Question 51

Rushford Corp.’s net income is $16,500,000 with 300,000 shares outstanding. The tax rate is 40%. The average share price for the year was $372. Rushford has 50,000, 9%, $1,000 par value convertible bonds outstanding. Each bond is convertible into two shares of common stock.

Rushford Corp.’s basic and diluted earnings per share (EPS) are closest to:

    Basic EPS   Diluted EPS

A)    $55.00        $48.00
B)   $55.00        $51.56
C)   $65.63        $51.56
D)   $65.63        $48.00

Question 52

Graham Inc. has outstanding convertible bonds with a conversion price of $85 per share. The current price per share is $90. Based on this information and U.S. GAAP, which of the following balance sheet treatments of convertible bonds is most appropriate?

       U.S. GAAP       Analytical perspective

A)    Treat as debt      Treat as debt
B)   Treat as equity   Treat as equity
C)   Treat as debt      Treat as equity
D)   Treat as equity   Treat as debt

Question 53

Which of the following financial statement disclosures is least likely to be reflected in a deferred income tax item on the balance sheet?

A)    Post-employment benefits.

B)   Proceeds from life insurance on key employees.

C)   Restructuring costs.

D)   Impairment of fixed assets.

Question 54

Simon Inc. is a publicly traded manufacturing company. Recently, it repurchased some of its own stock and purchased additional machinery for use in the business. Which of the following classifications of these two business transactions is most appropriate for financial reporting purposes?

       Repurchased stock
    Purchased machinery

A)    financing activity        operating activity

B)   investing activity        operating activity

C)   financing activity        investing activity

D)   investing activity        investing activity

Question 55

Which of the following statements about depreciation is least accurate?

A)    Return on assets is initially higher using straight-line depreciation than it is using accelerated depreciation.

B)   For a firm that purchases only a single depreciable asset, net income is higher in the later years of the asset’s life using accelerated depreciation than it would be using straight-line depreciation.

C)   For a firm with increasing capital expenditures, accelerated depreciation methods tend to increase both net income and stockholders' equity when compared to straight-line depreciation.

D)   If an asset produces a constant stream of net income over its useful life and is depreciated using the straight-line method, the rate of return on the asset increases over its life.

[此贴子已经被作者于2008-11-8 18:00:40编辑过]

Question 51

Rushford Corp.’s net income is $16,500,000 with 300,000 shares outstanding. The tax rate is 40%. The average share price for the year was $372. Rushford has 50,000, 9%, $1,000 par value convertible bonds outstanding. Each bond is convertible into two shares of common stock.

Rushford Corp.’s basic and diluted earnings per share (EPS) are closest to:

    Basic EPS   Diluted EPS

A)    $55.00        $48.00
B)   $55.00        $51.56
C)   $65.63        $51.56
D)   $65.63        $48.00

The correct answer was A)

$55.00        $48.00

Rushford’s basic EPS (net income / weighted average common shares outstanding) is $16,500,000 / 300,000 = $55.00. Diluted EPS is calculated under the assumption that the convertible bonds were converted into common stock, the bond interest net of tax is restored to net income, and the additional common shares are added to the denominator of the equation. Rushford’s diluted EPS is [$16,500,000 + (50,000 × $1,000 × 0.09)(1 - .40)] / (300,000 + (50,000 × 2) = $48.00.

This question tested from Session 8, Reading 32, LOS i

Question 52

Graham Inc. has outstanding convertible bonds with a conversion price of $85 per share. The current price per share is $90. Based on this information and U.S. GAAP, which of the following balance sheet treatments of convertible bonds is most appropriate?

       U.S. GAAP       Analytical perspective

A)    Treat as debt      Treat as debt
B)   Treat as equity   Treat as equity
C)   Treat as debt      Treat as equity
D)   Treat as equity   Treat as debt

The correct answer was C) Treat as debt       Treat as equity

For accounting purposes (U.S. GAAP), the convertible bonds are recorded on the balance sheet as debt (as if there were no conversion feature). Note that a change in this treatment is currently under consideration. For analytical purposes, when the share price is significantly above the conversion price, the convertible should generally be treated like equity for the purposes of calculating the leverage ratios. This is because it is likely that the bondholders will convert to equity, since the share price is above the conversion price.

This question tested from Session 9, Reading 39, LOS d

Question 53

Which of the following financial statement disclosures is least likely to be reflected in a deferred income tax item on the balance sheet?

A)    Post-employment benefits.

B)   Proceeds from life insurance on key employees.

C)   Restructuring costs.

D)   Impairment of fixed assets.

The correct answer was B) Proceeds from life insurance on key employees.

Proceeds from life insurance on key employees are not taxable but are recognized as revenue on the income statement. There is no effect on the deferred income tax liability.

Post-employment benefits are recognized as an expense when earned by the employee for financial statement purposes but are not recognized for tax purposes until actually paid. This will result in a current deferred tax asset. Restructuring costs generate a deferred tax asset because, for financial reporting purposes, the costs are recognized when restructuring is completed, but not expensed for tax purposes until actually paid. Impairments generally result in a deferred tax asset since the writedown of assets is recognized immediately for financial reporting purposes, but not for tax purposes until the asset is sold.

This question tested from Session 9, Reading 38, LOS i

Question 54

Simon Inc. is a publicly traded manufacturing company. Recently, it repurchased some of its own stock and purchased additional machinery for use in the business. Which of the following classifications of these two business transactions is most appropriate for financial reporting purposes?

       Repurchased stock Purchased machinery

A)    financing activity        operating activity

B)   investing activity        operating activity

C)   financing activity        investing activity

D)   investing activity        investing activity

The correct answer was C) financing activity investing activity

Repurchasing a firm’s own stock is a financing activity (the company is returning capital). The purchase of machinery is an investing activity (the company is acquiring long-term assets to use in earning income).

The purchase of machinery cannot be classified as an operating activity because it is not a transaction that would occur reasonably often enough to qualify as a primary activity of production and trade.

This question tested from Session 7, Reading 30, LOS a

Question 55

Which of the following statements about depreciation is least accurate?

A)    Return on assets is initially higher using straight-line depreciation than it is using accelerated depreciation.

B)   For a firm that purchases only a single depreciable asset, net income is higher in the later years of the asset’s life using accelerated depreciation than it would be using straight-line depreciation.

C)   For a firm with increasing capital expenditures, accelerated depreciation methods tend to increase both net income and stockholders' equity when compared to straight-line depreciation.

D)   If an asset produces a constant stream of net income over its useful life and is depreciated using the straight-line method, the rate of return on the asset increases over its life.

The correct answer was C) For a firm with increasing capital expenditures, accelerated depreciation methods tend to increase both net income and stockholders' equity when compared to straight-line depreciation.

For a firm with increasing capital expenditures, accelerated depreciation methods tend to decrease both net income and stockholders' equity when compared to straight-line depreciation.

Assuming the firm continues to invest in new assets, the following relationships hold. These relationships will eventually reverse if the firm's capital expenditures decline.

This question tested from Session 9, Reading 37, LOS a

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