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61. A firm that reports under IFRS is producing under a long-term contract for which it cannot measure the outcome reliably. In the first of the contract, the firm has spent €300,000 and collected €200,000 in cash. What amounts related to this contract should the firm recognize on its income statement for the year?

A. Revenue of €300,000, expenses of €300,000, and no profit.

B. No revenue, expenses, or profit until the contract is completed.

C. Revenue of €200,000, expenses of €300,000, and a loss of €100,000.

  
  Ans: A.

Under IFRS, if the outcome of a long-term contract cannot be estimated reliably, the firm should expense costs when incurred, recognize revenue to the extent of the costs, and recognize

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62.  During 2012, Bao Inc. reported net income of $15,000 and had 2,000 shares of common stock outstanding for the entire year. Bao also had 2,000 shares of 10%, $50 par value preferred stock outstanding during 2012. During 2009, Bao issued 100, $1,000 par, 6% bonds for $100,000. Each of these is convertible to 50 shares of common stock. Bao’s tax rate is 40%. Assuming these bonds are dilutive, 2012 diluted EPS for Bao is closest to: A. $0.71. B. $1.23. C. $2.50.

Ans: B. Diluted EPS= 100(1,000)(6%)(1-0.4)=$3,600; Convertible debt shares=50(100)=5,000 =$1.23

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63. Which of the following statements about the calculation of earnings per share (EPS) is least accurate: A. Shares issued after a stock split must be adjusted for the split. B. Options outstanding may have no effect on diluted EPS. C. Reacquired shares are excluded from the computation from the date of reacquisition.

Ans: A. Shares issued post-split need not be adjusted for the split as they are already “new” shares. Options with an exercise price greater than the average share price do not affect diluted EPS.

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64. Bao Company has 1,000,000 warrants outstanding at the beginning of the year, each convertible into one share of stock with an exercise price of $50. No new warrants were issued during the year. The average stock price during the period was $60, and the year-end stock price was $45. What adjustment for these warrants should be made, under the treasury stock method, to the number of shares used to calculate diluted earnings per share (EPS)? A. 0. B. 166,667. C. 200,000.

Ans: B. Diluted EPS uses average price. Since the average price is greater than the exe4rcise price, the warrants are dilutive. x1,000,000=166,667.

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65. A software company holds a number of marketable securities as investments. For the most recent period, the company reports that the market value of its securities held for trading decreased by $2 million and the market value of its securities available for sale increased in value by $3 million. Together, these changes in value will: A. reduce net income and shareholders’ equity by $2 million. B. increase shareholders’ equity by $1 million and have no effect on net income. C. reduce net income by $2 million and increase shareholders’ equity by $1 million.

Ans: C. Unrealized gains and losses on securities held for trading are included in net income. Unrealized gains and losses on securities available for sale are not reported in net income but are included in comprehensive income. Net income will show a $2 million loss from the securities held for trading. Shareholders’ equity will reflect this loss as well as the $3 million unrealized gain from securities available for sale, for a net increase of $1 millions.

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66. Analysts reviewing Amber Inc.’s and Bold Inc.’s long-term contracting activities observe that Amber’s contracts are being accounted for under the percentage-of-completion method while Bold’s are being accounted for under the completed contract method. This difference is least likely to affect the two companies’: A. income statement. B. statements of cash flows. C. assets on the balance sheets.

Ans: B. Cash flows are no different under the percentage-of-completion method compared with the completed-contract method. Income statement and balance sheet accounts will differ between the two firms.

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67. Which of the following statements about types of nonrecurring items under U.S.GAAP is least accurate?

A. Unusual or infrequent items are included in income from continuing operations.

B. Extraordinary items are unusual and infrequent items that are reported net of taxes and included in nonrecurring income from continuing operations.

C. Discontinued operations are reported net of taxes below income from continuing operating.

  
  Ans; B.

Extraordinary items are unusual and infrequent items that are reported separately, net of tax, after net income continuing operating.

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68. Bao Company has the following sequence of events regarding its stock: · The company had 1,000,000 shares outstanding at the beginning of the year. · On June 30, the company declared and issued a 10% stock dividend. · On September 30, the company sold 400,000 shares of common stock at par. The number of shares that should be used to compute basic earnings per share at year end is: A. 1,000,000. B. 1,100,000. C. 1,200,000.

Ans: C. Original shares of CS 1,000,000x12 12,000,000 Stock dividend 100,000x12 1,200,000 New shares of CS 400,000x3 1,200,000 Total shares of CS 1,200,000 Stock dividends are assumed to have been outstanding since the beginning of the year.

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69. Consider a manufacturing company and a financial services company. Interest expense is most likely classified as a non-operating component of income for:

A. both of these companies.

B. neither of these companies.

C. only one of these companies.

  
  Ans: C.

Interest expense is shown as a non-operating component of net income for a manufacturing company but would typical be classified as an operating expense for a financial services company.

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70. Financial analyst, Zhan Wang, gathered the following data about a company: · 1,000 common shares are outstanding (no change during the year). · Net income is $5,000. · The company paid $500 in preferred dividends. · The company paid $600 in common dividends. · The average market price of their common stock is $60 for the year. · The company had 100 warrants (for one share each) outstanding for the entire year, exercisable at $50. The company’s diluted earnings per share is closest to: A. $4.42. B. $4.55. C. $4.83.

Ans: A. The warrants are dilutive because their exercise price is less than the average market price. Shares issued to warrant holders = 100 Warrants generate cash of 100 x 50 = $5,000 Repurchased shares = = 83 Net new shares created = 100 -83 = 17 Alternatively, x 100=17 Diluted EPS = = =$4.42