Questions and Answers
Stock Warrants Outstanding should be classified as?
Compensation expense resulting from a compensatory stock option plan is generally?
Allocated to the periods benefited by the employees' required service.
If Litke Corp. converts its bonds into common stock, what is the amount of paid-in capital to be recorded?
$124,000
What accounts should Kegin Corporation credit to record the sale of bonds?
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Which of the following would be most indicative of a simple capital structure?
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In computing EPS for a simple capital structure, what amount should be deducted as an adjustment to the numerator (earnings) for cumulative preferred stock?
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Convertible bonds are assumed converted only if they are dilutive.
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If the exercise price of options exceeds the average market price, the computation would be dilutive.
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Application of the treasury stock method for the assumed exercise of warrants will increase the weighted average number of shares outstanding by?
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Convertible securities are recognized only if they are dilutive.
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A correct valuation for debt securities is?
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Which securities could be classified as held to maturity?
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Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are?
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How does the receipt of dividends affect the investment account of an investor under the Fair Value and Equity method?
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If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the?
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At December 31, 2018, if Atlanta Company has an equity portfolio valued at $160,000 with a cost of $132,000 and a Fair Value Adjustment with a debit balance of $8,000, what is the correct journal entry?
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Ziegler Corp purchased 25,000 shares of common stock for $40 per share and should report revenue from the investment for 2018 in the amount of?
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What is the first step in the process for revenue recognition?
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What is the second step in the process for revenue recognition?
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What is the fourth step in the process for revenue recognition?
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How should the transaction price for multiple performance obligations be allocated?
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In accounting for the warranty of stereo systems sold by Entertainment Tonight, what will be included?
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What recognition is given by the percentage of completion method?
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How should Progress Billings and Construction in Process be shown at reporting dates prior to completion of long-term contracts?
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Under the completed contract method, revenue, cost, and gross profit are recognized at the time the contract is completed.
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Study Notes
Stock Warrants and Compensation
- Stock Warrants Outstanding are classified as Paid in Capital Stock Warrants.
- Compensation expense from a stock option plan is allocated to periods benefiting from employees' services.
Convertible Bonds and Stock Conversion
- Litke Corp's bond conversion results in a paid-in capital of $124,000.
- The company issued a $200,000 bond convertible into 4,000 shares, with a $10,000 premium initially.
Kegin Corporation Bond Sale
- Kegin Corporation sold a $6,000,000 bond for $6,360,000, with detachable warrants allowing stock purchase at $30.
- Recorded accounts include Bonds Payable ($600,000), Premium on Bonds Payable ($105,000), and PIC-stock warrants ($254,400).
Earnings Per Share (EPS) and Capital Structure
- A simple capital structure is indicated by ownership consisting solely of common stock.
- In computing diluted EPS, cumulative preferred dividends are deducted from earnings.
Diluted EPS Calculations
- Convertible bonds are included in diluted EPS calculations only if they are dilutive.
- The treasury stock method assumes re-acquisition at the average market price; if the exercise price exceeds this price, it is considered antidilutive.
Warrants and Share Adjustments
- Application of the treasury stock method for warrants exercisable at $20 will increase shares by 16,000 if the average market price is $25.
Valuation and Securities Classification
- Debt securities held to maturity are valued at amortized cost.
- Municipal bonds are classified as held to maturity securities.
Equity Securities Accounting
- Equity securities with less than 20% ownership recognize unrealized holding gains or losses.
Dividend Accounting Impact
- Receipt of cash dividends affects the investment account differently under fair value (no effect) and equity methods (decreases the account).
Subsidiary Income Accounting
- Parent companies owning 90% of subsidiary stock generally apply the equity method for income accounting.
Fair Value Adjustment Journal Entry
- For an equity portfolio with a debit balance of $8,000, the correct journal entry includes Fair Value Adjustment of $20,000 and an Unrealized Holding Gain or Loss of $20,000.
Revenue from Investments
- Ziegler Corp should report $125,000 in revenue from investments after purchasing shares of Sherman Corp.
Revenue Recognition Process
- The first step in revenue recognition is to identify the contract with the customer.
- The second step involves identifying separate performance obligations.
Transaction Price Allocation
- The transaction price for multiple performance obligations is allocated based on standalone selling prices.
Warranty Accounting
- For warranties, $900 will be credited to unearned warranty revenue when sold with the stereo system.
Percentage of Completion Method
- Recognizes revenue and gross profit each period based on progress in long-term contracts.
Long-Term Contracts Reporting
- Progress Billings and Construction in Process balances are netted and reported as current assets or liabilities based on their balance.
Completed Contract Method
- Under this method, revenue, cost, and gross profit are recognized when the contract is fully completed.
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Description
This quiz covers essential concepts related to stock warrants, convertible bonds, and earnings per share calculations. It explores how these financial instruments affect a company's capital structure and employee compensation. Test your knowledge on these key topics in corporate finance.
