CHAPTER 15
DILUTIVE SECURITIES AND EARNINGS PER SHARE
IFRS questions are available at the end of this chapter.
TRUE-FALSE
1. The recording of convertible bonds at the date of issue is the same as the recording of
straight debt issues.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
2. Companies recognize the gain or loss on retiring convertible debt as comprehensive
income.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
3. The FASB states that when an issuer makes an additional payment to encourage
conversion, the payment should be reported as an expense.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Recordkeeping, IFRS: None
4. The market value method is used to account for the exercise of convertible preferred
stock.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
5. Companies recognize a gain or loss when stockholders exercise convertible preferred
stock.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
6. A company should allocate the proceeds from the sale of debt with detachable stock
warrants between the two securities based on their relative market values.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
7. Like detachable warrants, the accounting for nondetachable warrants requires an
allocation of the proceeds between the bonds and the warrants.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
8. The intrinsic value of a stock option is the difference between the market price of the stock
and the exercise price of the options at the grant date.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
9. Under the fair value method, total compensation expense is computed based on the fair
value of options on the date of exercise.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
,15 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. In a stock option plan, the service period is the time between the grant date and the
vesting date.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
11. If an employee fails to exercise a stock option before its expiration date, the company
should decrease compensation expense.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
12. If an employee forfeits a stock option because of failure to satisfy a service requirement,
the company should record paid-in capital from expired options.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
13. If preferred stock is cumulative and no dividends are declared, the current year preferred
dividend is subtracted in computing earnings per share.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
14. When stock dividends or stock splits occur, companies must restate the shares
outstanding after the stock dividend or split in order to compute the weighted-average
number of shares.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
15. If a stock dividend occurs after year-end, but before issuing the financial statements, a
company must restate the weighted-average number of shares outstanding for the year.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
16. Preferred dividends are subtracted from net income but not income from continuing
operations in computing earnings per share.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
17. When a company has a complex capital structure, it reports both basic and diluted
earnings per share.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Analysis, IFRS: None
18. In computing diluted earnings per share, stock options are considered dilutive when their
option price is greater than the market price.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
19. In a contingent issue agreement, the contingent shares are considered outstanding for
computing diluted EPS when the earnings or market price level is met by the end of the
year.
Ans: T, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
20. A company should report per share amounts for net income, but not for income from
continuing operations.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Analysis, IFRS: None
, Dilutive Securities and Earnings per Share 15 - 3
MULTIPLE CHOICE—Dilutive Securities, Conceptual
21. Convertible bonds
a. have priority over other types of indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control:
Financial Recordkeeping, IFRS: None
22. The conversion of bonds is most commonly recorded by the
a. incremental method.
b. proportional method.
c. market value method.
d. book value method.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
23. When additional consideration is offered to convertible bondholders to encourage
conversion, the payment is called a(n)
a. forced conversion.
b. sweetener.
c. additional conversion.
d. end conversion.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control:
Financial Recordkeeping, IFRS: None
S
24. Corporations issue convertible debt for two main reasons. One is the desire to raise equity
capital that, assuming conversion, will arise when the original debt is converted. The other
is
a. the ease with which convertible debt is sold even if the company has a poor credit
rating.
b. that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain debt financing at lower rates.
d. that convertible bonds will always sell at a premium.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Recordkeeping, IFRS: None
S
25. When convertible debt is retired by the issuer, any material difference between the cash
acquisition price and the carrying amount of the debt should be
a. reflected currently in income.
b. reflected currently in income as a discontinued operations item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.
Ans: A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
, 15 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
S
26. The conversion of preferred stock into common stock requires that any excess of the par
value of the common shares issued over the carrying amount of the preferred being
converted should be
a. reflected currently in income.
b. reflected currently in income as a discontinued operations item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
27. The conversion of preferred stock is most commonly recorded by the
a. incremental method.
b. book value method.
c. market value method.
d. par value method.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
28. 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, the excess should be
credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.
Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
29. Proceeds from the issuance of debt securities with stock warrants should not be allocated
between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.
Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
30. Stock warrants outstanding should be classified as
a. liabilities.
b. reductions of capital contributed in excess of par value.
c. assets.
d. paid-in capital.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Recordkeeping, IFRS: None
P
31. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-
in capital is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
DILUTIVE SECURITIES AND EARNINGS PER SHARE
IFRS questions are available at the end of this chapter.
TRUE-FALSE
1. The recording of convertible bonds at the date of issue is the same as the recording of
straight debt issues.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
2. Companies recognize the gain or loss on retiring convertible debt as comprehensive
income.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
3. The FASB states that when an issuer makes an additional payment to encourage
conversion, the payment should be reported as an expense.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Recordkeeping, IFRS: None
4. The market value method is used to account for the exercise of convertible preferred
stock.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
5. Companies recognize a gain or loss when stockholders exercise convertible preferred
stock.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
6. A company should allocate the proceeds from the sale of debt with detachable stock
warrants between the two securities based on their relative market values.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
7. Like detachable warrants, the accounting for nondetachable warrants requires an
allocation of the proceeds between the bonds and the warrants.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
8. The intrinsic value of a stock option is the difference between the market price of the stock
and the exercise price of the options at the grant date.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
9. Under the fair value method, total compensation expense is computed based on the fair
value of options on the date of exercise.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
,15 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. In a stock option plan, the service period is the time between the grant date and the
vesting date.
Ans: T, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
11. If an employee fails to exercise a stock option before its expiration date, the company
should decrease compensation expense.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
12. If an employee forfeits a stock option because of failure to satisfy a service requirement,
the company should record paid-in capital from expired options.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
13. If preferred stock is cumulative and no dividends are declared, the current year preferred
dividend is subtracted in computing earnings per share.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
14. When stock dividends or stock splits occur, companies must restate the shares
outstanding after the stock dividend or split in order to compute the weighted-average
number of shares.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
15. If a stock dividend occurs after year-end, but before issuing the financial statements, a
company must restate the weighted-average number of shares outstanding for the year.
Ans: T, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
16. Preferred dividends are subtracted from net income but not income from continuing
operations in computing earnings per share.
Ans: F, LO: 4, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
17. When a company has a complex capital structure, it reports both basic and diluted
earnings per share.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Analysis, IFRS: None
18. In computing diluted earnings per share, stock options are considered dilutive when their
option price is greater than the market price.
Ans: F, LO: 5, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
19. In a contingent issue agreement, the contingent shares are considered outstanding for
computing diluted EPS when the earnings or market price level is met by the end of the
year.
Ans: T, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
20. A company should report per share amounts for net income, but not for income from
continuing operations.
Ans: F, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Analysis, IFRS: None
, Dilutive Securities and Earnings per Share 15 - 3
MULTIPLE CHOICE—Dilutive Securities, Conceptual
21. Convertible bonds
a. have priority over other types of indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control:
Financial Recordkeeping, IFRS: None
22. The conversion of bonds is most commonly recorded by the
a. incremental method.
b. proportional method.
c. market value method.
d. book value method.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
23. When additional consideration is offered to convertible bondholders to encourage
conversion, the payment is called a(n)
a. forced conversion.
b. sweetener.
c. additional conversion.
d. end conversion.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: None, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and Control:
Financial Recordkeeping, IFRS: None
S
24. Corporations issue convertible debt for two main reasons. One is the desire to raise equity
capital that, assuming conversion, will arise when the original debt is converted. The other
is
a. the ease with which convertible debt is sold even if the company has a poor credit
rating.
b. that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain debt financing at lower rates.
d. that convertible bonds will always sell at a premium.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Recordkeeping, IFRS: None
S
25. When convertible debt is retired by the issuer, any material difference between the cash
acquisition price and the carrying amount of the debt should be
a. reflected currently in income.
b. reflected currently in income as a discontinued operations item.
c. treated as a prior period adjustment.
d. treated as an adjustment of additional paid-in capital.
Ans: A, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
, 15 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
S
26. The conversion of preferred stock into common stock requires that any excess of the par
value of the common shares issued over the carrying amount of the preferred being
converted should be
a. reflected currently in income.
b. reflected currently in income as a discontinued operations item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
27. The conversion of preferred stock is most commonly recorded by the
a. incremental method.
b. book value method.
c. market value method.
d. par value method.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
28. 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, the excess should be
credited to
a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.
Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
29. Proceeds from the issuance of debt securities with stock warrants should not be allocated
between debt and equity features when
a. the market value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the allocation would result in a discount on the debt security.
d. the warrants issued with the debt securities are nondetachable.
Ans: D, LO: 2, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
30. Stock warrants outstanding should be classified as
a. liabilities.
b. reductions of capital contributed in excess of par value.
c. assets.
d. paid-in capital.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Recordkeeping, IFRS: None
P
31. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-
in capital is preferably
a. zero.
b. calculated by the excess of the proceeds over the face amount of the bonds.
c. equal to the market value of the warrants.
d. based on the relative market values of the two securities.
Ans: D, LO: 2, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Recordkeeping, IFRS: None
