WGU D104 Intermediate Accounting II Pre Assessment Practice
Exam 90 Questions with Answers and Detailed Rationales
Equity Rights and Share Based Compensation
1. What is the purpose of a shareholder’s preemptive right?
Answer To allow proportionate participation in qualifying new share issuances
and help prevent involuntary ownership dilution.
Rationale The right protects an existing ownership percentage when it applies
under the governing documents and law. The shareholder generally must choose
to participate and pay for new shares. A preemptive right may be evidenced by
rights or warrants in some arrangements, but it is not identical to every warrant
a company issues.
2. An investor owns 10,000 of 100,000 shares. A company issues 20,000
additional shares. How many must the investor acquire to retain 10%
ownership?
Answer 2,000 shares.
Rationale Buying 10% of the new issuance adds 2,000 shares to the investor’s
10,000. The resulting 12,000 shares divided by 120,000 total shares equals 10%.
Buying nothing would leave 10,000/120,000 = 8.33%, illustrating the ownership
dilution a preemptive right can help address.
3. Does selecting the treasury-stock cost method rather than the par-value
method determine whether repurchased shares can later be reissued?
Answer No.
Rationale Both accounting methods can apply to reacquired shares that remain
available for reissue. Under the cost method, treasury stock is recorded at
repurchase cost; under a par-value approach, the accounting reallocates related
capital amounts differently. The legal status and retirement decision are separate
from choosing the bookkeeping method.
D104 Pre Assessment Practice | 1
,4. Record the repurchase of 1,000 common shares for $20 each under the
cost method.
Answer Dr Treasury stock $20,000; Cr Cash $20,000.
Rationale Treasury stock is a contra-equity balance, not an investment asset or
an expense. The repurchase reduces cash and total equity by $20,000. It also
reduces common shares outstanding while the shares are held, but does not
normally reverse the original common-stock and APIC balances under the cost
method.
5. One hundred treasury shares costing $20 each are reissued for $25 each.
Record the cost-method entry.
Answer Dr Cash $2,500; Cr Treasury stock $2,000; Cr APIC—Treasury stock
$500.
Rationale Remove treasury shares at recorded cost rather than their new selling
price. The $500 excess is an equity contribution adjustment, not income from
trading in the company’s own shares. The transaction increases outstanding
shares again, which may affect weighted-average shares for EPS from the
reissuance date.
6. What preferential benefit does preferred stock commonly provide?
Answer Priority over common stock for stated dividends and often for specified
liquidation amounts.
Rationale The preference depends on contractual terms and does not guarantee
that every dividend will be declared or paid. Cumulative terms may create
dividend arrears requiring disclosure. Classification can also depend on
redemption and settlement provisions, so the name “preferred stock” alone does
not resolve every accounting issue.
7. Does conversion of preferred shares into common shares always reduce
retained earnings?
Answer No; the result depends on the carrying amounts and common par value
issued under the applicable conversion treatment.
Rationale In the ordinary book-value method, remove preferred stock and its
related APIC, then credit common stock at par and common APIC as appropriate.
A retained-earnings debit may be needed when common par exceeds the carrying
equity transferred under the textbook facts. A blanket “decrease” answer is
therefore incomplete.
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, 8. Preferred stock has $100,000 par balance and $20,000 related APIC. It
converts into common stock with $80,000 total par. Record the book-value
conversion, with no inducement or other adjustment.
Answer Dr Preferred stock $100,000; Dr APIC—Preferred $20,000; Cr Common
stock $80,000; Cr APIC—Common $40,000.
Rationale The transaction reclassifies $120,000 within equity. Common stock
receives its $80,000 par value, and the remaining $40,000 becomes common
APIC. Total equity and retained earnings do not change on these facts. Current
market prices are not substituted for the carrying amounts in this specified
conversion method.
9. Bonds and detachable equity-classified warrants generate $1,020,000
proceeds. Standalone values are $960,000 for bonds and $40,000 for
warrants. Allocate proceeds proportionally.
Answer Bonds $979,200; warrants $40,800.
Rationale Total standalone value is $1,000,000. Bonds represent 96% and
warrants 4%, so multiply those fractions by $1,020,000. This relative-fair-value
method applies when both relevant values are known. Classification matters
because liability-classified warrants can require a different allocation and
subsequent measurement analysis.
10. How is basic EPS calculated when a year includes share issuances,
repurchases, and a stock split?
Answer Divide common earnings by time-weighted common shares, applying
required retrospective split adjustments.
Rationale Issuances increase shares from their dates, while treasury purchases
reduce outstanding shares from repurchase dates. A stock split restates
applicable earlier share counts to the new share unit. The split does not add
resources or income, so failing to restate prior share units would distort
comparisons.
D104 Pre Assessment Practice | 3
Exam 90 Questions with Answers and Detailed Rationales
Equity Rights and Share Based Compensation
1. What is the purpose of a shareholder’s preemptive right?
Answer To allow proportionate participation in qualifying new share issuances
and help prevent involuntary ownership dilution.
Rationale The right protects an existing ownership percentage when it applies
under the governing documents and law. The shareholder generally must choose
to participate and pay for new shares. A preemptive right may be evidenced by
rights or warrants in some arrangements, but it is not identical to every warrant
a company issues.
2. An investor owns 10,000 of 100,000 shares. A company issues 20,000
additional shares. How many must the investor acquire to retain 10%
ownership?
Answer 2,000 shares.
Rationale Buying 10% of the new issuance adds 2,000 shares to the investor’s
10,000. The resulting 12,000 shares divided by 120,000 total shares equals 10%.
Buying nothing would leave 10,000/120,000 = 8.33%, illustrating the ownership
dilution a preemptive right can help address.
3. Does selecting the treasury-stock cost method rather than the par-value
method determine whether repurchased shares can later be reissued?
Answer No.
Rationale Both accounting methods can apply to reacquired shares that remain
available for reissue. Under the cost method, treasury stock is recorded at
repurchase cost; under a par-value approach, the accounting reallocates related
capital amounts differently. The legal status and retirement decision are separate
from choosing the bookkeeping method.
D104 Pre Assessment Practice | 1
,4. Record the repurchase of 1,000 common shares for $20 each under the
cost method.
Answer Dr Treasury stock $20,000; Cr Cash $20,000.
Rationale Treasury stock is a contra-equity balance, not an investment asset or
an expense. The repurchase reduces cash and total equity by $20,000. It also
reduces common shares outstanding while the shares are held, but does not
normally reverse the original common-stock and APIC balances under the cost
method.
5. One hundred treasury shares costing $20 each are reissued for $25 each.
Record the cost-method entry.
Answer Dr Cash $2,500; Cr Treasury stock $2,000; Cr APIC—Treasury stock
$500.
Rationale Remove treasury shares at recorded cost rather than their new selling
price. The $500 excess is an equity contribution adjustment, not income from
trading in the company’s own shares. The transaction increases outstanding
shares again, which may affect weighted-average shares for EPS from the
reissuance date.
6. What preferential benefit does preferred stock commonly provide?
Answer Priority over common stock for stated dividends and often for specified
liquidation amounts.
Rationale The preference depends on contractual terms and does not guarantee
that every dividend will be declared or paid. Cumulative terms may create
dividend arrears requiring disclosure. Classification can also depend on
redemption and settlement provisions, so the name “preferred stock” alone does
not resolve every accounting issue.
7. Does conversion of preferred shares into common shares always reduce
retained earnings?
Answer No; the result depends on the carrying amounts and common par value
issued under the applicable conversion treatment.
Rationale In the ordinary book-value method, remove preferred stock and its
related APIC, then credit common stock at par and common APIC as appropriate.
A retained-earnings debit may be needed when common par exceeds the carrying
equity transferred under the textbook facts. A blanket “decrease” answer is
therefore incomplete.
D104 Pre Assessment Practice | 2
, 8. Preferred stock has $100,000 par balance and $20,000 related APIC. It
converts into common stock with $80,000 total par. Record the book-value
conversion, with no inducement or other adjustment.
Answer Dr Preferred stock $100,000; Dr APIC—Preferred $20,000; Cr Common
stock $80,000; Cr APIC—Common $40,000.
Rationale The transaction reclassifies $120,000 within equity. Common stock
receives its $80,000 par value, and the remaining $40,000 becomes common
APIC. Total equity and retained earnings do not change on these facts. Current
market prices are not substituted for the carrying amounts in this specified
conversion method.
9. Bonds and detachable equity-classified warrants generate $1,020,000
proceeds. Standalone values are $960,000 for bonds and $40,000 for
warrants. Allocate proceeds proportionally.
Answer Bonds $979,200; warrants $40,800.
Rationale Total standalone value is $1,000,000. Bonds represent 96% and
warrants 4%, so multiply those fractions by $1,020,000. This relative-fair-value
method applies when both relevant values are known. Classification matters
because liability-classified warrants can require a different allocation and
subsequent measurement analysis.
10. How is basic EPS calculated when a year includes share issuances,
repurchases, and a stock split?
Answer Divide common earnings by time-weighted common shares, applying
required retrospective split adjustments.
Rationale Issuances increase shares from their dates, while treasury purchases
reduce outstanding shares from repurchase dates. A stock split restates
applicable earlier share counts to the new share unit. The split does not add
resources or income, so failing to restate prior share units would distort
comparisons.
D104 Pre Assessment Practice | 3
