ACG 3113 FINAL EXAM 2025

ACG 3113 FINAL EXAM 2025 Allen Industries sells 20,000 bonds with a par value of $500. Each bond comes with a detachable warrant. Allen knows the market price of the warrants is $20 and that similar bonds without warrants sell for $99. Based on this information, Allen should allocate proceeds of the sale using the ________ method - Correct Answer-proportional - We are given two values of the bonds and the detachable warrant. We will opt to use the proportional method to allocate the proceeds using the proportion of the two amounts, based on fair values. With the incremental method, the value of the lump-sum purchase is first allocated to securities with known market values. The remaining value of the transaction is then allocated to the security with an unknown market value. Which of the following is one reason corporations issue convertible debt? A. They can obtain debt financing at lower rates. B. They can easily sell convertible debt even if the company has a poor credit rating. C. They can avoid issue costs associated with equity capital. D. They can always sell convertible bonds at a premium. - Correct Answer-A - Corporations issue convertible securities for two main reasons. One is to raise equity capital without giving up more ownership control than necessary. A second reason to issue convertibles is to obtain debt financing at cheaper rates. When will the distribution of stock rights to existing common stockholders increase paid in capital? Select answer from the options below: A - at the date of issuance of the rights B - at the date of issuance of the rights and at the date of ececise of the rights. C - It will never increase paid-in-capital D - at the date of exercise of the rights - Correct Answer-D - To have an increase in paid-in capital, the stockholder would need to exercise their right, and then they would receive cash in excess of par value, which credits Paid-in Capital in Excess of Par. Winter Sports Apparel issued convertible debt securities. Which of the following statements is true regarding their journal entries as a result of this issuance? A - They will have a single journal entry at issuance for all securities and another single entry at retirement for all securities in the issue. B - They will have two separate journal entries at issuance, one for the bonds to be converted and one for bonds that will not be converted. Then they will have a single entry at conversion for all bonds to be converted and another single entry at retirement for all securities that were not converted. C - They will have a single journal entry at issuance for all securities and another single entry at conversion for all securities in the issue. ACG 3113 ACG 3113 D - They will have a single journal entry at issuance for all securities, separate entries each time bonds are converted to common stock, and a single entry at the end of the - Correct Answer-D - Under GAAP, proceeds from the issuance of convertible debt are recorded entirely as debt. The entry to record would be a credit to cash and debit to bonds payable. When recording the conversion of bonds to common stock, there will always be a debit to Bonds Payable and a credit to Common Stock. Companies need to recognize a gain or loss on retiring convertible debt in the same way that they recognize a gain or loss on retiring nonconvertible debt. Justice Enterprises issued $1,000 par value convertible bonds at 98. At the time of issuance, they should record credits to A - Common Stock and Premium on Bonds Payable. B - Bonds Payable and Common Stock. C - Bonds Payable only. D - Bonds Payable and Discount on Bonds Payable. - Correct Answer-C - At the time of issuance, the method for recording convertible bonds at the date of issue follows the method used to record straight debt issues. Convertible bonds are classified as a liability, in this case, Bonds Payable only. How should the difference between the cash acquisition price of retired convertible debt and the carrying amount of the debt be recorded by the issuer? A - It should be recorded currently in income. B - It should be recorded as an adjustment of additional paid-in capital. C - It should be recorded as a prior period adjustment. D - It should be recorded currently in other comprehensive income, but not included in the calculation of EPS. - Correct Answer-A - Companies need to recognize a gain or loss on retiring convertible debt in the same way that they recognize a gain or loss on retiring nonconvertible debt. Gains and losses are recorded as income for that year. The company should record a debit to Retained Earnings for the difference when the par value of the common stock issued exceeds the book value of the preferred stock. On January 4, 2020, Newell Water Company issued 10-year convertible bonds at 105. On October 17, 2020, Newell encouraged bondholders to convert their bonds into common stock, with each investor receiving common stock with an aggregate par value equal to the total face amount of the bonds. Newell's common stock was selling at 50% above par value at the time of the conversion. How should the cash proceeds from the issuance of the convertible bonds on January 4, 2020, be reported? A - As paid-in capital for the entire proceeds. B - As paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. C - As a liability for the face amount of the bonds and paid-in capital for the premium over the face amount. ACG 3113 ACG 3113 D - As a liability for the entire proceeds. - Correct Answer-D - IFRS requires that the issuer of convertible debt record the liability and equity components separately. At the time of issuance, the method for recording convertible bonds at the issuance date follows the method used to record straight debt issues. Convertible bonds are classified as a liability. When a company uses the fair value method of recording stock options instead of the intrinsic-value method, it will report A - no compensation cost. B - a higher compensation cost. C - the same compensation cost. D - a lower compensation cost. - Correct Answer-B - The intrinsic-value method measures what the holder would receive today if the option was immediately exercised. Most likely holders will exercise their stock when the FMV is at a higher price. It will not be beneficial for the holder to exercise it for any other reason. The intrinsic value is the difference between the market price of the stock and the exercise price of the options at the grant date. Several of Merlin Corporation's employees have forfeited their stock options because they failed to satisfy the associated service requirements. How should Merlin adjust its books to reflect this forfeiture? A - It should credit Paid-in Capital—Stock Options and debit Paid-in Capital—Expired Stock Options B - It should debit Paid-in Capital—Stock Options and credit Compensation Expense. C - It should credit Paid-in Capital—Stock Options and debit Compensation Expense. D - It should debit Paid-in Capital—Stock Options and credit Paid-in Capital—Expired Stock Options. - Correct Answer-B Ursa Incorporated has an employee stock-purchase plan that is open to all of the firm's full-time employees. Under this plan, employees have the right to purchase Ursa stock at a 4% discount at any time in the next 12 months. In order for this plan to be considered non-compensatory, A - the 4% discount must exceed the per share amount of costs avoided by not having to raise cash in a public offering. B - no other conditions need to be met. C - it must not offer a substantive option feature. D - all eligible employees must opt to participate - Correct Answer-C A stock-purchase plan is considered compensatory until it meets what 3 conditions? - Correct Answer-1. the discounted stock is below 5% 2. every full-time employee can participate 3. offers has no significant option feature ACG 3113 ACG 3113 Which type of stockholders must companies calculate available income for? A - Preferred stockholders B - Low income stockholders C - Common stockholders D - High income stockholders - Correct Answer-C - Common stockholders When calculating diluted EPS, only securities that ________ should be added to the calculation compared to securities used for the basic EPS calculation. A - increase the number of common shares outstanding B - increase earnings per share C - decrease earnings per share D - decrease the number of common shares outstanding - Correct Answer-C - Diluted EPS includes the effect of all potentially dilutive common shares that were outstanding during the period which decreases EPS. While anti-dilutive securities refer to financial instruments that are not in the form of common stock, but when converted into common stock will increase earnings per share. At December 31, 2020, the Riley Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2020. The net income for the year ended December 31, 2020, was $1,360,000. The 2020 earnings per common share, rounded to the nearest penny would be A - $2.69 B - $3.40 C - $3.20 D - $3.03 - Correct Answer-C - To determine this answer, you must first find the weighted average of the outstanding shares. The weighted average for the 400,000 shares is actually 400,000 because they were outstanding throughout the year, but to find the average for the 100,000, you must multiply the number of shares by the fraction of the year. In this case 100,000 X 3/12 =25,000. To find the weighted average add 400,000 and 25,000 to arrive at 425,000. Then divide this number into net income: $1,360,000 / 425,000 = $3.20. Fultz Chiropractic acquired the Colby Massage Parlor in August 2018. As part of the transaction, they promised Colby stockholders 5,000 additional shares in August 2020, which coincides with the two-year anniversary of the acquisition. In which year should they add the promised shares to the diluted EPS calculation? - Correct Answer-2020 - Under the Contingent Issue Agreement, the diluted EPS takes place on the year in which the acquirer may promise to issue additional shares referred to as contingent shares. Here it was promised in the year 2020. ACG 3113 ACG 3113 A company uses the treasury stock method to account for stock options and warrants when calculating dilutive EPS. How would they treat the proceeds assumed to be received upon exercise of the options and warrants in the dilutive EPS calculation? A - They would disregard the proceeds 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. B - They would subtract the proceeds, net of tax, from the numerator of the calculation. C - They would add the proceeds, net of tax, to the numerator of the calculation. D - They would use the proceeds to calculate the number of common shares assumed to be repurchased at the average market price. - Correct Answer-D - The treasury-stock method assumes that the options or warrants are exercised. The company uses those proceeds to purchase common stock for the treasury. If the exercise price is lower than the market price of the stock, then the proceeds from exercise are not sufficient to buy back all the shares. The company then adds the incremental shares remaining to the weighted-average number of shares outstanding for purposes of computing diluted earnings per share. True or False: The only business organization that can issue stock is a corporation. - Correct Answer-True A stockholder can maintain their ownership percentage because of the ______ right. A - proprietorship B - preferred C - partnership D - preemptive - Correct Answer-D - preemptive True or False: Total Paid-in Capital includes capital stock, APIC, and Retaining Earnings. - Correct Answer-False - Total PIC includes capital stock and APIC, not RE. RE is considered earned capital. Stock Issue Costs will be paid in cash and debited to ______. A - retained earnings B - Paid in Capital - TS C - APIC D - Prepaid asset - Correct Answer-C - APIC True or False: The only reason shares outstanding would be less than shares issued is because of treasury stock. - Correct Answer-True Above cost reissuance of Treasury Stock: What is the plug on the credit side? A - Retained earnings B - Paid in Capital - TS ACG 3113 ACG 3113 C - APIC D - Treasury stock E - Gain - Correct Answer-B - PIC - TS The next reissuance of Treasury Stock is below cost, but only by a small amount: what is likely the plug on the debit side? A - Retained earnings B - PIC - TS C - APIC D - Treasury stock E - Loss - Correct Answer-B - Once we run out of PIC-TS, then and only then do we dip into RE. True or False: When Treasury Stock is reissued to the market at below cost, equity will go down. - Correct Answer-False - When treasury stock is reissued, equity will always go up. What are the 4 types of dividends? - Correct Answer-Cash, Stock, Property, and Liquidating. Which dividends do not reduce Retained Earnings? 1. Cash Dividends 2. Property Dividends 3. Liquidating Dividends 4. Stock Dividends - Correct Answer-3 - Liquidating dividends come out of APIC instead of RE Which dividends do not reduce Total Stockholders Equity? 1. Cash Dividends 2. Property Dividends 3. Liquidating Dividends 4. Stock Dividends - Correct Answer-4 - Stock Dividends come out of RE but go back into PIC for a net effect of 0 on total PIC True or False: A liquidating dividend may give cash, property, or stock as the dividend. - Correct Answer-True True or False: Where Retained Earnings is not available, Dividends Expense may be debited. - Correct Answer-False - A liquidating dividend can use APIC instead of RE A cash dividend should reduce Retained Earnings on the date of _________. 1. Payment ACG 3113 ACG 3113 2. Declaration 3. Dividend 4. Record - Correct Answer-2 - when the dividend is promised True or False: The two types of stock dividends are large stock dividends and par stock dividends. - Correct Answer-False, large stock and small stock dividends True or False: Of the two types of stock dividends, the small stock dividends are permitted to use the full fair value whereas the large stock dividends are restricted to the par value. - Correct Answer-True Which of the following requires a journal entry 1. Stock Split 2. Small Stock Dividend 3. Large Stock Dividend 4. All of the above 5. Only 2 & 3 - Correct Answer-5, no JE for stock splits The account "Common Stock Dividends Distributable" is included in what portion of the Stockholder's Equity section of the Balance Sheet? 1. Capital Stock 2. Additional Paid-in Capital 3. Earned Capital 4. Only Total Stockholders Equity - Correct Answer-Capital stock Which type of dividend should credit Additional Paid-in Capital? 1. Small Stock Dividend 2. Large Stock Dividend 3. Both 4. Neither - Correct Answer-1, LS Div will never have APIC The company is paying $12,000 in dividends. If PS is non participating and has a normal dividend amount of $10,000 in total, how much will CS receive? 1. $10,000 2.$12,000 3.$2,000 4.$22,000 - Correct Answer-3 - 12,000 - 10,000 = 2,000 What are the types of dilutive securities? - Correct Answer-Convertible Bonds Convertible PS Options/Warrants An instrument that is convertible converts into ACG 3113 ACG 3113 1.Common Stock 2.Preferred Stock 3.APIC 4.It depends - Correct Answer-1 - Common stock True or False - The Journal Entry for issuing convertible bonds will look the same as issuing non-convertible bonds. - Correct Answer-True True or False: There could be a gain on conversion of convertible bonds. - Correct Answer-False - plug goes to APIC What requires the incremental or proportional method?