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51. An analyst gathered the following data about a company: The company had 500,000 shares of common stock outstanding for the entire year. The company’s beginning stock price was $40, its ending price was $60, and its average price over the year was $50. The company has 120,000 warrants outstanding for the entire year. Each warrant allows the holder to buy one share of common stock at $45 per share. How many shears of common stock should the company use in computing its diluted earnings per share? A. 488,000. B. 500,000. C. 512,000.

Ans: C. Dilution occurs since the exercise price for the warrants ($45) is less than the average market price for the shares ($50). The incremental number of shares outstanding is found from: () x # warrants = x 120,000 =12,000 Number of shares to use in diluted EPS calculation = 500,000+12,000=512,000

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52. Which of the following statements about dilutive securities is least accurate?

A. A simple capital structure is one that contains only common stick and antidilutive securities.

B.  A dilutive security is one that will case EPS to decrease if it is converted into common stock.

C. Warrants with exercise prices less than the current stock price can be antidilutive.

  
  Ans: A.

A simple capital structure has only common stock or only common stock and nonconvertible stock. It contains no securities that could ever become or create common stock, even antidilutive ones. Whether warrants are antidilutive depends on the average stock price over the reporting period, not the value at the reporting date.

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53. As of January 1, a company had 22,500 $10 par value commons shares outstanding. On July 1, the company repurchased 5,000 shares. The company also has 11,000, 10%, $100 par value preferred shares. If the company’s net income is $210,000, its diluted earnings per share is closest to: A. $5.00. B. $7.50. C. $10.00.

Ans: A. Since this company has a simple capital structure, basic and diluted EPS are equal. The numerator equal net income-preferred dividends =210,000-(11,000shares x 0.10dividend x 100 par) =210,000-110,000=100,000. The weighted average shares outstanding =22,500-(5,000 shares repurchased x 0.5 midyear) =22,500-2,500=20,000. Then, basic EPS = diluted EPS=100,000/20,000=$5per share.

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54. Which of the following statements about the appropriate revenue recognition method to use under U.S.GAAP, given the status of completion of the earning process and assurance of payment, is least accurate? Use the: A. completed contract method when the firm cannot reliably estimate the outcome of the project. B. percentage-of-completion method when ultimate payment is reasonably assured and revenue and costs can be reliably estimated. C. installment method when collectability of payments for a sale can be reasonably estimated.

Ans: C. The installment method should be used when future cash collection cannot be reasonably estimated.

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55. An analyst gathers the following data about a company: · The company had 1 million shares of common stock outstanding for the entire year. · The company’s beginning stock price was $50, its ending price was $70, and its average price was $60. · The company had 100,000 warrants outstanding for the entire year. Each warrant allows the holder to buy one share of common stock at $50 per share. How many shares of common stock should the company use in computing its diluted EPS? A. 1,100,000. B. 1,083,333. C. 1,016,667. D.

Ans: C. Use the Treasury stock method: Step 1: determine the number of common shares created if the warrants are exercised = 100,000. Step 2: calculate the cash inflow if the warrants are exercised: (100,000)($50 per share)=$5,000,000. Step 3: Calculate the number of shares that can be purchased with these funds using the average market price ($60 per share): 5,000,000/60=83,333 shares. Step 4: Calculate the net increase in common shares outstanding from the exercise of the warrants: 100,000-83,333=16,667. Step 5: Add the net increase in common shares from the exercise of the warrants to the number of common shares outstanding for the entire year: 1,000,000+16,667=1,016,667

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56. A company reports a gain of €100,000 on the sale of an asset and a loss of €100,000 due to foreign currency translation adjustment. Which of these items will be included in the company’s comprehensive income?

A. Both of these items are include in comprehensive income.

B. Neither of these items is include in comprehensive income.

C. Only one of these items is include in comprehensive income.

  
  Ans: A.

Both items are included in comprehensive income. Comprehensive income includes all items that are included in net income are also included in comprehensive income. The gain on sale is reported in net income. The foreign currency translation loss is taken directly to owners’ equity.

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57. Which of the following items for a financial services company is least likely to be considered an operating item on the income statement?

A. Interest income.

B. Financing expenses.

C. Income tax expense.
  Ans: C.

For a financial services company, interest income, interest expense, and financing expense are likely considered operating activities. For both financial and nonfinancial companies, income tax expense is a non-operating item that is reported within “income from continuing operating” as opposed to “operating profit” as with the other answer considered an operating item.

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58. Which of the following statements about nonrecurring items is most accurate?

A. The correction of an accounting error is reported net of taxes below extraordinary items on the income statement.

B. Discontinued operations are classified as unusual or infrequent and are reported as a component of net income from continuing operations.

C. Uninsured losses from earthquakes and expropriations by foreign governments can be classified as extraordinary items under U.S.GAAP but not under IFRS.
  Ans: C.

These are examples of items that are typically treated as extraordinary under U.S.GAAP. There is no provision for accounting for an item as extraordinary under IFRS.

  

A is incorrect. Accounting errors are corrected with prior-period adjustments, which are made by restating results for any prior periods that are presented in the current financial statements.

  

B is incorrect. Discontinued operations are not classified as unusual or infrequent items and are reported (net of taxes) after net income from continuing operations but before net income.

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59. Bao Company has the following changes in its stock: The company had 2 million shares outstanding on December 31, 2011. On March 31, 2012, the company paid a 10% stock dividend. On June 30, 2012, the company sold $10 million face value of &% convertible debentures, convertible into common at $5 per share. On September 30, 2012, the company issued and sold 100,000 shares of common stock. The company should compute its 2012 basic EPS based on: A. 2,225,000 shares. B. 2,250,000 shares. C. 3,225,000 shares. D.

Ans; A. Basic EPS does not consider potential dilution from convertible bonds. Original shares =2,000,000x12=24,000,000 +stock dividend=200,000x12=2,400,000 +new shares =100,000x3=300,000 ==2,225,000 Alternatively, 2 million(1.1)+(1/4)(100,000)=2.225 million.

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60. When a used delivery truck is sold, the gain or loss on disposal is most accurately stated as:

A. fair market value – book value.

B. selling price – original cost – accumulated depreciation.

C. selling price – original cost + accumulated depreciation.

  
  Ans: C.

The gain (loss) on disposal is the amount by which the selling price exceeds (is less than) book value.

Book value= original price-accumulated depreciation.

Thus, gain or loss=selling price-(original price- accumulated depreciation), or selling price – original costs+ accumulated depreciation.