings as of March 1, 2011?
a. $56,000. c. $66,000.
b. $62,000. d. $72,000.

Questions 35 and 36 are based on the following information.

Layne Corporation had the following information in its financial statements for the years ended
2010 and 2011:
Cash dividends for the year 2011 $ 8,000
Net income for the year ended 2011 93,000
Market price of stock, 12/31/10 10
Market price of stock, 12/31/11 12
Common stockholders equity, 12/31/10 1,600,000
Common stockholders equity, 12/31/11 1,800,000
Outstanding shares, 12/31/11 150,000
Preferred dividends for the year ended 2011 15,000
35. What is the payout ratio for Layne Corporation for the year ended 2011?
a. 24.7% c. 10.3%
b. 16.1% d. 8.6%
36. What is the book value per share for Layne Corporation for the year ended 2011?
a. $12.00 c. $11.33
b. $11.90 d. $10.67
Use the following information for questions 37 and 38
The following data are provided:
December 31,
2011 2010
10% Cumulative preferred stock, $50 par $100,000 $100,000
Common stock, $10 par 120,000 90,000
Additional paid-in capital 80,000 65,000
Retained earnings (includes current year net income) 240,000 215,000
Net income 90,000
Additional information:
On May 1, 2011, 3,000 shares of common stock were issued. The preferred dividends were not
declared during 2011. The market price of the common stock was $50 at December 31, 2011.
37. The rate of return on common stock equity for 2011 is
a. 90 400. c. 80 400.
b. 90 440. d. 80 440.
38. The book value per share of common stock at 12/31/11 is
a. 430 12. c. 330 12.
b. 200 12. d. 440 11.
Use the following information for questions 39 and 40
Written, Inc. has outstanding 300,000 shares of $2 par common stock and 60,000 shares of no-
par 8% preferred stock with a stated value of $5. The preferred stock is cumulative and
nonparticipating. Dividends have been paid in every year except the past two years and the
current year.
39. Assuming that $150,000 will be distributed as a dividend in the current year, how much
will the common stockholders receive?
a. Zero. c. $102,000.
b. $78,000. d. $126,000.
40. Assuming that $63,000 will be distributed as a dividend in the current year, how much
will the preferred stockholders receive?
a. $21,000. c. $48,000.
b. $24,000. d. $63,000.
41. A corporation was organized in January 2007 with authorized capital of $10 par value
common stock. On February 1, 2010, shares were issued at par for cash. On March 1,
2010, the corporation's attorney accepted 7,000 shares of common stock in settlement
for legal services with a fair value of $90,000. Additional paid-in capital would increase
on
February 1, 2010 March 1, 2010
a. Yes No
b. Yes Yes
c. No No
d. No Yes
42. In 2010, Hobbs Corp. acquired 9,000 shares of its own $1 par value common stock at
$18 per share. In 2011, Hobbs issued 4,000 of these shares at $25 per share. Hobbs
uses the cost method to account for its treasury stock transactions. What accounts and
what amounts should Hobbs credit in 2011 to record the issuance of the 4,000 shares?
Treasury Additional Retained Common
Stock Paid-in Capital Earnings Stock
a. $72,000 $70,000
b. $72,000 $28,000
c. $96,000 $4,000
d. $68,000 $28,000 $4,000
43. At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common
stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its
common stock at a price of $16 per share and accounted for them by the cost method.
Subsequently, these shares were reissued at a price of $12 per share. There have been
no other issuances or acquisitions of its own common stock. What effect does the
reissuance of the stock have on the following accounts?
Retained Earnings Additional Paid-in Capital
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect
44. Fogel Co. has $2,500,000 of 8% convertible bonds outstanding. Each $1,000 bond is
convertible into 30 shares of $30 par value common stock. The bonds pay interest on
January 31 and July 31. On July 31, 2010, the holders of $800,000 bonds exercised the
conversion privilege. On that date the market price of the bonds was 105 and the market
price of the common stock was $36. The total unamortized bond premium at the date of
conversion was $175,000. Fogel should record, as a result of this conversion, a
a. credit of $136,000 to Paid-in Capital in Excess of Par.
b. credit of $120,000 to Paid-in Capital in Excess of Par.
c. credit of $56,000 to Premium on Bonds Payable.
d. loss of $8,000.
45. On July 1, 2010, an interest payment date, $60,000 of Parks Co. bonds were converted
into 1,200 shares of Parks Co. common stock each having a par value of $45 and a
market value of $54. There is $2,400 unamortized discount on the bonds. Using the
book value method, Parks would record
a. no change in paid-in capital in excess of par.
b. a $3,600 increase in paid-in capital in excess of par.
c. a $7,200 increase in paid-in capital in excess of par.
d. a $4,800 increase in paid-in capital in excess of par.
46. On December 1, 2010, Lester Company issued at 103, two hundred of its 9%, $1,000
bonds. Attached to each bond was one detachable stock warrant entitling the holder to
purchase 10 shares of Lester's common stock. On December 1, 2010, the market value
of the bonds, without the stock warrants, was 95, and the market value of each stock
purchase warrant was $50. The amount of the proceeds from the issuance that should
be accounted for as the initial carrying value of the bonds payable would be
a. $193,640. c. $200,000.
b. $195,700. d. $206,000.
47. On March 1, 2010, Ruiz Corporation issued $800,000 of 8% nonconvertible bonds at
104, which are due on February 28, 2030. In addition, each $1,000 bond was issued
with 25 detachable stock warrants, each of which entitled the bondholder to purchase for
$50 one share of Ruiz common stock, par value $25. The bonds without the warrants
would normally sell at 95. On March 1, 2010, the fair market value of Ruizs common
stock was $40 per share and the fair market value of the warrants was $2.00. What
amount should Ruiz record on March 1, 2010 as paid-in capital from stock warrants?
a. $28,800 c. $41,600
b. $33,600 d. $40,000
48.Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into
2,000 shares of common stock (par value $40). At the time of the conversion, the
unamortized premium is $2,000, the market value of the bonds is $110,000, and the
stock is quoted on the market at $60 per share. If the bonds are converted into common,
what is the amount of paid-in capital in excess of par to be recorded on the conversion of
the bonds?
a. $25,000 c. $32,000
b. $22,000 d. $40,000
Use the following information for questions 49 and 50
On May 1, 2010, Payne Co. issued $300,000 of 7% bonds at 103, which are due on April 30,
2020. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of
Paynes common stock, $15 par value, were attached to each $1,000 bond. The bonds without
the warrants would sell at 96. On May 1, 2010, the fair value of Paynes common stock was $35
per share and of the warrants was $2.
49. On May 1, 2010, Payne should credit Paid-in Capital from Stock Warrants for
a. $11,520. c. $12,360.
b. $12,000. d. $21,000.
50. On May 1, 2010, Payne should record the bonds with a
a. discount of $12,000. c. discount of $3,000.
b. discount of $3,360. d. premium of $9,000.

Use this in formation for no. 51
On April 7, 2010, Kegin Corporation sold a $2,000,000, twenty-year, 8 percent bond issue for
$2,120,000. Each $1,000 bond has two detachable warrants, each of which permits the
purchase of one share of the corporation's common stock for $30. The stock has a par value of
$25 per share. Immediately after the sale of the bonds, the corporation's securities had the
following market values:
8% bond without warrants $1,008
Warrants 21
Common stock 28


51. What accounts should Kegin credit to record the sale of the bonds?
a. Bonds Payable $2,000,000
Premium on Bonds Payable 77,600
Paid-in CapitalStock Warrants 42,400
b. Bonds Payable $2,000,000
Premium on Bonds Payable 16,000
Paid-in CapitalStock Warrants 84,000
c. Bonds Payable $2,000,000
Premium on Bonds Payable 35,200
Paid-in CapitalStock Warrants 84,800
d. Bonds Payable $2,000,000
Premiums on Bonds Payable120,000
52. On January 1, 2011 Reese Company granted Jack Buchanan, an employee, an option
to buy 100 shares of Reese Co. stock for $40 per share, the option exercisable for 5
years from date of grant. Using a fair value option pricing model, total compensation
expense is determined to be $1,200. Buchanan exercised his option on September 1,
2011, and sold his 100 shares on December 1, 2011. Quoted market prices of Reese
Co. stock during 2011 were:
January 1 $40 per share
September 1 $48 per share
December 1 $54 per share
The service period is for two years beginning January 1, 2011. As a result of the option
granted to Buchanan, using the fair value method, Reese should recognize
compensation expense for 2011 on its books in the amount of
a. $0. c. $1,200
b. $600. d. $1,400
Use the following information for questions 53 through 55
On January 1, 2010, Korsak, Inc. established a stock appreciation rights plan for its executives.
It entitled them to receive cash at any time during the next four years for the difference between
the market price of its common stock and a pre-established price of $20 on 60,000 SARs.
Current market prices of the stock are as follows:
January 1, 2010 $35 per share
December 31, 2010 38 per share
December 31, 2011 30 per share
December 31, 2012 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning
January 1, 2010.
53. What amount of compensation expense should Korsak recognize for the year ended
December 31, 2010?
a. $180,000 c. $225,000
b. $270,000 d. $1,080,000
54. What amount of compensation expense should Korsak recognize for the year ended
December 31, 2011?
a. $0 c. $300,000
b. $30,000 d. $150,000
55. On December 31, 2012, 16,000 SARs are exercised by executives. What amount of
compensation expense should Korsak recognize for the year ended December 31,
2012?
a. $285,000 c. $585,000
b. $195,000 d. $78,000




56. On January 2, 2010, for past services, Rosen Corp. granted Nenn Pine, its president,
16,000 stock appreciation rights that are exercisable immediately and expire on January
2, 2011. On exercise, Nenn is entitled to receive cash for the excess of the market price
of the stock on the exercise date over the market price on the grant date. Nenn did not
exercise any of the rights during 2010. The market price of Rosen's stock was $30 on
January 2, 2010, and $45 on December 31, 2010. As a result of the stock appreciation
rights, Rosen should recognize compensation expense for 2010 of
a. $0. c. $240,000.
b. $80,000. d. $480,000.
57. On January 2, 2010, Farr Co. issued 10-year convertible bonds at 105. During 2012,
these bonds were converted into common stock having an aggregate par value equal to
the total face amount of the bonds. At conversion, the market price of Farrs common
stock was 50 percent above its par value. On January 2, 2010, cash proceeds from the
issuance of the convertible bonds should be reported as
a. paid-in capital for the entire proceeds.
b. paid-in capital for the portion of the proceeds attributable to the conversion feature
and as a liability for the balance.
c. a liability for the face amount of the bonds and paid-in capital for the premium over
the face amount.
d. a liability for the entire proceeds.

58. Lang Co. issued bonds with detachable common stock warrants. Only the warrants had
a known market value. The sum of the fair value of the warrants and the face amount of
the bonds exceeds the cash proceeds. This excess is reported as
a. Discount on Bonds Payable. c. Common Stock Subscribed.
b. Premium on Bonds Payable. d. Paid-in Capital in Excess of ParStock
Warrants.
59. On January 1, 2011, Gridley Corporation had 125,000 shares of its $2 par value common
stock outstanding. On March 1, Gridley sold an additional 250,000 shares on the open
market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1,
Gridley purchased 140,000 shares and immediately retired the stock. On November 1,
200,000 shares were sold for $25 per share. What is the weighted-average number of
shares outstanding for 2011?
a. 510,000 c. 358,333
b. 375,000 d. 258,333
60. Kasravi Co. had net income for 2011 of $300,000. The average number of shares
outstanding for the period was 200,000 shares. The average number of shares under
outstanding options, at an option price of $30 per share is 12,000 shares. The average
market price of the common stock during the year was $36. What should Kasravi Co.
report for diluted earnings per share for the year ended 2011?
a. $1.50 c. $1.43
b. $1.49 d. $1.42
61. Beaty Inc. purchased Dunbar Co. and agreed to give stockholders of Dunbar Co. 10,000
additional shares in 2012 if Dunbar Co.s net income in 2011 is $500,000; in 2010
Dunbar Co.s net income is $520,000. Beaty Inc. has net income for 2010 of $200,000
and has an average number of common shares outstanding for 2010 of 100,000 shares.
What should Beaty report as diluted earnings per share for 2010?
a. $2.22 c. $1.82
b. $2.00 d. $1.67
62. On January 2, 2011, Mize Co. issued at par $300,000 of 9% convertible bonds. Each
$1,000 bond is convertible into 30 shares. No bonds were converted during 2007. Mize
had 50,000 shares of common stock outstanding during 2011. Mize 's 2011 net income
was $160,000 and the income tax rate was 30%. Mize's diluted earnings per share for
2011 would be (rounded to the nearest penny)
a. $2.71. c. $3.20.
b. $3.03. d. $3.58.




63. At December 31, 2010, Kifer Company had 500,000 shares of common stock
outstanding. On October 1, 2011, an additional 100,000 shares of common stock were
issued. In addition, Kifer had $10,000,000 of 6% convertible bonds outstanding at
December 31, 2010, which are convertible into 225,000 shares of common stock. No
bonds were converted into common stock in 2011. The net income for the year ended
December 31, 2011, was $3,000,000. Assuming the income tax rate was 30%, the
diluted earnings per share for the year ended December 31, 2011, should be (rounded
to the nearest penny)
a. $6.52. c. $4.56.
b. $4.80. d. $4.00.
64. Grimm Company has 1,800,000 shares of common stock outstanding on December 31,
2010. An additional 150,000 shares of common stock were issued on July 1, 2011, and
300,000 more on October 1, 2011. On April 1, 2011, Grimm issued 6,000, $1,000 face
value, 8% convertible bonds. Each bond is convertible into 40 shares of common stock.
No bonds were converted into common stock in 2011. What is the number of shares to
be used in computing basic earnings per share and diluted earnings per share,
respectively, for the year ended December 31, 2011?
a. 1,950,000 and 2,130,000 c. 1,950,000 and 2,190,000
b. 1,950,000 and 1,950,000 d. 2,250,000 and 2,430,000
Use the following information for questions 65 and 66
Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock,
and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is
convertible into 40,000 shares of common stock. During 2011, Lerner paid dividends of $.90 per
share on the common stock and $3.00 per share on the preferred stock. Each $1,000 bond is
convertible into 45 shares of common stock. The net income for 2011 was $600,000 and the
income tax rate was 30%.
65. Basic earnings per share for 2011 is (rounded to the nearest penny)
a. $2.21. c. $2.51.
b. $2.42. d. $2.70.
66. Diluted earnings per share for 2011 is (rounded to the nearest penny)
a. $2.14. c. $2.35.
b. $2.25. d. $2.46.
Use the following information for questions 67 and 68
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2011 2010
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
9% convertible bonds $2,400,000 $2,400,000
During 2011, Piper paid dividends of $1.20 per share on its common stock and $3.00 per share
on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock.
The 9% convertible bonds are convertible into 75,000 shares of common stock. The net income
for the year ended December 31, 2011, was $600,000. Assume that the income tax rate was
30%.
67. What should be the basic earnings per share for the year ended December 31, 2011,
rounded to the nearest penny?
a. $2.66 c. $3.70
b. $2.92 d. $4.00
68. What should be the diluted earnings per share for the year ended December 31, 2011,
rounded to the nearest penny?
a. $3.20 c. $2.83
b. $2.95 d. $2.35






Test III.PROBLEM SOLVING - Entry and Essays. Supply information needed in each number.
(20pts)

A. Stockholders Equity- Lump sum issuance of stock(6pts)
Parker Corporation has issued 2,000 shares of common stock and 400 shares of preferred
stock for a lump sum of $72,000 cash.
Instructions
(a) Give the entry for the issuance assuming the par value of the common was $5 and the
market value $30, and the par value of the preferred was $40 and the market value $50.
(Each valuation is on a per share basis and there are ready markets for each stock.)
(b) Give the entry for the issuance assuming the same facts as (a) above except the preferred
stock has no ready market and the common stock has a market value of $25 per share.

B. Dilutive Securities Convertible bonds and stock warrants (6pts)
For each of the unrelated transactions described below, present the entry(ies) required to record
the bond transactions.
1. On August 1, 2011, Lane Corporation called its 10% convertible bonds for conversion. The
$8,000,000 par bonds were converted into 320,000 shares of $20 par common stock. On
August 1, there was $700,000 of unamortized premium applicable to the bonds. The fair
market value of the common stock was $20 per share. Ignore all interest payments.
2. Packard, Inc. decides to issue convertible bonds instead of common stock. The company
issues 10% convertible bonds, par $3,000,000, at 97. The investment banker indicates that
if the bonds had not been convertible they would have sold at 94.
3. Gomez Company issues $5,000,000 of bonds with a coupon rate of 8%. To help the sale,
detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold.
It is estimated that the value of the bonds without the warrants is $4,935,000 and the value
of the warrants is $315,000. The bonds with the warrants sold at 101.



C. Shared-Based Payment - Stock appreciation rights. (5pts)
On January 1, 2009, Orr Co. established a stock appreciation rights plan for its executives. They
could receive cash at any time during the next four years equal to the difference between the
market price of the common stock and a preestablished price of $16 on 300,000 SARs. The
market price is as follows: 12/31/09$21; 12/31/10$18; 12/31/11$19; 12/31/12$20. On
December 31, 2011, 50,000 SARs are exercised, and the remaining SARs are exercised on
December 31, 2012.
Instructions
(a) Prepare a schedule that shows the amount of compensation expense for each of the four
years starting with 2009.
(b) Prepare the journal entry at 12/31/10 to record compensation expense.
(c) Prepare the journal entry at 12/31/12 to record the exercise of the remaining SARs.

D. Diluted earnings per share. (3pts)
Dunbar Company had 400,000 shares of common stock outstanding during the year 2011. In
addition, at December 31, 2011, 90,000 shares were issuable upon exercise of executive stock
options which require a $40 cash payment upon exercise (options granted in 2009). The
average market price during 2011 was $50.

Instructions
Compute the number of shares to be used in determining diluted earnings per share for 2011.







BONUS QUESTION:
E. Stockholders Equity (5pts)
Agler Corporation's balance sheet reported the following:
Capital stock outstanding, 5,000 shares, par $30 per share $150,000
Paid-in capital in excess of par 80,000
Retained earnings 100,000

The following transactions occurred this year:
(a) Purchased 120 shares of capital stock to be held as treasury stock, paying $60 per share.
(b) Sold 90 of the shares of treasury stock at $65 per share.
(c) Sold the remaining shares of treasury stock at $50 per share.

Instructions
Prepare the journal entry for these transactions under the cost method of accounting for
treasury stock.