MQ1.Sum07g

Name: __________________________Section: 001University of Texas at ArlingtonMid-Term 1Acct 3312- Summer 2007Chandra SubramaniamTHIS EXAM IS 140 MINUTES LONG.This exam consists of 4 problems. The first problem uses the multiple choice format. Please use your Scantron sheet for this section. Answer the remaining problems in the space provided in this exam. Please make sure that you have fifteen (15) pages including this cover page.There are 100 total points. Allocate an appropriate amount of time to each question.The only materials you are permitted to use on this exam are (1) a calculator, (2) a pencil with eraser or pen.Be sure to note the relevant dates referred to in each question.Point AllocationProblem 1 (35)Problem 2 (27)Problem 3 (18)Problem 4 (20)Total Possible points 100GOOD LUCK!Multiple choice (1 point each)1. The pre-emptive right enables a stockholder toa. share proportionately in any new issues of stock of the same class.b. receive cash dividends before other classes of stock without the pre-emptiveright.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 preferredstockholders.2. Direct costs incurred to sell stock such as underwriting costs should beaccounted for as1. a reduction of additional paid-in capital.2. an expense of the period in which the stock is issued.3. an intangible asset.a. 1b. 2c. 3d. 1 or 33. When treasury stock is purchased for more than the par value of the stock andthe cost method is used to account for treasury stock, what account(s) should be debited?a. Treasury stock for the par value and paid-in capital in excess of par for theexcess of the purchase price over the par value.b. Paid-in capital in excess of par for the purchase price.c. Treasury stock for the purchase price.d. Treasury stock for the par value and retained earnings for the excess of thepurchase price over the par value.4. Wilson Corp. purchased its own par value stock on January 1, 2007 for $20,000and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction froma. additional paid-in capital to the extent that previous net "gains" from sales ofthe same class of stock are included therein; otherwise, from retainedearnings.b. additional paid-in capital without regard as to whether or not there have beenprevious net "gains" from sales of the same class of stock included therein.c. retained earnings.d. net income5. According to the FASB, redeemable preferred stock should bea. 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.6. Cumulative preferred dividends in arrears should be shown in a corporation'sbalance sheet asa. an increase in current liabilities.b. an increase in stockholders' equity.c. a footnote.d. an increase in current liabilities for the current portion and long-term liabilitiesfor the long-term portion.7. At the date of the financial statements, common stock shares issued wouldexceed common stock shares outstanding as a result of thea. declaration of a stock split.b. declaration of a stock dividend.c. purchase of treasury stock.d. payment in full of subscribed stock.8. Which dividends do not reduce stockholders' equity?a. Cash dividendsb. Stock dividendsc. Property dividendsd. Liquidating dividends9. Pryor Corporation issued a 100% stock dividend of its common stock which hada par value of $10 before and after the dividend. At what amount should retainedearnings be capitalized for the additional shares issued?a. There should be no capitalization of retained earnings.b. Par valuec. Market value on the declaration dated. Market value on the payment date10. What effect does the issuance of a 2-for-1 stock split have on each of thefollowing?Par Value per Share Retained Earningsa. No effect No effectb. Increase No effectc. Decrease No effectd. Decrease Decrease11. When convertible debt is retired by the issuer, any material difference betweenthe cash acquisition price and the carrying amount of the debt should bea. 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.12. When the cash proceeds from a bond issued with detachable stock warrantsexceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited toa. additional paid-in capital from stock warrants.b. retained earnings.c. a liability account.d. premium on bonds payable.13. The distribution of stock rights to existing common stockholders will increasepaid-in capital at theDate of Issuance Date of Exerciseof the Rights of the Rightsa. Yes Yesb. Yes Noc. No Yesd. No No14. The major difference between convertible debt and stock warrants is that uponexercise of the warrantsa. the stock is held by the company for a defined period of time before they areissued 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 aset period of time.d. no paid-in capital in excess of par can be a part of the transaction.15. The date on which total compensation expense is computed in a stock option plan isthe datea. of grant.b. of exercise.c. that the market price coincides with the option price.c. that the market price exceeds the option price.16. Jenks Co.has $2,500,000 of 8% convertible bonds outstanding. Each $1,000bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2007, 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.Jenks should record, as a result of this conversion, aa. 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 $8,000.17. On December 1, 2007, Howell 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 Howell's common stock. On December 1, 2007, 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 bea. $193,640.b. $195,700.c. $200,000.d. $206,000.18. On April 7, 2007, Meade Corporation sold a $2,000,000, twenty-year, 8 percentbond 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 corpo-ration's securities had the following market values:8% bond without warrants $1,008Warrants 21Common stock 28 What accounts should Meade credit to record the sale of the bonds?a. Bonds Payable $2,000,000Premium on Bonds Payable 77,600Paid-in Capital—Stock Warrants 42,400b. Bonds Payable $2,000,000Premium on Bonds Payable 16,000Paid-in Capital—Stock Warrants 84,000c. Bonds Payable $2,000,000Premium on Bonds Payable 35,200Paid-in Capital—Stock Warrants 84,800d. Bonds Payable $2,000,000Premiums on Bonds Payable 120,00019. On January 1, 2008, Downs Company granted Tim Wright, an employee, anoption to buy 1,000 shares of Downs Co. stock for $25 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 $7,500. Wright exercised his option on September 1, 2008, and sold his 1,000 shares on December 1, 2008. Quoted market prices of Downs Co. stock during 2008 wereJanuary 1 $25 per shareSeptember 1 $30 per shareDecember 1 $34 per shareThe service period is for three years beginning January 1, 2008. As a result of the option granted to Wright, using the fair value method, Downs should recognize compensation expense for 2008 on its books in the amount ofa. $9,000.b. $7,500.c. $2,500.d. $1,500.20. On December 31, 2007, Jansen Company granted some of its executives optionsto purchase 45,000 shares of the company's $50 par common stock at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $900,000. The options become exercisable on January 1, 2008, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2008. What is the impact on Jansen's total stockholders' equity for the year ended December 31, 2007, as a result of this transaction under the fair value method?a. $900,000 decreaseb. $300,000 decreasec. $0d. $300,000 increase21. In computations of weighted average of shares outstanding, when a stockdividend or stock split occurs, the additional shares area. weighted by the number of days outstanding.b. weighted by the number of months outstanding.c. considered outstanding at the beginning of the year.d. considered outstanding at the beginning of the earliest year reported.22. In computing earnings per share, the equivalent number of shares of convertiblepreferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?a. Annual preferred dividendb. Annual preferred dividend times (one minus the income tax rate)c. Annual preferred dividend times the income tax rated. Annual preferred dividend divided by the income tax rate23. When applying the treasury stock method for diluted earnings per share, themarket price of the common stock used for the repurchase is thea. price at the end of the year.b. average market price.c. price at the beginning of the year.d. none of these.24. When an investor's accounting period ends on a date that does not coincide withan interest receipt date for bonds held as an investment, the investor musta. make an adjusting entry to debit Interest Receivable and to credit InterestRevenue for the amount of interest accrued since the last interest receiptdate.b. notify the issuer and request that a special payment be made for theappropriate portion of the interest period.c. make an adjusting entry to debit Interest Receivable and to credit InterestRevenue for the total amount of interest to be received at the next interestreceipt date.d. do nothing special and ignore the fact that the accounting period does notcoincide with the bond's interest period.25. Use of the effective-interest method in amortizing bond premiums and discountsresults ina. a greater amount of interest income over the life of the bond issue than wouldresult from use of the straight-line method.b. a varying amount being recorded as interest income from period to period.c. a variable rate of return on the book value of the investment.d. a smaller amount of interest income over the life of the bond issue than wouldresult from use of the straight-line method.26. A requirement for a security to be classified as held-to-maturity isa. ability to hold the security to maturity.b. positive intent.c. the security must be a debt security.d. All of these are required.27. Which of the following is not correct in regard to trading securities?a. They are held with the intention of selling them in a short period of time.b. Unrealized holding gains and losses are reported as part of net income.c. Any discount or premium is not amortized.d. All of these are correct.28. Which of the following is correct about the effective-interest method ofamortization?a. The effective interest method applied to investments in debt securities isdifferent from that applied to bonds payable.b. Amortization of a discount decreases from period to period.c. Amortization of a premium decreases from period to period.d. The effective-interest method produces a constant rate of return on the bookvalue of the investment from period to period.29. Bista Corporation declares and distributes a cash dividend that is a result ofcurrent earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?Fair Value Method Equity Methoda. No Effect Decreaseb. Increase Decreasec. No Effect No Effectd. Decrease No Effect30. Byner Corporation accounts for its investment in the common stock of YountCompany under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount asa. a reduction of the carrying value of the investment.b. additional paid-in capital.c. an addition to the carrying value of the investment.d. dividend income.Use the following information for questions 31 and 32.Oliver Company purchased $400,000 of 10% bonds of McGee Co. on January 1, 2008, paying $376,100. The bonds mature January 1, 2018; interest is payable each July 1 and January 1. The discount of $23,900 provides an effective yield of 11%. Oliver Company uses the effective-interest method and plans to hold these bonds to maturity. 31. On July 1, 2008, Oliver Company should increase its Held-to-Maturity DebtSecurities account for the McGee Co. bonds bya. $2,392.b. $1,371.c. $1,196.d. $686.32. For the year ended December 31, 2008, Oliver Company should report interestrevenue from the McGee Co. bonds of:a. $42,392.b. $41,409.c. $41,368.d. $40,000.Use the following information for questions 33 and 34.Marten Co. purchased $500,000 of 8%, 5-year bonds from Duggan, Inc. on January 1, 2008, with interest payable on July 1 and January 1. The bonds sold for $520,790 at an effective interest rate of 7%. Using the effective-interest method, Marten Co. decreased the Available-for-Sale Debt Securities account for the Duggan, Inc. bonds on July 1, 2008 and December 31, 2008 by the amortized premiums of $1,770 and $1,830, respectively.33. At December 31, 2008, the fair value of the Duggan, Inc. bonds was $530,000.What should Marten Co. report as other comprehensive income and as a separate component of stockholders' equity?a. $12,810.b. $9,210.c. $3,600.d. No entry should be made.34. At April 1, 2009, Marten Co. sold the Duggan bonds for $515,000. After accruingfor interest, the carrying value of the Duggan bonds on April 1, 2009 was $516,875. Assuming Marten Co. has a portfolio of Available-for-Sale Debt Securities, what should Marten Co. report as a gain or loss on the bonds?a. ($14,685).b. ($10,935).c. ($1,875).d. $ 0.35. On October 1, 2007, Lyman Co. purchased to hold to maturity, 200, $1,000, 9%bonds for $208,000. An additional $6,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2011. Lyman uses straight-line amortization. Ignoring income taxes, the amount reported in Lyman's 2007 income statement from this investment should bea. $4,500.b. $4,020.c. $4,980.d. $5,460.Problem 2 (27 points, 3 points each)On December 31, 2006, Gerlach Inc. had the following account balances in its shareholders' equity accounts.During 2007, Gerlach Inc. had several transactions relating to common stock.Requireda) Assuming all preferred shares outstanding were sold in one transaction what wasselling price per shareb) Assuming all common shares were issued in one transaction what was theselling price per sharec) If you own 10,000 common shares what percentage of the company do you own?d) If you own 1,000 preferred shares what percentage of the company do you own?e) If stock options were granted to the company’s officers i n January 1, 2005 basedon a service period of 5 years, what journal entry would have been reported on December 31, 2006 assuming no stock options were retired or forfeitedf) What would have been the fair market value of the option grant on January 1,2005 (date of the grant) assuming no stock options were retired or forfeitedg) Prepare the journal for the transaction on January 15h) Prepare the journal entry the transaction on April 10i) Prepare the journal entry for the transaction on December 1Problem 3 (18 points)On December 31, 2006, Herbicide Company had 200,000 shares of commonstock outstanding and 30,000 shares of 7%, $50 par, cumulative convertiblepreferred stock outstanding. The preferred is convertible into 4 common share for each preferred after December 31, 2010. Preferred dividends have not beenpaid for the last two years. On February 28, 2007, Herbicide purchased 24,000shares of common stock on the open market as treasury stock paying $45 pershare. Herbicide sold 6,000 of the treasury shares on September 30, 2007, for$47 per share. Net income for 2007 was $380,905. The income tax rate is 30%.Other potentially dilutive securities outstanding at December 31, 2006 were asfollows:Stock options giving key personnel the option to buy 50,000 common shares at$40. During 2007, the average market price of the common shares was $50 witha closing price of $51 on December 31, 2007. However these options are notexercisable till 2008.Five thousand of 6% bonds were issued at par on January 1, 2007. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds hadbeen converted by December 31, 2007.Required:a) Compute the weighted average number of shares to determine the basicearnings per share (4 points)b) Compute basic earnings per share for Herbicide Company for 2007 (3 points).c) Compute the diluted earnings per share for Herbicide Company for 2007 (8 points).d) How will your answer to (c) change if the convertible bonds had been converted intostock on July 1, 2007 (3 points)Problem 4 (20 points)Part AOn January 1, 2006 Devasia Inc purchased $1,000,000, 12%, 10 year bonds for $1,122,888 to yield 10%. Payments are to made annually on December 31.Devasia uses the effective interest method to allocate unamortized discount orpremium. The bonds are classified as available for sale securities. The fair value of the bonds at December 31, 2006 and 2007 are $1,125,000 and $1,025,000respectively.a. Prepare the journal entry on the date of purchaseb. Prepare the journal entry or entries on December 31, 2006c. Prepare the journal entry or entries on December 31, 2007Part B (8 points)On January 1, 2006, Patel Corporation purchased 25% of the outstanding voting shares of Rajaram Supplies common stock for $120,000 cash. Rajaram's netincome reported on December 31, 2006, was $50,000. On September 1, 2006,Rajaram also paid cash dividends in the amount of $30,000. On December 31,2006 the Patel’s ownership of Rajaram is value at $150,000a) Determine the amount of dividend revenue Patel can claim for 2006b)Assuming the only investment Patel owns is the investment in Rajaramcompute the amount that would be reported under investment on PatelCorporation's financial statements at December 31, 2006.。