optiix

Earlier this year, Slayton Corporation repurchased 5% of its total shares outstanding. At the time, the book value of Slayton shares exceeded their market value. The shares are expected to be reissued in the future when the market price of Slayton’s stock increases. Do Slayton’s repurchased shares continue to have voting rights and to pay cash dividends?

Voting rights

Cash dividends paid

A) Yes No

B) No No

C) No Yes

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Repurchased stock that is not cancelled is called treasury stock. Treasury stock does not have voting rights and does not receive cash dividends.

optiix

Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation expense of $90 million. The trial balance did not include the following:

• 
  Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled $3.5 million and were paid on January 4, 2008.
• 
  Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.

Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Coleman’s 2007 current ratio?

Compensation expense

Current ratio

A) $98.5 million Decrease

B) $94.5 million Decrease

C) $98.5 million No effect

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Because of the matching principle, compensation expense should be increased by the (accrued) salary expense for the last week of 2007 and the liability for the bonuses was incurred in 2007. Thus, total compensation expense for 2007 is $98.5 million ($90 million unadjusted compensation expense + $3.5 million salary accrual + $5 million bonus accrual). Since the salaries and bonuses were not paid in 2007, accrued liabilities would increase by $8.5 million. An increase in accrued liabilities, a current liability, would decrease the current ratio.

optiix

On January 1, 2008, Tenant Company leased office space from Landlord Inc. for 5 years at $75,000 per month. On that same date, Tenant made the following payments to Landlord:

First month’s rent	$75,000
Last month’s rent	75,000
Security deposit	100,000
Lease improvements	1,500,000

The leasehold improvements include build-out costs to install office walls, restrooms, and a kitchen. Tenant allocates the cost of the leasehold improvements over the lease term using the straight-line method. What amount of total lease expense should Tenant report for the year ended 2008 and what is the balance of all of the lease related assets on December 31, 2008, assuming the lease payments are made on the first day of each month?

Lease expense

Lease related assets

A) $1,200,000 $1,375,000

B) $1,200,000 $1,200,000

C) $375,000 $1,375,000

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Total annual lease expense is $1,200,000 [$75,000 monthly payment × 12 months) + ($1,500,000 lease improvements / 5 years)]. At the end of 2008, Tenant will report lease related assets of $1,375,000 [$75,000 prepaid rent + 100,000 deposit + $1,200,000 book value of leasehold improvements].

optiix

The statement of changes in equity is least likely to provide information on the firm’s:

A) payment of dividends.

B) repayment of bond principal.

C) comprehensive income.

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The statement of changes in equity shows a firm’s comprehensive income (net income and other comprehensive income) and transactions with shareholders, such as dividends paid and issuance or repurchases of stock. Repayment of bond principal is not a change in equity: assets (cash) decrease and liabilities (long-term debt) decrease.