Intermediate Accounting Chapter 16 Review Questions with Verified Solutions Rated A+
What is meant by a dilutive security? - Answers Convertible debt or stock options are dilutive because
their features indicate that the holders of the securities can become common shareholders. Results in a
reduction of earnings per share.
Briefly explain why corporations issue convertible securities: - Answers 1.To raise equity capital without
giving up more ownership control than necessary
2. Obtain financing at cheaper rates
Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the
purchaser - Answers (a) For the issuer, lower cash interest cost than in the case of nonconvertible debt,
allows raising equity capital over long term
(b) Gives purchaser option to receive either the face amount of debt upon maturity or specified number
of common shares upon conversion, if market value of underlying common stock increases above the
conversion price, the purchases receives benefits of appreciation. On the other hand, if market value
decreases, the purchaser could nevertheless expect to receive the principal and (lower) interest
On July 1, 2012, Roberts Corporation issued $3,000,000 of 9% bonds payable in 20 years. The bonds
include detachable warrants giving the bondholder the right to purchase for $30 one share of $1 par
value common stock at any time during the next 10 years. The bonds were sold for $3,000,000. The
value of the warrants at the time of issuance was $100,000. Prepare the journal entry to record this
transaction. - Answers De. Cash 3,000,000
De. Discount on Bonds Payable 100,000
Cr. Bonds Payable 3,000,000
Cr. Paid-in Capital—Stock Warrants 100,000
What date or event does the profession believe should be
used in determining the value of a stock option? What arguments support this position? - Answers Grant
date: the market price on the date of grant may be presumed to be the value which the employer had in
mind for compensation, not the ultimate gain or loss on the transaction.
Over what period of time should compensation cost be allocated? - Answers Service period, which is the
vesting period (the time between the grant date and the vesting date)
At December 31, 2012, Reid Company had 600,000 shares of common stock issued and outstanding,
400,000 of which had been issued and outstanding throughout the year and 200,000 of which were
issued on October 1, 2012. Net income for 2012 was $2,000,000, and dividends declared on preferred
, stock were $400,000. Compute Reid's earnings per common share. (Round to the nearest penny.) -
Answers Weighted-average shares outstanding
Outstanding shares (all year) = 400,000
October 1 to December 31 (200,000 X 3/12) = 50,000
(Net Income - Preferred Dividends)/Weighted Average Shares Outstanding
(2,000,000 - 400,000)/ 450,000 = 3.56
Define: Basic earnings per share - Answers Amount of earnings for the period available to each share of
common stock outstanding during the reporting period
Define: A potentially dilutive security - Answers Security which can be exchanged for or converted into
common stock, therefore upon conversion could dilute or decrease earnings per share. (convertible
securities, stock options, stock warrants, and other rights)
Define: Diluted earnings per share - Answers The amount of earnings for the period available to each
share of common stock outstanding and to each share that would have been outstanding assuming the
issuance of common shares for all dilutive potential common shares outstanding
Define: A complex capital structure - Answers A complex capital structure exists whenever a company's
capital structure includes dilutive securities.
Define: Potential common stock - Answers Potential common stock is not common stock in form but
does enable its holders to obtain common stock upon exercise or conversion
Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not
included the conversion feature, they would have sold for 95. Prepare the journal entry to record the
issuance
of the bonds. - Answers De. Cash 3,960,000
De. Discount on Bonds Payable 40,000
Cr. Bonds Payable 4,000,000
Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of
$10 par value common stock. The bonds are converted on December 31, 2012, when the unamortized
discount
is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book
value approach. - Answers De. Bonds Payable 2,000,000
What is meant by a dilutive security? - Answers Convertible debt or stock options are dilutive because
their features indicate that the holders of the securities can become common shareholders. Results in a
reduction of earnings per share.
Briefly explain why corporations issue convertible securities: - Answers 1.To raise equity capital without
giving up more ownership control than necessary
2. Obtain financing at cheaper rates
Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the
purchaser - Answers (a) For the issuer, lower cash interest cost than in the case of nonconvertible debt,
allows raising equity capital over long term
(b) Gives purchaser option to receive either the face amount of debt upon maturity or specified number
of common shares upon conversion, if market value of underlying common stock increases above the
conversion price, the purchases receives benefits of appreciation. On the other hand, if market value
decreases, the purchaser could nevertheless expect to receive the principal and (lower) interest
On July 1, 2012, Roberts Corporation issued $3,000,000 of 9% bonds payable in 20 years. The bonds
include detachable warrants giving the bondholder the right to purchase for $30 one share of $1 par
value common stock at any time during the next 10 years. The bonds were sold for $3,000,000. The
value of the warrants at the time of issuance was $100,000. Prepare the journal entry to record this
transaction. - Answers De. Cash 3,000,000
De. Discount on Bonds Payable 100,000
Cr. Bonds Payable 3,000,000
Cr. Paid-in Capital—Stock Warrants 100,000
What date or event does the profession believe should be
used in determining the value of a stock option? What arguments support this position? - Answers Grant
date: the market price on the date of grant may be presumed to be the value which the employer had in
mind for compensation, not the ultimate gain or loss on the transaction.
Over what period of time should compensation cost be allocated? - Answers Service period, which is the
vesting period (the time between the grant date and the vesting date)
At December 31, 2012, Reid Company had 600,000 shares of common stock issued and outstanding,
400,000 of which had been issued and outstanding throughout the year and 200,000 of which were
issued on October 1, 2012. Net income for 2012 was $2,000,000, and dividends declared on preferred
, stock were $400,000. Compute Reid's earnings per common share. (Round to the nearest penny.) -
Answers Weighted-average shares outstanding
Outstanding shares (all year) = 400,000
October 1 to December 31 (200,000 X 3/12) = 50,000
(Net Income - Preferred Dividends)/Weighted Average Shares Outstanding
(2,000,000 - 400,000)/ 450,000 = 3.56
Define: Basic earnings per share - Answers Amount of earnings for the period available to each share of
common stock outstanding during the reporting period
Define: A potentially dilutive security - Answers Security which can be exchanged for or converted into
common stock, therefore upon conversion could dilute or decrease earnings per share. (convertible
securities, stock options, stock warrants, and other rights)
Define: Diluted earnings per share - Answers The amount of earnings for the period available to each
share of common stock outstanding and to each share that would have been outstanding assuming the
issuance of common shares for all dilutive potential common shares outstanding
Define: A complex capital structure - Answers A complex capital structure exists whenever a company's
capital structure includes dilutive securities.
Define: Potential common stock - Answers Potential common stock is not common stock in form but
does enable its holders to obtain common stock upon exercise or conversion
Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not
included the conversion feature, they would have sold for 95. Prepare the journal entry to record the
issuance
of the bonds. - Answers De. Cash 3,960,000
De. Discount on Bonds Payable 40,000
Cr. Bonds Payable 4,000,000
Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of
$10 par value common stock. The bonds are converted on December 31, 2012, when the unamortized
discount
is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book
value approach. - Answers De. Bonds Payable 2,000,000
