Ans Doc 115


1. How would the carrying value of a bond payable be affected by amortization of each of the following?
Discount Premium
A. No effect No effect
B. Increase No effect
C. Increase Decrease
D. Decrease Increase

2. White Sox Corporation issued $200,000 of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and have a stated rate of 10 percent. If the market rate of interest at the time the bonds are sold is 8 percent, what will be the issuance price of the bonds?
A. $175,078 C. $215,902
B. $211,283 D. $227,183
3. On January 1, 2007, Felipe Hospital issued a $250,000, 10 percent, 5-year bond for $231,601. Interest is payable on June 30 and December 31. Felipe uses the effective-interest method to amortize all premiums and discounts. Assuming an effective interest rate of 12 percent, approximately how much discount will be amortized on December 31, 2007?
A. $2,230 C. $1,396
B. $1,480 D. $987

4. On February 24, BMC Company purchased 4,000 shares of Winn Corp.’s newly issued 6 percent cumulative $75 par preferred stock for $304,000. Each share carried one detachable stock warrant entitling the holder to acquire at $10 one share of Winn no-par common stock. On February 25, the market price of the preferred stock ex-warrants was $72 per share, and the market price of the stock warrants was $8 per warrant. On December 29, BMC sold all the stock warrants for $41,000. The gain on the sale of the stock warrants was
A. $0. C. $9,000.
B. $1,000. D. $10,600.

5. Victor Corporation was organized on January 2 with 100,000 authorized shares of $10 par value common stock. During the year, Victor had the following capital transactions:

January 5—issued 75,000 shares at $14 per share
December 27—purchased 5,000 shares at $11 per share

Victor used the par value method to record the purchase of the treasury shares. What would be the balance in the paid-in capital from treasury stock account at December 31?
A. $0 C. $15,000
B. $5,000 D. $20,000
6. On June 30, 2007, Country Inc. had outstanding 10 percent, $1,000,000 face amount, 15-year bonds maturing on June 30, 2012. Interest is paid on June 30 and December 31, and bond discount and bond issue costs are amortized on these dates. The unamortized balances on June 30, 2007, of bond discount and bond issue costs were $55,000 and $20,000, respectively. Country reacquired all of these bonds at 96 on June 30, 2007, and retired them. Ignoring income taxes, how much gain or loss should Country record on the bond retirement?
A. Loss of $15,000 C. Gain of $5,000
B. Loss of $35,000 D. Gain of $40,000

7. Ellis Company has 1,000,000 shares of common stock authorized with a par value of $3 per share of which 600,000 shares are outstanding. Ellis authorized a stock dividend when the market value was $8 per share, entitling its stockholders to one additional share for each share held. The par value of the stock was not changed. Assuming the declaration is not recorded separately, what entry, if any, should Ellis make to record distribution of the stock dividend?
A. Retained Earnings $4,800,000
Common Stock $1,800,000
Gain on Stock Dividends $3,000,000
B. Retained Earnings $1,800,000
Common Stock $1,800,000
C. Retained Earnings $4,800,000
Common Stock $1,800,000
Paid-In Capital from Stock Dividends $3,000,000
D. Memorandum entry noting the number of additional shares issued as a dividend

8. Assuming the straight-line method of amortization is used, the average yearly interest expense on a $250,000, 11 percent, 20-year bond issued at 94 would be
A. $26,750. C. $28,250.
B. $27,500. D. $29,500.

9. Which of the following would be the entry to record the issuance of common stock for fully paid stock subscriptions?
A. A memorandum entry
B. Common Stock Subscribed
Common Stock
Additional Paid-In Capital
C. Common Stock Subscribed
Subscriptions Receivable
D. Common Stock Subscribed
Common Stock

10. If a $6,000, 10 percent, 10-year bond was issued at 104 plus accrued interest two months after the authorization date, how much cash was received by the issuer?
A. $6,000 C. $6,340
B. $6,240 D. $6,600

11. On January 2, 2007, Stoner Corporation granted stock options to key employees for the purchase of 60,000 shares of the company’s common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2009, by grantees still in the employ of the company. The market price of Stoner’s common stock is $32 per share at the date of grant, and application of an option pricing model results in a computed value of $10 per option as of the grant date. Assume that no stock options were terminated during the year. How much should Stoner charge to compensation expense for the year ended December 31, 2007?
A. $600,000 C. $300,000
B. $420,000 D. $210,000

12. On January 2, 2007, the board of directors of Gimli Mining Corporation declared a cash dividend of $1,200,000 to stockholders of record on January 18, 2007, and payable on February 10, 2007. The dividend is permissible by law in Gimli’s state of incorporation.

Selected data from Gimli’s December 31, 2006, balance sheet follow:
Accumulated depletion $ 200,000
Capital stock 1,100,000
Additional paid-in capital 800,000
Retained earnings 500,000
The $1,200,000 dividend includes a liquidating dividend of
A. $800,000. C. $600,000.
B. $700,000. D. $200,000.

13. At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the
A. declaration of a stock split.
B. declaration of a stock dividend.
C. purchase of treasury stock.
D. payment in full of subscribed stock.

14. A company issued rights to its existing shareholders to acquire, at $15 per share, 5,000 unissued shares of common stock with a par value of $10 per share. Common Stock will be credited at
A. $15 per share when the rights are exercised.
B. $15 per share when the rights are issued.
C. $10 per share when the rights are exercised.
D. $10 per share when the rights are issued.

15. On December 10, Daniel Co. split its stock 5-for-2 when the market value was $65 per share. Prior to the split, Daniel had 200,000 shares of $15 par value stock. After the split, the par value of the stock was
A. $3.00. C. $15.00.
B. $6.00. D. $26.00.

16. Thorpe Corporation holds 10,000 shares of its $10 par common stock as treasury stock, which was purchased in 2006 at a cost of $120,000. On December 10, 2007, Thorpe sold all 10,000 shares for $210,000. Assuming that Thorpe used the cost method of accounting for treasury stock, this sale would result in a credit to
A. Paid-In Capital from Treasury Stock of $90,000.
B. Paid-In Capital from Treasury Stock of $110,000.
C. Gain on Sale of Treasury Stock of $90,000.
D. Retained Earnings of $90,000.

17. The stockholders’ equity section of Dolphin Corporation as of December 31, 2007, contained the following accounts:

Common stock, 25,000 shares authorized;
10,000 shares issued and outstanding $ 30,000

Capital contributed in excess of par 40,000
Retained earnings 80,000

Dolphin’s board of directors declared a 10 percent stock dividend on April 1, 2008, when the market value of the stock was $7 per share. Accordingly, 1,000 new shares were issued. All of Dolphin’s stock has a par value of $3 per share. Assuming Dolphin sustained a net loss of $12,000 for the quarter ended March 31, 2008, what amount should Dolphin report as retained earnings as of April 1, 2008?
A. $61,640 C. $68,000
B. $64,000 D. $73,000

18. On September 20, 2007, Nozzle Corporation declared the distribution of the following dividend to its stockholders of record as of September 30, 2007:

Investment in 100,000 shares of Astro Corporation stock, carrying value $600,000; fair market value on September 20, $1,450,000; fair market value on September 30, $1,575,000.

The entry to record the declaration of the property dividend would include a debit to Retained Earnings of
A. $1,575,000. C. $850,000.
B. $1,450,000. D. $600,000.

19. At December 31, 2007, Reed Corp. owed notes payable of $1,000,000 with a maturity date of April 30, 2008. These notes didn’t arise from transactions in the normal course of business. On February 1, 2008, Reed issued $3,000,000 of 10-year bonds with the intention of using part of the bond proceeds to liquidate the $1,000,000 of notes payable. Reed’s December 31, 2007, financial statements were issued on March 29. How much of the $1,000,000 notes payable should be classified as current in Reed’s balance sheet at December 31, 2007?

A. $0 C. $900,000
B. $100,000 D. $1,000,000
20. Bonds usually sell at a premium
A. when the market rate of interest is greater than the stated rate of interest on the bonds.
B. when the stated rate of interest on the bonds is greater than the market rate of interest.
C. when the price of the bonds is greater than their maturity value.
D. in none of the above cases.