WGU D104 Objective Assessment V2 – Intermediate Accounting II Guide (Latest 2026/ 2027 Update) 100% Verified Questions & Answers | Grade A

WGU D104 Objective Assessment V2 – Intermediate Accounting II Guide (Latest 2026/ 2027 Update) 100% Verified Questions & Answers | Grade A Question: In every corporation, what is the one class of stock that represents the basic ownership interest called? Common stock Each corporation has Common Stock, the one class of stock that represents basis ownership interest. Who does the residual interest in a corporation belong to? The common stockholders The holders of common stock own the residual interest in the corporation and bears the ultimate risk of loss and assets upon dissolution. Which type of preferred stock generates a dividend in arrears? Cumulative preferred stock Only cumulative preferred stock requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders. If the directors fail to declare a dividend at the normal date for dividend action, the dividend is said to have been "passed." Any passed dividend on cumulative preferred stock constitutes a dividend in arrears. Duszynski Company issues 20,000 shares of its $.50 par value common stock having a market value of $25 per share and 6,000 shares of its $25 par value preferred stock having a market value of $50 per share for a lump sum of $750,000. What is the amount of the proceeds allocated to the common stock? $468,750 When the fair value of the stock is known, stocks issued at a lump sum are calculated using the proportional method. The fair value of the common stock is: 20,000 shares x $25 = $500,000. The fair value of the preferred stock is: 6,000 shares x $50 = $300,000. Common stock makes up 62.5% of the fair value [$500,000 / ($500,000 + $300,000) = .625]. Therefore, the proceeds associated with the common stock is calculated as: $750,000 purchase price x 62.5% = $486,750. On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value common stock for $40 per share. Gayot uses the cost method to account for treasury stock. What is the debit side of the journal entry to record the reacquisition of the stock? Treasury Stock for $480,000 Under the cost method, when a company purchases treasury stock, it records the transaction at the price it paid in the Treasury Stock account. The journal entry for this transaction is: Debit: Treasury Stock $480,000, Credit Cash $480,000. An analysis of stockholders' equity of Hahn Corporation as of January 1, 2021, is as follows: Common stock, par value $20; authorized 100,000 shares; issued and outstanding 90,000 shares: $1,800,000 Paid-in capital in excess of par: $900,000 Retained earnings: $760,000 Total: $3,460,000 Hahn uses the cost method of accounting for treasury stock and during 2021 entered into the following transactions: Acquired 2,500 shares of its stock for $75,000. Sold 2,000 treasury shares at $35 per share. Sold the remaining treasury shares at $20 per share. Assuming no other equity transactions occurred during 2021, what should Hahn report on December 31, 2021, as total additional paid-in capital? $905,000 The difference in the cost of treasury stock and the subsequent sale is recorded in the Paid-in Capital account. In this case, Hahn purchased the original treasury stock at $30 per share ($75,000/2,500 shares). To record the subsequent sale of 2,000 shares, the $30 cost per share is posted to the treasury stock account and the $5 difference is posted to the paid-in capital account. The same is true when the remaining 500 shares of treasury stock are sold at a price of $10 per share lower than the original purchase price. Therefore, the balance of the paid-in capital account can be calculated by: $900,000 + (2000 shares x $5) - (500 shares x $10) = $905,000. Also, consider the journal entries for each of the transactions: Purchase of $2,500 shares of treasury stock: Debit Treasury Stock $75,000; Credit Cash $75,000; Sold 2,000 shares of treasury stock; Debit Cash $70,000; Credit Treasury Stock $60,000 (2,000 shares x $30 purchase price); Credit Paid-In Capital Excess of Par $10,000; Sold remaining 500 shares of treasury stock: Debit Cash $10,000; Debit Paid-In Capital Excess of Par $5,000; Credit Treasury Stock $15,000 (500 shares x $30 purchase price); The Balance of the Paid-In Capital Excess of Par account is: $900,000 + $10,000 - $5,000 = $905,000 When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? Treasury stock for the purchase price Under the cost method, when a company purchases treasury stock, it records the transaction at the price it paid for the stock in the Treasury Stock account. The journal entry for this transaction is: Debit: Treasury Stock at the purchase price, Credit Cash. "Gains" on sales of treasury stock (using the cost method) should be credited to which account? Paid-in capital from treasury stock Sales of treasury stock above and below cost of treasury stock are only recorded in the Paid-in Capital from Treasury Stock account. The capital stock account, the price at which shares are originally issued, is not affected. Gains & Losses occur when selling assets, however, treasury stock is not an asset. On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017. As a result of this stock dividend, what happened to the company's total stockholders' equity? It did not change Stock dividends simply reflect a reclassification of stockholder's equity. The total of stockholder's equity does not change. On January 1, 2017, Vancleave Corporation had 110,000 shares of its $.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017. What was the impact of the 10% stock dividend on the balance of the retained earnings account? $88,000 decrease Small stock dividends use the fair value of the stock to record issue of the stock dividend. 110,000 shares x 10% divided = 11,000 shares x $8/share = $88,000 stock dividend. When the dividend is declared and issued, the following journal entry is recorded: Debit Retained Earnings: $88,000; Credit Common Stock $11 (11,000 shares x $.001 par), Credit Paid-in Capital in Excess of Par - Common Stock $87,989. While total Stockholder's Equity does not change, Retained Earnings is decreased by $88,000. Cash dividends are paid on the basis of which number of shares? Outstanding Cash dividends are paid only on the shares that are currently owned - the outstanding shares. Where should the balance in Common Stock Dividend Distributable be reported on the Balance Sheet? Addition to capital stock On the declaration date, a small stock dividend is recorded using the following journal entry: Debit to Retained Earnings (at fair value), Credit to Common Stock Dividend Distributable (at par) Credit Paid-in Capital in Excess of Par - Common Stock. Common Stock Dividends Payable have a credit balance and therefore are in increase (or addition to) capital stock. Stock dividends are not related to cash and therefore are not liability, nor are they a contra-asset. Return on Common Stockholder's Equity: Net Income - Preferred Dividends / Average Common Stockholder's Equity measures profitability from the common stockholders' viewpoint. This ratio shows how many dollars of net income the company earned for each dollar invested by the owners. Return on equity also helps investors judge the worthiness of a stock when the overall market is not doing well. Payout Ratio: Cash Dividends/Net Income Book Value per Share: Common Stockholders' Equity / Outstanding Shares Book value per share of stock is the amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet. However, the figure loses much of its relevance if the valuations on the balance sheet fail to approximate fair value of the assets. Book value per share equals common stockholders' equity divided by outstanding common shares How is the rate of return on common stock equity computed? Net income less preferred dividends/average common stockholders' equity How is the payout ratio calculated? Cash dividends/net income less preferred dividends Layne Corporation had the following information in its financial statements for the years ended 2020 and 2021: Cash dividends for the year 2021: $10,000 Net income for the year ended 2021: $93,000 Market price of stock, 12/31/20: $10 Market price of stock, 12/31/21 $12 Common stockholders' equity, 12/31/20: $1,600,000 Common stockholders' equity, 12/31/21: $1,980,000 Outstanding shares, 12/31/21: 160,000 Preferred dividends for the year ended 2021: $15,000 What is the payout ratio for Layne Corporation for the year ended 2021? 0.128 The Common Stock Payout Ratio is calculated as Common Stock Cash Dividends divided by Net Income (less preferred dividends, if applicable). [$10,000 ÷ ($93,000 - $15,000)] = 12.8%. Layne Corporation had the following information in its financial statements for the years ended 2020 and 2021: Cash dividends for the year 2021: $10,000 Net income for the year ended 2021: $93,000 Market price of stock, 12/31/20: $10 Market price of stock, 12/31/21 $12 Common stockholders' equity, 12/31/20: $1,600,000 Common stockholders' equity, 12/31/21: $1,980,000 Outstanding shares, 12/31/21: 160,000 Preferred dividends for the year ended 2021: $15,000 What is the book value per share for Layne Corporation for the year ended 2021? $12.38 The book value per share is calculated as: Common Stockholders' Equity divided by Outstanding Shares. $1,980,000 ÷ 160,000 = $12.38 Think of book value per share as the “accounting value” of each slice of the company. If you shut the company down and sold off everything at book value, each share would be worth $12.38. Durango Inc. had net income for 2017 of $2,120,000 and earnings per share on common stock of $5. Included in the net income was $300,000 of bond interest expense related to its long-term debt. The income tax rate for 2017 was 30%. Dividends on preferred stock were $400,000. The payout ratio on common stock was 25%. What were the dividends for common stock in 2017? $430,000 The Common Stock Payout Ratio is calculated as Common Stock Cash Dividends divided by Net Income (less preferred dividends, if applicable). Net income already accounts for bond interest and income taxes. Therefore, Common Stock Cash Dividends = Common Stock Payout Ratio x Net Income (less preferred dividends). [25% x ($2,120,000 - $400,000)] = $430,000. At the date of declaration of a large common stock dividend, what should the entry include? A debit to Retained Earnings A large stock dividend (greater than 20% - 25%) more closely resembles a stock split. The corporation uses the par value instead of the fair value when calculating the transfer from Retained Earnings to Common Stock. On the declaration date, a large stock dividend is recorded using the following journal entry: Debit to Retained Earnings (at par), Credit to Common Stock Dividend Distributable (at par). Common stockholders of a business enterprise are said to be the residual owners. What does the term residual owner mean? The stockholders bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. Common stockholders bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. Long Co. issued 100,000 shares of $10 par common stock for $1,200,000. A year later Long acquired 16,000 shares of its own common stock at $15 per share. Three months later Long sold 8,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, what is the credit side of the journal entry to record the sale of the 8,000 treasury shares? Treasury Stock for $120,000 and Paid-in Capital from Treasury Stock for $32,000 Sales of treasury stock above and below cost of treasury stock are only recorded in the Paid-in Capital from Treasury Stock account. The treasury stock balance for the 16,000 shares purchased is $240,000 (16,000 shares x $15/share). The cost of 8,000 shares, therefore is $120,000. The credit to treasury stock is limited to that cost. The journal entry to record the sale of 8,000 shares of treasury stock is: Debit Cash $152,000 (8,000 shares x $19/share); Credit Treasury Stock $120,000, Credit Paid-in Capital from Treasury Stock $32,000. Sealy Corporation had the following information in its financial statements for the years ended 2020 and 2021: Cash dividends for the year 2021: $5,000 Net income for the year ended 2021: $97,000 Market price of stock, 12/31/20: $10 Market price of stock, 12/31/21: $12 Common stockholders' equity, 12/31/20: $1,000,000 Common stockholders' equity, 12/31/21: $1,200,000 Outstanding shares, 12/31/21: 100,000 Preferred dividends for the year ended 2021: $15,000 What is the rate of return on common stock equity for Sealy Corporation for the year ended 2021? 0.075 The Return on Common Stockholders' Equity is calculated as: [(Net Income - Preferred Dividends)/Average Common Stockholders' Equity. = 7.5%. What are convertible bonds usually converted into? Common stock In order to obtain financing at lower rates, corporations will issue convertible bonds so the purchaser may convert it's debt into common stock (or ownership interest) of the corporation. When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, how is the sweetener accounted for? Expense To eliminate required principal and interest payments on debt, it is in the interest of the corporation to induce its convertible bond holders to exercise the conversion option. This inducement is most commonly in the form of cash or additional common stock. This inducement is an expense of the current period, with an amount equal to the fair value of the additional securities or other consideration given. During the conversion of preferred stock into common, how should any excess of the par value of the common shares issued over the carrying amount of the preferred being converted be treated? It should be treated as a direct reduction of retained earnings In accounting for the exercise of convertible preferred stock, a company uses the book value method and fair values are ignored. The journal entry for the conversion includes: Debit Convertible Preferred Stock (at par), Debit Paid-in Capital in Excess of Par - Preferred Stock, Debit Common Stock (at par). Additionally, if the Preferred Stock entries exceed the Common Stock, an additional credit is made to the Paid-in Capital in Excess of Par - Common Stock account. On the other hand, if the Common Stock credits exceeds the Preferred Stock entries, an additional debit is recorded in the Retained Earnings account to balance the entry. In 2016, Newton Inc. issued for $105 per share, 100,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Newton's $30 par value common stock at the option of the preferred stockholder. In August 2017, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $42 per share. What total amount should be credited to additional paid-in capital, common stock as a result of the conversion of the preferred stock into common stock? $1,500,000 In accounting for the exercise of convertible preferred stock, a company uses the book value method and fair values are ignored. The journal entry for the conversion includes: Debit Convertible Preferred Stock (at par), Debit Paid-in Capital in Excess of Par - Preferred Stock, Debit Common Stock (at par). Additionally, if the Preferred Stock entries exceed the Common Stock, an additional credit is made to the Paid-in Capital in Excess of Par - Common Stock account. On the other hand, if the Common Stock credits exceeds the Preferred Stock entries, an additional debit is recorded in the Retained Earnings account to balance the entry. In this case, the journal entry includes the following: Debit Convertible Preferred Stock: $10,000,000 (100,000 shares x $100/share par value) Debit Paid-in Capital in Excess of Par - Preferred Stock: $500,000 [100,000 x (105/share - 100/share)] Credit Common Stock: $9,000,000 (100,000 preferred shares converted to 3 shares of common stock = $300,000 common shares x $30/share par value) Credit Paid-in Capital in Excess of Par - Common Stock: $1,500,000 [($10,000,000 + $500,000) - $9,000,000] Lake Norman Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 200, $1,000 bonds with the warrants attached was $205,000. The market price of the Lake Norman bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants? $20,500 When bonds are issued with detachable warrants, two securities are created. The value of each security is allocated between the two using the proportional method which uses the fair value of both securities, if available, to make the allocation of proceeds. The amount that should be allocated to the warrants is calculated as: $205,000 x [( $20,000 / ($180,000 + $20,000)] = $20,500. Think of it like buying a combo meal (burger + drink) for $10, but if the burger alone costs $8 and the drink costs $2, you’d allocate 80% of the $10 to the burger and 20% to the drink. Here, we’re just splitting the bundle between bonds and warrants in proportion to their real value. On what should the allocation of proceeds from the sale of debt with detachable stock warrants be based? Aggregate fair market value of the bonds and the warrants When bonds are issued with detachable warrants, two securities are created. The value of each security is allocated between the two using the proportional method which uses the fair value of both securities, if available, to make the allocation of proceeds. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair value of the warrants, to which account should the excess be credited? Premium on bonds payable When bonds with detachable warrants are issued, two securities are created. However, until the warrants are exercised, they are reported on the balance sheet in the stockholders' equity section at the value of the cash attributed to the warrants. Therefore, any difference in proceeds and the face value of the bond will be reported as either a premium or discount on the bond payable and amortized over the life of the bond. What is the major difference between convertible debt and stock warrants upon exercise of the instrument? The holder has to pay a certain amount of cash to obtain the shares. When exercised at the warrant holder's option, warrants convert to common stock (similar to convertible bonds) and usually have a dilutive effect (reduce earnings per share). However, a substantial difference between convertible securities and stock warrants is that upon exercise of the warrants, the holder has to pay a certain amount of money to obtain the shares. On January 1, 2021 Reese Company granted Jack Buchanan, an employee, an option to buy 300 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 $4,800. Buchanan exercised his option on September 1, 2021, and sold his 300 shares on December 1, 2021. Quoted market prices of Reese Co. stock during 2021 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, 2021. As a result of the option granted to Buchanan, using the fair value method, what value should Reese recognize as compensation expense for 2021? $2,400 A company recognizes compensation expense in the periods in which its employees perform the service—the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Thus, the company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees' services In this case, the compensation expense of $4,800 is divided by the service period of 2 years. The compensation expense for 2021 is $2,400. What is an advantage of a restricted-stock plan? It never becomes completely worthless Major advantages of a restricted-stock plan include: (1) the stock never becomes completely worthless, (2) the stock generally results in less dilution to existing shareholders, and (3) the stock better aligns the employee incentives with the company's incentives. When is the compensation expense resulting from a compensatory stock option plan generally reported? When it is allocated to the periods benefited by the employee's required service. In general, a company recognizes compensation expense in the periods in which its employees perform the service—the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Thus, the company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees' services. Earnings per Share Net income - Preferred Dividends / Weighted-Average Common Shares Outstanding What is the numerator of the Earnings per Share of Common Stock calculation Net Income - Preferred Dividends At December 31, 2017, Twin Rivers Company had 450,000 shares of common stock issued and outstanding, 350,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on September 1, 2017. Net income for the year ended December 31, 2017, was $1,160,000. What should be Twin Rivers' 2017 earnings per common share, rounded to the nearest penny? $3.02 Earnings per share is calculated as: [(Net Income - Preferred Dividends)/Weighted-Average Common Shares Outstanding]. 350,000 x 12/12 + 100,000 x 4/12 = 383,333. The correct answer is: $1,160,000/383,333 = 3.02 Pesca Company had 820,000 shares of common stock outstanding on January 1, issued 360,000 shares on April 1 and purchased 24,000 shares of treasury stock on December 1. What is the weighted average shares outstanding for the year? 1,088,000 shares To calculate the weighted-average number of shares outstanding, companies must weight the shares by the fraction of the period they are outstanding. Pesca's weighted-average of number of shares outstanding is calculated as: (a) 820,000 shares x 3/12 of the year = 205,000 shares (b) 820,000 shares + 360,000 issued shares = 1,180,000 shares x 8/12 of the year = 786,667 shares (c) 1,180,000 shares - 24,000 shares purchased as treasury stock = 1,156,000 shares x 1/12 of the year = 96,333 shares 205,000 shares + 786,667 shares + 96,333 shares = 1,088,000 shares With respect to the computation of earnings per share, what would be indicative of a simple capital structure? Ownership interest consisting solely of common stock. A simple capital structure consists of common and preferred stock, but does not include dilutive securities such as convertible bonds, warrants, and convertible preferred stock. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? Decrease in stockholder's equity and increase in earnings per share. When a corporation purchases treasury stock, stockholders' equity decreases. Additionally, earnings per share is calculated by dividing net income by the number of shares outstanding. With fewer shares outstanding, the earnings per share will increase. Of what will the numerator of the diluted EPS calculation consist when convertible preferred stock is being included? Net income When considering earnings per share where convertible securities are present, companies measure the dilutive effects using the if-converted method, assuming that the dilutive security has been converted to common stock. Therefore, the preferred dividend normally included in the numerator of the earnings per share calculation is eliminated. Therefore, the numerator will only consist of Net Income. Which earnings per share amounts are reported in a complex capital structure? Basic and diluted EPS A company that has a complex capital structure is required to report both the Basic EPS and Diluted EPS on Income from continuing operations, Discontinued operations, and Net income. The treasury stock method of computing incremental shares applies to which dilutive securities? Stock options and warrants The treasury stock method is only used to calculate the shares related to stock options and warrants. Convertible securities (bonds and stock) use the if-converted method. How should antidilutive securities be treated in presenting the earnings per share information? They should be ignored in all earnings per share calculations The purpose of presenting both basic and diluted EPS is to inform financial statement users of situations that will likely occur (basic EPS) and also to provide "worst case" dilutive situations (dilutive EPS). Therefore, companies must completely ignore any security that is anti-dilutive. In 2019, Chartres Inc., issued for $105 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Chartre's $25 par value common stock at the option of the preferred stockholder. In April 2020, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? $1,800,000 In accounting for the exercise of convertible preferred stock, a company uses the book value method and fair values are ignored. The journal entry for the conversion includes: Debit Convertible Preferred Stock (at par), Debit Paid-in Capital in Excess of Par - Preferred Stock, Debit Common Stock (at par). Additionally, if the Preferred Stock entries exceed the Common Stock, an additional credit is made to the Paid-in Capital in Excess of Par - Common Stock account. On the other hand, if the Common Stock credits exceeds the Preferred Stock entries, an additional debit is recorded in the Retained Earnings account to balance the entry. In this case, the journal entry includes the following: Debit Convertible Preferred Stock: $6,000,000 (60,000 shares x $100/share par value) Debit Paid-in Capital in Excess of Par - Preferred Stock: $300,000 [60,000 x (105/share - 100/share)] Credit Common Stock: $4,500,000 (60,000 preferred shares converted to 3 shares of common stock = $180,000 common shares x $25/share par value) Credit Paid-in Capital in Excess of Par - Common Stock: $1,800,000 [($6,000,000 + $300,000) - $4,500,000] Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. What is Milo's weighted average shares outstanding for the year? 872,000 To calculate the weighted-average number of shares outstanding, companies must weight the shares by the fraction of the period they are outstanding. Milo's weighted-average of number of shares outstanding is calculated as: (a) 800,000 shares x 4/12 of the year = 266,667 shares (b) 820,000 shares + 126,000 issued shares = 926,000 shares x 4/12 of the year = 308,667 shares (c) 926,000 shares - 63,000 shares purchased as treasury stock = 863,000 shares x 2/12 of the year = 143,833 shares (d) 863,000 shares + 54,000 shares issued = 152,833 shares x 2/12 of the year = 152,833 266,667 shares + 308,667 shares + 143,833 shares + 152,833 shares = 872,000 shares On March 1, 2021, Ruiz Corporation issued $2,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2041. 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, 2021, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2021 as paid-in capital from stock warrants? 104,000 When bonds are issued with detachable warrants, two securities are created. The value of each security is allocated between the two using the proportional method which uses the fair value of both securities, if available, to make the allocation of proceeds. The calculation of the amount allocated to the Paid-in Capital - Stock Warrants is calculated below: Proceeds = $2,000,000 x 104% = $2,080,000 Fair value of bonds = $2,000,000 x 95% = $1,900,000 Number of warrants issued = $2,000,000 / $1,000 per bond = 2,000 bonds x 25 warrants per bond = 50,000 warrants Fair value of warrants = 50,000 warrants x $2 per warrrant = $100,000 Amount of proceeds allocated to warrants = [$100,000 / ($1,900,000 + $100,000)] x $2,080,000 = $104,000 On June 30, 2021, Yang Corporation granted compensatory stock options for 25,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $100,000. The options are exercisable beginning January 1, 2023, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2024. On January 4, 2023, when the market price of the stock was $36 per share, all options for the 25,000 shares were exercised. The service period is for two years beginning January 1, 2021. Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2021? $50,000 A company recognizes compensation expense in the periods in which its employees perform the service—the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Thus, the company determines total compensation cost at the grant date and allocates it to the periods benefited by its employees' services. In this case, the compensation expense of $100,000 is divided by the service period of 2 years. The compensation expense for 2021 is $50,000. At December 31, 2021, Hancock 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, 2021. Net income for the year ended December 31, 2021, was $1,700,000. What should be Hancock's 2021 earnings per common share, rounded to the nearest penny 4.00 Earnings per share is calculated as: [(Net Income - Preferred Dividends)/Weighted-Average Common Shares Outstanding]. The correct answer is calculated as follows: ((400,000 X 12/12) + (100,000 X 3/12)) = 425,000. 1,700,000/425,000 = 4.00 A company is buying a patent in exchange for 1,000 shares of common stock in the company at $5 a share. The fair market value of the stock is $10, and the market value of the patent is unknown. Which journal entry should the company use to account for the purchase of the patent? Debit Patents for $10,000; Credit Common Stock for $5,000; Credit Paid-in Capital for $5,000 The entry is made for the exchange of the patent for the value of the common stock. A company issues 15,000 shares of $1 par value common stock in exchange for a trademark with a fair market value of $20,000. Additionally, the company paid underwriting costs of $5,000. Which journal entry should be used to record this common stock issuance? Debit Trademark for $20,000; Credit Common Stock for $15,000; Credit Cash for $5,000 The trademark should be valued at the fair market value, and common stock should be recorded at the par value A corporation receives a lump sum of $1,010.25 for a $1,000 par value bond with one warrant attached. The warrant is to purchase one share of common stock for $30 within the next five years when the stock is trading at $60. The warrant can be traded separately from the bond. The bond's market price cannot be determined, but themarket price for the warrant is $30.90. How much of the bond sale proceeds is allocated to the bonds using the incremental method? $979.35 $979.35 = $1,010.25 - $30.90. The company received the $1,010.25 for the bond with the warrant attached. Knowing the warrant has a fair value of $30.90, the remaining is allocated to the bond. A company currently has stock warrants outstanding. The company needs to determine when these warrants impact its earnings per share. When should they be included in the calculation? When the warrants have a dilutive effect on earnings per share. The warrants that have a dilutive effect on earnings per share are included in the diluted earnings per share calculation A company reports net income of $1,000,000 for the year. Shares outstanding during the first three months of the year equal 500,000, and shares outstanding during the final nine months of the year equal 1,000,000. There are $100,000 of preferred dividends. What is the earnings per share? 1.03 $1.03 = ($1,000,000 - $100,000) / ((500,000 x 3/12) + (1,000,000 x 9/12)). Share must be averaged on a weighted basis during the year. A company has a complex capital structure regarding dilutive securities currently outstanding. The company is making a financial statement disclosure regarding their common stock and may include a note in their financial statements. Which note must be included, if any A description of the rights assigned to the diluted securities. A disclosure is required in the financial statements describing the rights and privileges of the dilutive securities. This disclosure provides detail useful to the financial statement user regarding the potential effects of the dilutive securities. A company announces a $500,000 dividend payable to common stockholders. The cash dividend announcements noted that stockholders should consider $400,000 of the dividend as income and the remainder as a return of capital. Which journal entry should be used to record this dividend? Debit Retained Earnings for $400,000; Debit Paid-in Capital in Excess of Par - Common Stock for $100,000; Credit Dividends Payable for $500,000 $100,000 = $500,000 - $400,000. This is a liquidating dividend. The difference between the return of capital should be debited to the Paid-in Capital in Excess of Par - Common Stock account A company allows all full-time employees--but no part-time employees--to participate in its employee stock purchase plan. The employees have the option to purchase common stock discounted by 25%, and the plan offers no substantive option feature. What is one of the three required features that causes the plan to be considered compensatory? The stock is discounted by 25%. Non-compensatory plans can only be discounted for 5% or less. A company has issued bonds with a total face value of $5,000,000 with a detachable warrant. The fair value of the bonds without the warrants was $4,800,000, and the fair value of the warrants amounted to $100,000. Which amount should be debited to Discount on Bonds Payable using the proportional method $102,041 $102,041 =$5,000,000 -((($4,800,000 / ($5,000,000 - $100,000)) x $5,000,000)). This shows the amount allocated to the warrants that will be debited to Discount on Bonds Payable. A bookkeeper is reviewing transactions for a company that acquired 12,000 shares of its $1 par value common stock at $10 per share using the cost method. The shares were originally issued at $1 over par value.The first sale of the treasury stock was for 1,000 shares at $10, the second sale was for 5,000 shares at $2 above cost, and the third sale was for 5,000 shares at $4 below cost. The company retired the remaining 1,000 shares of treasury stock on the last day of the year. Which transaction includes a debit to Paid-on Capital from Treasury stock for $10,000? Third sale of 5,000 shares $50,000 = 5,000 x $10; $30,000 = 5,000 x ($10 - $4); $10,000 = 5,000 x ($4 - $2); $10,000 = $50,000 - $30,000 - $2,000. The journal entry for the third sale is as follows: Debit Cash for $30,000; Debit Paid-in Capital from Treasury Stock for $10,000; Debit Retained Earnings for $10,000; Credit Treasury Stock for $50,000.