Practice For Midterm 1

practice for midterm 1
Student: ___________________________________________________________________________
1. The net assets of a corporation equal to:
A. Contribute
d capital.
B. Retained earnings.
C. Shareholders' equity.
D. None of the above.
2. Characteristics of the corporate form that have led

to the growth of this form of business ownership
include all of the following except:
A. Ease of
raising
capital.
B. Low government regulation.
C. Limited liability.
D. Ease of ownership transfer.
3. Retained earnings represent:
A. Earned
capital.
B. Cash.
C. Assets.
D. Net assets.
4. The two primary components of shareholders'

equity are:
A. Preferred stock and

retained earnings.
B. The par value of common stock plus retained earnings.
C. Paid-in capital and retained earnings.
D. Preferred and common stock.
5. Unrealized pension cost is included among

shareholders' equity as:
A. Future
earnings.
B. An addition to paid-in capital.
C. A restriction of retained earnings.
D. A contra account.
6. Details of each class of stock must be reported:
A. On the face of the

balance sheet only.
B. In disclosure notes only.
C. On the face of the balance sheet or in disclosure notes.
D. On the face of the balance sheet and in disclosure note
7. In terms of business volume, the dominant form of

business organization is the:
A. Partner
ship.
B. Corporation.
C. Limited liability company.
D. Proprietorship.
8. The corporate charter sometimes is known as (a):
A. Articles of
incorporation
.
B. Statement of organization.
C. By-laws.
D. Registration statement.
9. The preemptive right refers to the shareholder's

right to:
A. Maintain a proportional
ownership interest in the
corporation.
B. Vote for members of the board of directors.
C. Receive a share of dividends.
D. Share in profits proportionally with all other stockholder
10. Common shareholders usually have all of the

following rights except:
A. To share in
the profits.
B. To share in assets upon liquidation.
C. To elect a board of directors.
D. To participate in the day-to-day operations.
11. Corporations are formed in accordance with:
A. The Model
Business
Corporation Act.
B. Federal statutes.
C. The laws of individual states.
D. Federal trade commission regulations.
12. Preferred stock is called preferred because it

usually has two preferences. These preferences
relate to:
A. Dividends and
voting rights.
B. Par value and dividends.
C. The preemptive right and voting rights.
D. Assets at liquidation and dividends.
13. The par value of shares issued is normally

recorded in the:
A. Paid-in capital in
excess of par
account.
B. Common stock account.
C. Retained earnings account.
D. Appropriated retained earnings account.
14. Authorized capital stock refers to the total number

of shares:
A. Outsta
nding.
B. Issued.
C. Issued and outstanding.
D. That can be issued.
15. The par value of common stock represents:
A. The arbitrary dollar amount

assigned to a share of stock
B. The liquidation value of a share.
C. The book value of a share of stock.
D. The amount received when the stock was issued.
16. Which of the following statements is true when

dividends are not declared or paid on cumulative
preferred stock?
A. The shareholders m
convert their share
B. The unpaid dividends are accrued as a liability.
C. The unpaid dividends are reported in a note to the finan
D. The unpaid dividends accrue interest until paid.
17. Outstanding common stock is:
A. Stock that is performing w

the New York Stock Exch
B. Stock that has been authorized by the state for issue.
C. Stock held in the corporate treasury.
D. Stock in the hands of shareholders.
18. Issued stock refers to the number of shares:
A. Outstanding plus
treasury shares.
B. Shares issued for cash.
C. In the hand of shareholders.
D. That may be issued under state law.
19. Preferred shares that are participating may:
A. Vote for the

board of
directors.
B. Be exchanged for common stock.
C. Receive extra cash during corporate liquidation.
D. Receive additional dividends beyond the stated amount
20. The Model Business Corporation Act:
A. Uses the w
describing
stock.
B. Defines legal capital as the amount of net assets not av
C. Provides guidance for choosing an appropriate par valu
D. Has affected the laws of most states.
21. When preferred stock carries a redemption

privilege, the shareholders may:
A. Purchase new shares as

they become available.
B. Exchange their preferred shares for common shares.
C. Surrender the preferred shares for a specified amount o
D. Purchase treasury shares ahead of common sharehold
22. Treasury shares are most often reported as:
A. A reduction of total
shareholders' equity.
B. A reduction of total paid-in capital.
C. A reduction to retained earnings.
D. An expense on the income statement.
23. When treasury shares accounted for under the

cost method are sold at a price above cost:
A. A gain
account is
credited.
B. A loss is reported.
C. A revenue account is credited.
D. Additional paid-in capital is increased.

cost method are resold at a price below cost:
A. Additional paid-in capital a

retained earnings is reduc
B. Additional paid-in capital and/or retained earnings is inc
C. Retained earnings is always reduced.
D. A loss is taken on the income statement.
25. When treasury stock is purchased for an amount

greater than its par value, what is the effect on
total shareholders' equity under the cost method?
A. Incre
ase
B. Decrease
C. No effect
D. Cannot tell from the given information.
26. When stock is issued in exchange for property, the

best evidence of market value might be any of the
following except:
A. The appraised value of

the property received.
B. The selling price of the stock in a recent transaction.
C. The price of the stock quoted on the stock exchange.
D. The average book value of outstanding stock.
27. When stock is issued under a stock subscription:
A. No entry is recorded until

the shares are fully paid for.
B. An asset is recorded for the receivable from share purc
C. A credit is made to common stock upon receipt of the s
D. A debit is made to paid-in capital - excess of par.
28. The SEC requires that a receivable from a share

purchase contract be reported:
A. As a reduction of
paid-in capital.
B. As a current asset.
C. As a noncurrent asset.
D. As an increase in shareholders' equity.
29. When preferred stock is purchased by the issuing

corporation at a price below the original issue
price and the stock is retired, the transaction:
A. Increases net
income for the
year.
B. Increases retained earnings.
C. Increases revenue for the year.
D. Increases paid-in capital share repurchase.
30. When more than one security is sold for a single

price and the total selling price is not equal to the
sum of the market prices, the cash received is
allocated between the securities based on:
A. Relative
book
values.
B. Par values.
C. Relative market values.
D. The earnings per share.
31. The retained earnings balance reported on the

balance sheet typically is not affected by:
A. Net
income
.
B. A prior period adjustment.
C. Dividends paid.
D. Restrictions.
32. When dividends are declared in one fiscal year

and paid in the next fiscal year, the liability for the
dividend should be recorded as of the:
A. Date the
dividend is
declared.
B. Last day of the fiscal year.
C. Date of record.
D. Date of payment.
33. When a property dividend is declared, the

reduction in retained earnings is for:
A. The book value of the

property on the date of
declaration.
B. The book value of the property on the date of distributio
C. The fair market value of the property on the date of dist
D. The fair market value of the property on the date of dec
34. Any dividend that is considered to be a liquidating

dividend will:
A. Reduce
retained
earnings.
B. Reduce additional paid-in capital.
C. Increase additional paid-in capital.
D. Reduce the common stock account.
35. Retained earnings represent a company's:
A. Undistributed
net income.
B. Undistributed net assets.
C. Extra paid-in capital.
D. Undistributed cash.
36. When a property dividend is declared, the property

to be distributed should be revalued to fair market
value as of the:
A. Record
date.
B. Date of distribution.
C. Date of declaration.
D. Announcement date.
37. The declaration and issuance of a common stock

dividend:
A. Has no effect on assets,

liabilities, or total shareho
equity.
B. Decreases total shareholders' equity and increases com
C. Decreases assets and decreases total shareholders' eq
D. Does not change retained earnings or paid-in capital.
38. Stock splits are issued primarily to:
A. Increase the number

of outstanding shares.
B. Increase the number of authorized shares.
C. Increase legal capital.
D. Induce a decline in market value per share.
39. A small stock dividend is defined as one that is:
A. Less than or
equal to 25%.
B. Less than 20%.
C. Less than or equal to 20%.
D. Less than 25%.
40. The common stock account on a company's

balance sheet is measured as:
A. The number of co
outstanding x the
share.
B. The number of common shares outstanding x the stock
C. The number of common shares issued x the stock's par
D. None of the above is correct.
41. How many of Levi's common shares were

outstanding on 12/31/05?
A. 14
millio
n
B. 9 million
C. 5 million
Use the following to answer questions 91-94:

The following partial information is taken from the comparative balance sheet of Levi Corporation:
42. What was the average price of the additional

shares issued by Levi in 2006?
A. $5 per
share
B. $26 per share
C. $39 per share
D. Cannot be determined from the given information.
43. What was the average price (rounded) of the

additional treasury shares purchased by Levi
during 2006?
A. $11 per
share
B. $12 per share
C. $12.50 per share
44. What was the amount of net income earned by
Levi during 2006?
A. $0
B. $40 million
C. $62 million
The 12/31/05 balance sheet of Despot Inc. included the following:
45. In January, 2006, Despot recorded a transaction

with this journal entry:
The transaction was:
A. Issue of 2 million shares of

common stock at par value
B. Issue of common stock for $150 million in cash
C. Receipt of $20 per share for a new stock issue
D. All of the above are correct.
46. In February, 2006, Despot declared cash

dividends of $12 million to be paid in April of that
year. What effect did the April transaction have on
Despot's accounts?
A. Decreased
assets and
liabilities
B. Decreased assets and shareholders' equity
C. Increased liabilities and decreased shareholders' equity
47. In October, 2006, Despot's Board of Directors

declared and distributed a 1% common stock
dividend when the market value of the common
stock was $60 per share. In recording this
transaction, Despot would:
A. Debit retained
earnings for $18
million
B. Credit paid-in capital--excess of par for $18 million
C. Credit common stock for $18 million
48. Which of the following Despot transactions

decreases its retained earnings?
A. A property
dividend
B. A stock dividend
C. A cash dividend
49. Despot declared a property dividend to give

marketable securities to its common stockholders.
The securities had cost Despot $7 million and
currently had a fair value of $16 million. Which of
the following would be included in recording the
property dividend declaration?
A. Increase in a
liability for $16
million.
B. Decrease in retained earnings for $7 million.
C. Decrease in marketable securities by $16 million.
50. Pug Corporation has 10,000 shares of $10 par

common stock outstanding and 20,000 shares of
$100 par, 6% noncumulative, nonparticipating
preferred stock outstanding. Dividends have not
been paid for the past two years. This year, a
$150,000 dividend will be paid. What are the
dividends per share for preferred and common,
respectively?
A. $7.50;
$0.
B. $6; $3.
C. $6; $1.50.
51. Beagle Corporation has 20,000 shares of $10 par

$100 par, 6% cumulative, nonparticipating
dividends per share payable to preferred and
common, respectively?
A. $6;
$12.
B. $18; $6.
C. $6; $6.
52. The changes in account balances for Elder

Company for 2006 are as follows:
Assuming the only charges in retained earnings in

2006 were for net income and a $50,000 dividend,
what was net income for 2006?
A. $40,0
00.
B. $60,000.
C. $70,000.
D. $90,000.
53. The changes in account balances for Allen Inc. for

2006 are as follows:
Assuming the only changes in retained earnings in
A. $30,
000
B. $20,000
C. $15,000
D. $ 5,000
54. Poodle Corporation was organized on January 3,

2006. The firm was authorized to issue 100,000
shares of $5 par common stock. During 2006,
Poodle had the following transactions relating to
shareholders' equity:
Issued 30,000 shares of common stock at $7 per
share.
share.
Reported a net income of $100,000.
Paid dividends of $50,000.
What is total contributed capital at the end of
2006?
A. $420,
000.
B. $370,000.
C. $470,000.
D. $320,000.
55. Roberto Corporation was organized on January 1,

Roberto had the following transactions relating to
share.
share.
Purchased 2,000 shares of treasury stock at $10
(part of the 20,000 shares issued at $8).
What is total shareholders' equity at the end of
2006?
A. $270,
000.
B. $300,000.
C. $250,000.
D. $200,000.
56. Boxer Company owned 20,000 shares of King

Company that were purchased in 2004 for
$500,000. On May 1, 2006, Boxer declared a
property dividend of 1 share of King for every 10
shares of Boxer stock. On that date, there were
50,000 shares of Boxer stock outstanding. The
market value of the King stock was $30 per share
on the date of declaration and $32 per share on
the date of distribution. By how much is retained
earnings reduced by the property dividend?
A. $0
.
B. $150,000.
C. $160,000.
D. $300,000.
57. On January 1, 2006, the board of directors of

Goby Inc. declared a $540,000 dividend. The
following data are from the balance sheet of Goby
on that date:
How much is the liquidating dividend?
A. $140,
000
B. $240,000
C. $290,000
58. ABC declared a property dividend. The dividend

consisted of 10,000 common shares of its
investment in XYZ Company. The shares had
originally been purchased at $4 per share and had
a $1 par value. The value of the shares on the
declaration date is $7 per share. What is the first
entry that should be recorded related to this
dividend?
A. Item
A
B. Item B
C. Item C
D. Item D
59. The board of directors of Capstone Inc. declared a

$0.60 per share cash dividend on its $1 par
common stock. On the date of declaration, there
were 50,000 shares authorized, 20,000 shares
issued, and 5,000 shares held as treasury stock.
What is the entry for the dividend declaration?
A. Item
A
B. Item B
C. Item C
D. Item D
60. On October 1, 2006, Chief Corporation declared

and issued a 20% stock dividend. Prior to this
date, Chief had 40,000 shares of common stock
outstanding with a $5 par value. The market value
of Chief Corporation on the date of declaration
was $10 per share. As a result of this dividend,
Chief's retained earnings will:
A. Decrease
by $80,000.
B. Not change.
C. Decrease by $40,000.
D. Increase by $80,000.
61. Lucid Company declared a property dividend of

20,000 shares of $1 par Polk Company common
stock. The Polk stock was purchased for $5 per
share. Market value was $10 per share on the
declaration date and $11 per share on the
distribution date. What is the amount of the
dividend?
A. $100,
000.
B. $200,000.
C. $220,000.
D. $300,000.
As of December 31, 2006, Warner Corporation reported the following:
During 2007, half of the treasury stock was resold for $240,000; net income was $600,000; cash
dividends declared were $1,500,000; and stock dividends declared were $500,000.
62. What was shareholders' equity as of December

31, 2006?
A. $7,020
,000.
B. $6,440,000.
C. $6,420,000.
D. $6,400,000.
63. The 2007 sale of half of the treasury stock would:

A. Reduce income
before tax by
$60,000.
B. Reduce retained earnings by $60,000.
C. Increase total shareholders' equity by $300,000.
D. Decrease retained earnings by $40,000.
64. What would shareholders' equity be as of

December 31, 2007?
A. Amount is
not shown.
B. $5,760,000.
C. $5,820,000.
D. $6,760,000.
65. Olsson Corporation received a check from its

underwriters for $72 million. This was for the issue
of one million of its $5 par value stock that the
underwriters expect to sell for $52 per share.
Which is the correct entry to record the issue of
the stock?
A. Item
A
B. Item B
C. Item C
D. Item D
Black Enterprises reported the following (in thousands of dollars) as of December 31, 2006. All
accounts have normal balances.
During 2007 (in thousands of dollars), net income was $9,000; 25% of the treasury stock was
resold for $450; cash dividends declared were $600; cash dividends paid were $500; and all of
the stock options expired.
66. What (in thousands of dollars) was shareholders'

equity as of December 31, 2006?
A. $29,6
00.
B. $35,600.
C. $30,400.
D. $28,600.

A. $38,1
00.
B. $37,450.
C. $38,450.
D. $38,350.
68. Montgomery & Co., a well established law firm,

provided 500 hours of its time to Fink Corporation
in exchange for 1,000 shares of Fink's $5 par
common stock. Mitchell's usual billing rate is $700
per hour, and Fink's stock has a book value of
$250 per share. By what amount will Fink's
additional paid-in capital increase for this
transaction?
A. $345,
000.
B. $295,000.
C. $350,000.
D. $300,000.
69. Three years ago, Emily Corporation issued 12,000

shares of $100 par, convertible, preferred stock for
$105 per share. Each share of preferred can be
converted into 4 shares of $1 par common stock.
Half of the preferred shares were converted in the
current year when the common stock was trading
for $40 per share. How much will total paid-in
capital increase as a result of the conversion?
A. $630,
000.
B. $960,000.
C. $330,000.
D. $0.
70. The single accounting number in the annual report

that receives the most attention by investors is:
A. Total
revenue
.
B. Book value per share.
C. Equity per share.
D. Earnings per share.
71. A primary goal of earnings per share determination

is:
A. Conserv
atism.
B. Comparability.
C. Materiality.
D. Objectivity.
72. ABC declared and paid cash dividends in January

of the current year to its common shareholders.
The dividend:
A. Will be added
earnings per s
year.
B. Will be added to the denominator of the earnings per sh
C. Will be subtracted from the numerator of the earnings p
D. Has no effect on the earnings per share for the coming
73. The reporting of earnings per share is required
only for:
A. Private
companies
.
B. Companies with complex capital structures.
C. Publicly traded corporations.
D. Medium-sized and large corporations.
74. When a company's only potential common shares

are convertible bonds:
A. Diluted EP
actually co
converted.
B. Diluted EPS will be smaller if the bonds are actually con
converted.
C. Diluted EPS will be the same whether or not the bonds
D. The effect of conversion on diluted EPS cannot be dete
75. If convertible bonds were issued at a discount,

when computing diluted EPS, the amortization of
the bond discount:
A. Will have
no effect.
B. Will decrease the numerator.
C. Will increase the numerator.
D. May increase or decrease the numerator, depending on
76. XYZ paid $10,000 in dividends in January of the

current year to its preferred shareholders. The
preferred stock is nonconvertible and
noncumulative. The dividend:
A. Will be added
earnings per
year.
B. Will be added to the numerator of the earnings per shar
D. May not affect earnings per share depending on the de
77. When computing earnings per share,
noncumulative preferred dividends not declared
should be:
A. Ignor
ed.
B. Deducted from earnings for the year.
C. Added to earnings for the year.
D. Deducted, net of tax effect, from earnings for the year.
78. When computing earnings per share, cumulative

preferred dividends not declared should be:
A. Deducted from
earnings for the
year.
B. Deducted, net of tax effect, from earnings for the year.
D. Ignored.
79. Basic earnings per share is computed using:
A. The actual number o

shares outstanding a
year.
B. A weighted-average of preferred and common shares.
C. The number of common shares outstanding plus comm
D. Weighted-average common shares outstanding for the
80. Which of the following is a correct statement

concerning earnings per share?
A. Earnings per share can

never be a negative
number.
B. Earnings per share must be reported for all corporations
C. If a company has an extraordinary loss, at least two EP
D. Reported earnings per share is the result of dividing we
81. When a company's income statement includes an

extraordinary gain, the company should report per
share information on:
A. Item
A
B. Item B
C. Item C
D. Item D
82. When a company's income statement includes

discontinued operations and a gain on the sale of
machinery, the company should report per share
information on:
A. Item
A
B. Item B
C. Item C
D. Item D
83. The result of a stock split is:
A. A larger number of
more valuable
shares.
B. An increase in corporate assets.
C. An increase in shareholders' equity.
D. A larger number of less valuable shares.
84. When computing diluted earnings per share, which

of the following will be omitted from the
calculation?
A. Dividends paid on
common stock.
B. The weighted average common shares.
C. The effect of stock splits.
D. The number of common shares represented by stock p
85. When computing diluted earnings per share, stock

options:
A. Are included if
they are
antidilutive.
B. Should be ignored.
C. Are included if they are dilutive.
D. Increase the numerator while not affecting the denomin
86. Basic and diluted earnings per share data are

required to be reported:
A. In footnotes to the
financial statements.
B. Only if they add to the relevance of the income stateme
C. In the summary section of the annual report.
D. On the face of the income statement.
87. Which of the following will require a recalculation

of weighted-average shares outstanding for all
years presented?
A. Stock dividends
and stock splits.
B. Stock dividends but not stock splits.
C. Stock splits but not stock dividends.
D. Stock rights.
88. All other things equal, what is the effect on

earnings per share when a corporation acquires
shares of its own stock on the open market?
A. Decre
ase.
B. No effect if the shares are held as treasury shares.
C. Increase only if the shares are considered to be retired.
D. Increase.
89. If a stock dividend were distributed, when
calculating the current year's EPS, the shares
distributed are treated as having been issued:
A. At the end
of the year.
B. At the beginning of the year.
C. On the declaration date.
D. On the date of distribution.
90. If a stock split occurred, when calculating the

current year's EPS, the shares are treated as
issued:
A. At the end
of the year.
B. On the first day of the next fiscal year.
C. At the beginning of the year.
91. The adjustment to the weighted-average shares

for retired shares is the same as for issuing new
shares except:
A. The shares are

deducted rather than
added.
B. The shares are added rather than deducted.
C. The shares are treated as being acquired at the end of
D. The shares are treated as being acquired at the beginn
92. Preferred dividends are subtracted from earnings

when computing earnings per share whether or
not the dividends are declared or paid if the
preferred stock is:
A. Calla
ble.
B. Convertible.
C. Participating.
D. Cumulative.
93. Preferred dividends would not be subtracted from
earnings when computing earnings per share in a
year when the dividends are not declared if the
preferred stock is:
A. Noncum
ulative.
B. Convertible.
C. Participating.
D. Cumulative.
94. How many types of potential common shares must

a corporation have in order to be said to have a
complex capital structure?
A. 3.
B. 2.
C. 1.
D. 0.
95. Which of the following is not a potential common

stock?
A. Convertible
preferred
stock.
B. Convertible bonds.
C. Stock rights.
D. Participating preferred stock.
96. Basic earnings per share ignores:
A. All potential
common
shares.
B. Some potential common shares, but not others.
C. Dividends declared on noncumulative preferred stock.
D. Stock splits.
97. Stock options, rights, and warrants are different

from convertible securities in that they:
A. Typically increase
cash upon exercise.
B. Usually reduce total assets upon exercise.
C. Often reduce liabilities upon exercise.
D. Normally increase retained earnings upon exercise.
98. Stock options do not affect the calculation of:
A. Diluted
EPS.
B. Weighted-average common shares.
C. The denominator in the diluted EPS fraction.
D. Basic EPS.
99. The calculation of diluted earnings per share

assumes that stock options were exercised and
that the proceeds were used to:
A. Buy common stock

as an investment.
B. Retire preferred stock.
C. Buy treasury stock.
D. Increase net income.

that the proceeds were used to buy treasury stock
at:
A. The end-of-year
market price.
B. The average market price during the period.
C. The purchase price stated on the options.
D. The stock's par value.
101. When we assume conversion of convertible

bonds, the numerator is increased by:
A. The amount of
after-tax interest.
B. The gross amount of interest.
C. The weighted-average interest.
D. The amount of cash paid during the current year for inte
102. When we take into account the dilutive effect of

stock options, rights, and warrants in the
calculation of EPS, the method used is called the:
A. Optional
method.
B. If converted method.
C. Dilution method.
D. Treasury stock method.

convertible securities in the calculation of EPS, the
method used is called the:
A. Treasury
stock
method.
C. Optional method.
D. Dilution method.
104. Nonconvertible bonds affect the calculation of:
A. Basic
earnings per
share.
B. Diluted earnings per share.
C. Both A and C.
105. A simple capital structure might include:
A. Stock
rights.
C. Nonconvertible preferred stock.
D. Stock purchase warrants.
106. In computing diluted earnings per share, the

treasury stock method is used for:
A. Stock
warrants
.
B. Stock splits.
C. Reverse stock splits.
D. Convertible preferred stock.
107. When several types of potential common shares

exist, the one that enters the computation of
diluted EPS first is the one with the:
A. Highest
incremental
effect.
B. Higher numerator.
C. Median incremental effect.
D. Lowest incremental effect.
108. Contingently issuable shares may be included in:
A. Basic
EPS.
B. Diluted EPS.
C. Both A and C.
109. Which of the following results in increasing basic

earnings per share?
A. Paying more than carrying

value to retire outstanding
bonds.
B. Issuing cumulative preferred stock.
C. Purchasing treasury stock.
D. All of the above decrease basic earnings per share.
110. The most important accounting objective for

executive stock options is:
A. Measuring a
compensatio
period.
B. Measuring their fair value for balance sheet purposes.
C. To disclose increases or decreases in the stock options
period.
111. Executive stock options should report as

compensation expense:
A. Using the
intrinsic value
method.
B. Using the fair value method.
C. Using either the fair value method or the intrinsic value
D. Only on rare occasions.
112. Which of the following statements is true regarding

SARS payable in cash?
A. Any change in es
compensation is r
adjustment.
B. The total amount of compensation is not known for cert
C. The liability is adjusted only to reflect each additional ye
113. The compensation associated with a share of

restricted stock under a stock award plan is:
A. The market price of a sha

similar fixed income secur
B. The market price of an unrestricted share of the same s
C. The book value of an unrestricted share of the same sto
D. The book value of a share of similar stock.
114. If restricted stock is forfeited because an

employee leaves the company, the appropriate
accounting procedure is to:
A. Reverse related
entries made
previously.
B. Do nothing.
C. Prepare correcting entries.
D. Record an income item.
115. Under the fair value approach for recognizing

compensation under a stock option plan,
unanticipated forfeitures are treated as:
A. A change in
accounting
principle.
B. A loss.
C. An income item.
D. A change in estimate.
During 2006, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6%
cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share.
Falwell did not declare or pay any dividends during 2006.
Falwell's net income for the year ended December 31, 2006, was $2.5 million. The income tax
rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each
option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per
share. The market price of the common stock averaged $30 per share during 2006, and the price
on 12/31/06 was $33.
116. What is Falwell's basic earnings per share for

2006, rounded to the nearest cent?
A. $3.
14
B. $4.40
C. $5.00
117. What is Falwell's diluted earnings per share for

A. $3.
14
B. $4.90
C. $4.34
D. Cannot determine from the given information.
During 2006, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6%
preferred stock outstanding. The preferred stock does not have cumulative or convertible
features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and
preferred shareholders, respectively, during 2006.
On January 1, 2005, Angel issued $2,000,000 of convertible 5% bonds at face value. Each
$1,000 bond is convertible into 5 common shares.
Angel's net income for the year ended December 31, 2006, was $6 million. The income tax rate is
20%.
118. What is Angel's basic earnings per share for 2006,

rounded to the nearest cent?
A. $5.
29
B. $5.57
C. $6.50
119. What will Angel report as diluted earnings per

share for 2006, rounded to the nearest cent?
A. $6.
43
B. $6.25
C. $6.22
Wilson Inc. developed a business strategy that used stock options as a major compensation
incentive for is top executives. On 1/1/05, 20 million options were granted, each giving the
executive owning them the right to acquire five $1 par value common shares. The exercise price
is the market price on the grant date--$10 per share. Options vest on 1/1/07. They cannot be
exercised before that date and will expire on 12/31/10. The fair value of the 20 million options,
estimated by an appropriate option pricing model, is $40 per option.
120. Wilson's compensation expense in 2005 for these

stock options was:
A. $0
B. $200 million
C. $800 million
121. On March 1, 2009, when the market price of

Wilson's stock was $14 per share, 3 million of the
options were exercised. The journal entry to record
this would include:
A. A debit to paid-in capital--

stock options for $42
million.
B. A credit to paid-in capital (excess of par) for $285 million
C. A credit to common stock for $75 million
122. Assume that all compensation expense from the

stock options granted by Wilson has already been
recorded. Further assume that 200,000 options
expire without being exercised in 2010? The
journal entry to record this would include:
A. Debit to paid-in capital -

stock options for $8
million.
B. A debit to common stock for $5 million.
C. A debit to paid-in capital - expiration of stock options for
Pastore Inc. granted options for one million shares of its $1 par common stock at the beginning of
the current year. The exercise price is $35 per share, which was also the market value of the
stock on the grant date. The fair value of the options was estimated at $8 per option.
123. What would be the total compensation indicated

by these options?
A. $3
million
.
B. $27 million.
C. $ 8 million.
D. $35 million.
124. If the options have a vesting period of five years,

what would be the balance in "Paid-in Capital-
Stock Options" three years after the grant date?
A. A credit of
$4.8 million.
B. A credit of $16.2 million.
C. A debit of $4.8 million.
D. A debit of $16.2 million.
Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2006, options
were granted for sixty thousand $1 par common shares. The exercise price equals the $5 market
price of the common stock on the grant date. The options cannot be exercised before January 1,
2009, and expire December 31, 2010. Each option has a fair value of $1 based on an option
pricing model.
125. What is the total compensation cost for this plan?
A. $0
.
B. $60,000.
C. $240,000.
D. $300,000.
126. Which is the correct entry to record compensation

expense for the year 2006?
A. Item
A
B. Item B
C. Item C
D. Item D
127. Which is the correct entry to record the exercise of

90% the options on April 15, 2009, when the
market price of the stock was $8?
A. Item
A
B. Item B
C. Item C
D. Item D
128. What is the entry to record the expiration of 10%

of the options on December 31, 20010?
A. Item
A
B. Item B
C. Item C
D. Item D
129. On December 31, 2005, Albacore Company had

300,000 shares of common stock issued and
outstanding. Albacore issued a 10% stock
dividend on June 30, 2006. On September 30,
2006, 12,000 shares of common stock were
reacquired as treasury stock. What is the
appropriate number of shares to be used in the
basic earnings per share computation for 2006?
A. 303,0
00.
B. 342,000.
C. 312,000.
D. 327,000.
130. On December 31, 2005, Beta Company had

outstanding. Beta issued a 5% stock dividend on
June 30, 2006. On September 30, 2006, 40,000
shares of common stock were reacquired as
treasury stock. What is the appropriate number of
shares to be used in the basic earnings per share
computation for 2006?
A. 315,0
00.
B. 307,500.
C. 305,000.
D. 267,500.
131. On December 31, 2005, the Bennett Company

had 100,000 shares of common stock issued and
outstanding. On July 1, 2006, the company sold
20,000 additional shares for cash. Bennett's net
income for the year ended December 31, 2006
was $650,000. During 2006, Bennett declared and
paid $89,000 in cash dividends on its
nonconvertible preferred stock. What is the 2006
basic earnings per share?
A. $5.9
1.
B. $5.61.
C. $5.10.
132. On December 31, 2005, the Frisbee Company had

outstanding. On March 31, 2006, the company
sold 50,000 additional shares for cash. Frisbee's
net income for the year ended December 31, 2006
was $700,000. During 2006, Frisbee declared and
A. $2.1
6.
B. $3.50.
C. $3.10.
D. $2.80.
133. Flyaway Travel Company reported net income for

2006 in the amount of $90,000. During 2006,
Flyaway declared and paid $2,125 in cash
dividends on its nonconvertible preferred stock.
Flyaway also paid $10,000 cash dividends on its
common stock. Flyaway had 40,000 common
shares outstanding from January 1 until 10,000
new shares were sold for cash on April 1, 2006.
What is the 2006 basic earnings per share?
A. $1.8
5.
B. $1.64.
C. $1.76.
D. None of the above is correct
134. Getaway Travel Company reported net income for

Getaway declared and paid $2,000 in cash
Getaway also paid $10,000 cash dividends on its
common stock. Getaway had 40,000 common
new shares were sold for cash on July 1, 2006. A
2-for-1 stock split was granted on July 5, 2006.
A. $.4
2.
B. $.47.
C. $.53.
D. $.56.
135. Baldwin Company had 40,000 shares of common

stock outstanding on January 1, 2006. On April 1,
2006 the company issued 20,000 shares of
common stock. The company had outstanding
stock options for 10,000 shares exercisable at $10
that had not been exercised by its executives. The
end-of-year market price of common stock was
$11 while the average price for the year was $12.
What number of shares of stock should be used in
computing diluted earnings per share?
A. 65,0
00.
B. 56,667.
C. 55,000.
D. 61,667.
136. Blue Cab Company had 50,000 shares of common
2006, the company issued 20,000 shares of
The company reported net income in the amount
of $269,915 for 2006. What is the diluted earnings
per share?
A. $3.6
0.
B. $4.10.
C. $4.50.
D. $3.81.
137. Purple Cab Company had 50,000 shares of

common stock outstanding on January 1, 2006.
On April 1, 2006, the company issued 20,000
shares of common stock. The company had
outstanding stock options for 5,000 shares
exercisable at $10 that had not been exercised by
its executives. The end-of-year market price of
common stock was $11 while the average price for
the year was $12. The company reported net
income in the amount of $269,915 for 2006. What
is the basic earnings per share?
A. $4.1
0.
B. $3.86.
C. $3.60.
D. $4.15.
138. Burnet Company had 30,000 shares of common

end-of-year market price of common stock was $8
while the average for the year was $9. The
company reported net income in the amount of
$189,374 for 2006. What is the effect of the
options?
A. The options
are antidilutive.
B. The options will dilute EPS by $.09 per share.
C. The options will dilute EPS by $.33 per share.
D. The options will dilute EPS by $.17 per share.
139. At December 31, 2006, Hansen Corporation had

50,000 shares of common stock and 5,000 shares
of 6%, $100 par cumulative preferred stock
outstanding. No dividends were declared or paid in
2006. Net income was reported as $200,000.
What is basic EPS?
A. $4.0
0.
B. $3.40.
C. $3.64.
D. $4.02.
Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100 par
convertible preferred stock outstanding during the year. Net income for the year was $400,000
and dividends were paid to both common and preferred shareholders. Rudyard's effective tax rate
is 40%. Each share of preferred stock is convertible into 5 shares of common.
140. What is Rudyard's basic EPS?
A. $2.1
3.
B. $4.80.
C. $4.00.
D. $3.20.
141. What is Rudyard's diluted EPS?
A. $2.
13
B. $2.67
C. $3.20
D. $4.80
142. Dulce Corporation had 200,000 shares of common

stock outstanding during the current year. At the
beginning of the year, options for 10,000 shares of
common stock were granted with an exercise price
of $20. The average market price of the common
stock during the year was $25. Net income was $4
million. What is diluted EPS?
A. $20.
00.
B. $19.80.
C. $19.23.
D. $18.18.
143. Cracker Company had 2 million shares of common

stock outstanding all through 2005. On April 1,
2006, an additional 100,000 shares were sold and
issued. On September 30, 2006, Cracker declared
a 2-for-1 stock split. Net income in 2006 and 2005
was $10 million and $8 million, respectively. On
the 2006, comparative financial statements, EPS
would be reported as follows:
A. Item
A
B. Item B
C. Item C
D. Item D
144. Dublin Inc. had the following common stock record

during the current calendar year:
A 10% stock dividend was paid on December 1.

What is the number of shares to be used in
computing basic EPS?
A. 2,075,
000.
B. 2,282,500.
C. 2,475,000.
D. 2,620,000.
145. During the current year, East Corporation had 2

million shares of common stock outstanding. Two
thousand, $1,000, 8% convertible bonds were
issued at face amount at the beginning of the year.
East reported income before tax of $3 million and
net income of $1.8 million for the year. Each bond
is convertible into ten shares of common stock.
What is diluted EPS?
A. $.9
0.
B. $.95.
C. $.89.
D. $.94.
146. Morrison Corporation had the following common

stock record during the current calendar year:

A. 2,000,
000.
B. 2,200,000.
C. 2,307,500.
D. 2,310,000.
147. Gear Corporation had the following common stock

record during the current calendar year:

A. 5,500,
000.
B. 5,557,500.
C. 5,555,000.
D. 5,050,000.
148. During the current year, High Corporation had 3

million shares of common stock outstanding. Five
High reported income before tax of $4 million and
is convertible into ten shares of common. What is
diluted EPS?
A. $.8
5.
B. $.86.
C. $.80.
D. $.79.
149. Ignatius Corporation had 7 million shares of

common stock outstanding during the current
calendar year. It issued ten thousand, $1,000,
convertible bonds on January 1. On June 30,
Ignatius issued 100,000 shares of $100 par 6%
cumulative preferred stock. Dividends are
declared and paid semiannually. The bonds were
issued at face amount and pay interest quarterly at
an annual rate of 10%. Each bond is convertible
into 50 shares of common stock. Ignatius has an
effective tax rate of 40%. Ignatius would report the
following EPS data on its net income of $20
million.
A. Item
A
B. Item B
C. Item C
D. Item D
150. Jet Corporation had 8 million shares of common

stock outstanding during the current calendar year.
On July 1, Jet issued ten thousand, $1,000 face
value, convertible bonds. The bonds were issued
at face amount and pay interest quarterly for 20
years. They have a stated rate of 12%. Each bond
is convertible into 50 shares of common stock. Jet
had income before tax of $30 million and a net
income of $18 million. Jet would report the
following EPS data:
A. Item
A
B. Item B
C. Item C
D. Item D
151. The investment category for which the investor's

"positive intent and ability to hold" is important is:
A. Securities reported
under the equity
method.
B. Trading securities.
C. Securities classified as held to maturity.
D. Securities available for sale.
152. The fair value of debt securities not regularly

traded can be reasonably approximated by:
A. Calculating the d
of the principal a
B. Determining the value using similar securities in the NA
C. Using the relative fair value method.
D. Calling a licensed and registered stockbroker.
153. Securities that are purchased with the intent of

selling them in the near future to take advantage
of short-term price changes are classified as:
A. Securities
available for
sale.
B. Consolidating securities.
C. Held-to-maturity securities.
D. Trading securities.
154. Both fair values and subsequent growth of the

investee are irrelevant for investments in which of
the following categories?
under the equity
method.
155. All investments in debt and equity securities that

don't fit the definitions of the other reporting
categories are classified as:
A. Trading
securities.
B. Securities available for sale.
D. Consolidated securities.
156. Investments in securities available for sale are

reported at:
A. Discounted
present value.
B. Lower of cost or market.
C. Historical cost.
D. Fair value on the reporting date.
157. The income statement reports changes in fair

value for which type of securities?
under the equity
method.
B. Trading securities
158. The shareholders' equity section of the balance

sheet reflects changes in the fair value of
securities for which type of securities?
A. Securities
available for
sale.
C. Consolidated securities.
D. Held-to-maturity securities.
159. Which category completely excludes equity

securities?
A. Securities
available for
sale.
160. The rules of FASB Statement No. 115,

"Accounting for Certain Debt and Equity
Securities," generally apply when the percentage
of ownership of another company is:
A. Less
than
20%.
B. 20% to 50%.
C. Over 50%.
D. Exactly 100%.
161. If the fair value of equity securities is not

determinable and the equity method is not
appropriate, the securities should be reported at:
A. Amortize
d cost.
B. Cost.
C. Consolidated value.
D. Net present value.
162. When an investor uses the cost method to account

for an investment in common stock, cash
dividends are classified by the investor as:
A. A return of
capital.
B. A loss.
C. A deduction from the investment account.
D. Dividend income.
163. When an equity security is appropriately carried

and reported using the cost method, a gain should
be reported:
A. When the fair market value

of the security changes.
B. When the present value of the security changes.
C. Only when the Dow Jones Industrial Average increases
D. Only when the security is sold.
164. Investments in securities to be held for an

unspecified period of time are reported at:
A. Historic
al cost.
B. Present value.
C. Lower of cost or market.
D. Fair value.
165. All investment securities are initially recorded at:
A. Cos
t.
B. Present value.
C. Equity value.
166. Unrealized holding gains and losses on securities

available for sale would have the following effects
on shareholders' equity:
A. Item
A
B. Item B
C. Item C
D. Item D
167. When an impairment of securities available for

sale occurs for a reason that is judged to be "other
than temporary," the investment is written down to
its fair market value and the amount of the write-
down is:
A. Recorded as a
deferred credit.
B. Included in income.
C. Recorded as deferred asset.
D. Treated as unrealized.
168. Trading securities are most commonly found on

the books of:
A. Oil
compani
es.
B. Manufacturing companies.
C. Banks.
D. Foreign subsidiaries.
169. For trading securities, unrealized holding gains

and losses are included in earnings:
A. Only at the end of

the fiscal year.
B. On each reporting date.
C. Only when they exceed 10% of the underlying investme
D. Based on a vote of the board of directors.
170. Holding gains and losses on trading securities are

included in earnings because:
A. They measure
taking advanta
changes.
B. The IRS mandates the inclusion.
C. The SEC mandates the inclusion.
D. They measure the book value of the securities on the b
171. Trading securities, by definition, are properly

classified on the balance sheet as:
A. Invest
ments.
B. Intangibles.
C. Current assets.
D. Other assets.
172. On the statement of cash flows, inflows and

outflows of cash from buying and selling trading
securities typically are considered:
A. Investing
activities.
B. Operating activities.
C. Financing activities.
D. Noncash financing activities.

outflows of cash from buying and selling available
for sale securities are considered:
A. Operating
activities.
B. Financing activities.
C. Investing activities.
174. The equity method of accounting for investments
in voting common stock is appropriate when:
A. The investor can

significantly influence the
investee.
B. The investor has voting control over the investee.
C. The investor intends to vote the common stock.
D. The investor is assured of a continued supply of a valua
175. Consolidated financial statements are prepared

when one company has:
A. Accounted for the

investment using the equity
method.
B. Accounted for the investment using the cost method.
C. Significant influence over another company.
176. When using the equity method to account for an

investment, cash dividends received by the
investor from the investee should be recorded:
A. As a reduction in the
investment account.
B. As an increase in the investment account.
C. As dividend income.
D. As a contra item to stockholders' equity.
177. When the equity method of accounting for

investments is used by the investor, the
investment account is increased when:
A. A cash dividend is
received from the
investee.
B. The investee reports a net income for the year.
C. The investor records additional depreciation related to t
D. The investee reports a net loss for the year.
amortization of additional depreciation due to
differences between book values and fair values of
investee assets on the date of acquisition:
A. Reduces the investme

and increases investm
B. Increases the investment account and increases investm
C. Reduces the investment account and reduces investme
D. Increases the investment account and reduces investm
179. When the investor's level of influence changes, it

may be necessary to change from the equity
method to another method. When the level of
ownership falls from a range of 20% to 50% to
less than 20%, the equity method would be
discontinued and the investment account balance
would be carried over at:
A. Amortized cost on the

date of ownership
change.
B. Fair market value on the date of ownership change.
C. Discounted present value on the date of ownership cha
D. The current balance, and this balance would serve as th

may be necessary to change to the equity method
from another method. When the level of ownership
rises from less than 20% to a range of 20% to
50%, the equity method would become
appropriate and the investment account balance
should be:
A. Retroacti
have exis
effect for
B. Carried over as is with no adjustment necessary.
C. Carried over at fair market value on date of transfer.
D. Adjusted to reflect amortized cost.
181. What is the effect on a company's cash flows and

reported profit from using a particular method to
account for an investment in another company?
A. Item
A
B. Item B
C. Item C
D. Item D
182. If Pop Company owns 15% of the common stock

of Son Company, then Pop Company:
A. Would record
Company as
B. Records dividends received from Son Company as inve
C. Would increase its investment account by 15% of Son C
183. If Pop Company exercises significant influence

over Son Company and owns 40% of its common
stock, then Pop Company:
A. Records dividends re
Son Company as inv
revenue.
B. Would increase its investment account when Son Comp
C. Would record 40% of the net income of Son Company a
184. Which of the following increases the investment

account under the equity method of accounting?
A. Decreasing the market

price of the investee's
stock
B. Dividends paid by the investee that were declared in the
C. Net loss of the investee company
185. Which of the following investment securities held
by Zoogle Inc. may be classified as held-to-
maturity securities in its balance sheet?
A. Long-term
debenture
bonds
B. Common stock
C. Callable preferred stock

by Zoogle Inc. are not reported at fair value in its
balance sheet?
A. Common stock held as

available for sale
securities
B. Debt securities held to maturity
C. Preferred stock held as trading securities
D. All of the above are reported at fair value.
187. Assume that, on 1/1/06, Matsui Co. paid

$1,200,000 for its investment in 60,000 shares of
Yankee Inc. Further, assume that Yankee has
200,000 total shares of stock issued. The book
value and fair value of Yankee's identifiable net
assets were both $4,000,000 at 1/1/06. The
following information pertains to Yankee during
2006:
What amount would Matsui report in its year-end

2006 balance sheet for its investment in Yankee?
A. $1,320
,000
B. $1,260,000
C. $1,242,000
188. Assume that, on 1/1/05, Sosa Enterprises paid
Orioles Co. Further, assume that Orioles has
120,000 total shares of stock issued, and
estimates an 8 year remaining useful life and
straight-line depreciation with no residual value for
its depreciable assets.
The book value and fair value of Orioles'
identifiable net assets were $7,000,000 and
$10,000,000, respectively, at 1/1/05. The
difference between the fair value and book value
of Orioles is attributable to $1,800,000 of goodwill
and the remainder to depreciable equipment.
The following information pertains to Orioles
during 2005:
What amount would Sosa Enterprises report in its

year-end 2005 balance sheet for its investment in
Orioles Co.?
A. $3,200
,000
B. $3,180,000
C. $3,135,000
D. $3,027,000
Beresford Inc. purchased several investment securities during 2005, its first year of operations.
The following information pertains to these securities. The fluctuations in their fair values are not
considered permanent.
189. What balance sheet amount would Beresford

report for its total investment securities at
12/31/05?
A. $637,
000
B. $644,500
C. $645,400
190. What total holding gain would Beresford report in

its 2006 income statement relative to its
investment securities?
A. $55,
900
B. $36,000
C. $80,900
D. $48,200
191. What holding gain would Beresford report in a

special section of shareholders' equity in its
12/31/06 balance sheet?
A. $55,
100
B. $26,500
C. $10,400
192. On January 1, 2006, Nana Company paid

$100,000 for 8,000 shares of Papa Company
common stock. These securities were classified as
trading securities. The ownership in Papa
Company is 10%. Papa reported net income of
$52,000 for the year ended December 31, 2006.
The fair value of the Papa stock on that date was
$45 per share. What amount will be reported on
the balance sheet of Nana Company for the
investment in Papa at December 31, 2006?
A. $284,
400.
B. $300,000.
C. $315,600.
D. $360,000.
193. On January 1, 2006, Everglade Company
purchased the following securities and properly
accounted for them as securities available for sale:
All declines in value are considered temporary.

What amount should the Everglade Company
report relative to these securities in its 2006
income statement?
A. $0
.
B. $19,000 unrealized gain.
C. $12,000 net unrealized gain.
D. $7,000 unrealized loss.
194. Goofy Inc. bought 15,000 shares of Crazy Co.'s

stock for $150,000 on May 5, 2005, and classified
the stock as available for sale. The market value of
the stock declined to $118,000 by December 31,
2005. Goofy reclassified this investment as trading
securities in December of 2006 when the market
value had risen to $125,000. What effect on 2006
income should be reported by Goofy for the Crazy
Co. shares?
A. $0
.
B. $25,000 net loss.
C. $7,000 net gain..
D. $32,000 net loss.
195. Boulter, Inc. began business on January 1, 2006.

At the end of December 2006, Boulter had the
following investments in equity securities:
A. Item
A
B. Item B
C. Item C
D. Item D
196. Hobson Company bought the securities listed

below during 2005. These securities were
classified as trading securities. On its December
31, 2005, income statement Hobson reported a
net unrealized loss of $13,000 on these securities.
Pertinent data at the end of December 2006 are
as follows:
What amount of loss on these securities should

Hobson include in its income statement for the
year ended December 31, 2006?
A. $41,0
00.
B. $54,000.
C. $13,000.
D. $ 0.
197. Zwick Company bought 28,000 shares of the

voting common stock of Handy Corporation in
January 2006. In December, Hart announced
$200,000 net income for 2006 and declared and
paid a cash dividend of $2 per share on the
200,000 shares of outstanding common stock.
Zwick Company's dividend revenue from Handy
Corporation in December 2006 would be:
A. $
0.
B. $32,000.
C. $56,000.
198. On January 2, 2005, Howdy Doody Corporation

purchased 12% of Ranger Corporation's common
stock for $50,000 and classified the investment as
available for sale. Ranger's net income for the
years ended December 31, 2005 and 2006, were
$10,000 and $50,000, respectively. During 2006,
Ranger declared and paid a dividend of $60,000.
There were no dividends in 2005. On December
31, 2005, the fair value of the Ranger stock owned
by Howdy Doody had increased to $70,000. How
much should Howdy Doody show on the 2006
income statement as income from this
investment?
A. $26,0
00.
B. $ 7,200.
C. $20,000.
D. $27,200.
199. Anthers Inc. bought the following portfolio of

trading securities near the end of 2006.
A. Item
A
B. Item B
C. Item C
D. Item D
200. Jeremiah Corporation purchased securities during

2006 and classified them as securities available
for sale:
All declines are considered to be temporary. How

much gain will be reported by Jeremiah
Corporation on the December 31, 2006, income
statement relative to the portfolio?
A. $0
.
B. $16,000.
C. $20,000.
201. On January 1, 2006, Green Corporation

purchased 20% of the outstanding voting common
stock of Gold Company for $300,000. The book
value of the acquired shares was $275,000. The
excess of cost over book value is attributable to an
intangible asset on Gold's books that was
undervalued and had a remaining useful life of five
years. For the year ended December 31, 2003,
White reported net income of $125,000 and paid
cash dividends of $25,000. What is the carrying
value of Green's investment in Gold at December
31, 2006?
A. $295,
000.
B. $300,000.
C. $315,000.
D. $320,000.
202. Hope Company bought 30% of Faith Corporation

in 2006. During 2006, Faith reported net income in
the amount of $4,000,000 and declared and paid
dividends in the amount of $500,000. Hope
mistakenly accounted for the investment using the
cost method instead of the equity method. What
effect would this error have on the investment
account and net income, respectively, for 2006?
A. Overstated by $1,050,000;
understated by $1,050,000.
B. Understated by $1,050,000; understated by $1,050,000
C. Overstated by $1,200,000; overstated by $1,200,000.
D. Understated by $1,200,000; overstated by $1,050,000.
203. Sox Corporation purchased a 40% interest in Hack

Corporation for $1,500,000 on Jan 1, 2006. On
November 1, 2006, Hack declared and paid $1
million in dividends. On December 31, Hack
reported a net loss of $6 million for the year. What
amount of loss should Sox report on its income
statement for 2006 relative to its investment in
Hack?
A. $1,100
,000.
B. $2,400,000.
C. $1,500,000.
D. $1,600,000.
204. Jack Corporation purchased a 20% interest in Jill

Corporation for $1,500,000 on January 1, 2006.
Jack can significantly influence Jill. On December
10, 2006, Jill declared and paid $1 million in
dividends. Jill reported a net loss of $6 million for
the year. What amount of loss should Jack report
on its income statement for 2006 relative to its
investment in Jill?
A. $1
000,00
0.
B. $1,200,000.
C. $1,400,000.
D. $1,500,000.
205. Hawk Corporation purchased ten thousand shares

of Diamond Corporation stock in 2003 for $50 per
share and classified the investment as securities
available for sale. Diamond's market value was
$60 per share on December 31, 2004, and $65 on
December 31, 2005. During 2006, Hawk sold all of
its Diamond stock at $70 per share. In its 2006
income statement, Hawk would report:
A. A gain of
$100,000.
B. A gain of $150,000.
C. A gain of $200,000
D. A gain of $300,000.
206. Dim Corporation purchased one thousand shares

of Witt Corporation stock in 2003 for $800 per
available for sale. Witt's market value was $400
per share on December 31, 2004, and $300 on
December 31, 2005. During 2006, Dim sold all of
its Witt stock at $350 per share. For 2006, Dim
would report:
A. A realized gain
of $50,000.
B. A recognition of unrealized losses of $400,000.
C. A loss on the sale of investments of $450,000.
D. A trading gain of $50,000 and an unrealized loss of $50
207. Dicker Furriers purchased one thousand shares of

Loose Corporation stock on January 10, 2005, for
$800 per share and classified the investment as
securities available for sale. Loose's market value
was $400 per share on December 31, 2005. As of
December 31, 2006, Dicker still owned the Loose
stock whose market value has declined to $100
per share. The decline is due to a reason that's
judged to be other than temporary. Dicker's
December 31, 2006, balance sheet and the 2006
income statement would show the following:
A. Item
A
B. Item B
C. Item C
D. Item D
208. In 2004, Osgood Corporation purchased $4 million

in ten-year municipal bonds at face value. On
December 31, 2006, the bonds had a market
value of $3,600,000 and Osgood reclassified the
bonds from held to maturity to trading securities.
Osgood's December 31, 2006, balance sheet and
the 2006 income statement would show the
following:
A. Item
A
B. Item B
C. Item C
D. Item D
At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At the
time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair market
value of Sky Tech's depreciable assets was $15 million in excess of their book value. For this
year, Sky Tech reported a net income of $75 million and declared and paid $15 million in
dividends.
209. The amount of purchased goodwill is:
A. $18
million.
B. $30 million.
C. $60 million.
210. The total amount of additional depreciation to be

recognized over the remaining life of the assets
is:
A. $4.5
million.
B. $15 million.
C. $27 million.
practice for midterm 1 Key
1. The net assets of a corporation equal to:
A. Contribute
d capital.
B. Retained earnings.
C. Shareholders' equity.
D. None of the above.
Learning Objective: 1
Level of Learning: 1
Spiceland - Chapter 18 #51
2. Characteristics of the corporate form that have led

to the growth of this form of business ownership
include all of the following except:
A. Ease of
raising
capital.
B. Low government regulation.
C. Limited liability.
D. Ease of ownership transfer.
3. Retained earnings represent:
A. Earned
capital.
B. Cash.
C. Assets.
D. Net assets.
4. The two primary components of shareholders'

equity are:
A. Preferred stock and

retained earnings.
B. The par value of common stock plus retained earnings.
C. Paid-in capital and retained earnings.
D. Preferred and common stock.
5. Unrealized pension cost is included among

shareholders' equity as:
A. Future
earnings.
B. An addition to paid-in capital.
C. A restriction of retained earnings.
D. A contra account.
6. Details of each class of stock must be reported:
A. On the face of the

balance sheet only.
B. In disclosure notes only.
C. On the face of the balance sheet or in disclosure notes
D. On the face of the balance sheet and in disclosure note
7. In terms of business volume, the dominant form of

business organization is the:
A. Partner
ship.
B. Corporation.
C. Limited liability company.
D. Proprietorship.
8. The corporate charter sometimes is known as (a):

A. Articles of
incorporation.
B. Statement of organization.
C. By-laws.
D. Registration statement.
9. The preemptive right refers to the shareholder's

right to:
A. Maintain a proportional
ownership interest in the
corporation.
B. Vote for members of the board of directors.
C. Receive a share of dividends.
D. Share in profits proportionally with all other stockholder
10. Common shareholders usually have all of the

following rights except:
A. To share in
the profits.
B. To share in assets upon liquidation.
C. To elect a board of directors.
D. To participate in the day-to-day operations.
11. Corporations are formed in accordance with:
A. The Model
Business
Corporation Act.
B. Federal statutes.
C. The laws of individual states.
D. Federal trade commission regulations.
12. Preferred stock is called preferred because it
usually has two preferences. These preferences
relate to:
A. Dividends and
voting rights.
B. Par value and dividends.
C. The preemptive right and voting rights.
D. Assets at liquidation and dividends.
13. The par value of shares issued is normally

recorded in the:
A. Paid-in capital in
excess of par
account.
B. Common stock account.
C. Retained earnings account.
D. Appropriated retained earnings account.
14. Authorized capital stock refers to the total number

of shares:
A. Outsta
nding.
B. Issued.
C. Issued and outstanding.
D. That can be issued.
15. The par value of common stock represents:
A. The arbitrary dollar amount

assigned to a share of stock
B. The liquidation value of a share.
C. The book value of a share of stock.
D. The amount received when the stock was issued.
16. Which of the following statements is true when

dividends are not declared or paid on cumulative
preferred stock?
A. The shareholders m
convert their share
B. The unpaid dividends are accrued as a liability.
C. The unpaid dividends are reported in a note to the finan
D. The unpaid dividends accrue interest until paid.
17. Outstanding common stock is:
A. Stock that is performing w

the New York Stock Exch
B. Stock that has been authorized by the state for issue.
C. Stock held in the corporate treasury.
D. Stock in the hands of shareholders.
18. Issued stock refers to the number of shares:
A. Outstanding plus
treasury shares.
B. Shares issued for cash.
C. In the hand of shareholders.
D. That may be issued under state law.
19. Preferred shares that are participating may:
A. Vote for the

board of
directors.
B. Be exchanged for common stock.
C. Receive extra cash during corporate liquidation.
D. Receive additional dividends beyond the stated amoun
20. The Model Business Corporation Act:
A. Uses the w
describing
stock.
B. Defines legal capital as the amount of net assets not av
shareholders.
C. Provides guidance for choosing an appropriate par valu
D. Has affected the laws of most states.
21. When preferred stock carries a redemption

privilege, the shareholders may:
A. Purchase new shares as

they become available.
B. Exchange their preferred shares for common shares.
C. Surrender the preferred shares for a specified amount
D. Purchase treasury shares ahead of common sharehold
22. Treasury shares are most often reported as:
A. A reduction of total
shareholders' equity.
B. A reduction of total paid-in capital.
C. A reduction to retained earnings.
D. An expense on the income statement.

cost method are sold at a price above cost:
A. A gain
account is
credited.
B. A loss is reported.
C. A revenue account is credited.
D. Additional paid-in capital is increased.

cost method are resold at a price below cost:
A. Additional paid-in capital a

retained earnings is reduc
B. Additional paid-in capital and/or retained earnings is inc
C. Retained earnings is always reduced.
D. A loss is taken on the income statement.
25. When treasury stock is purchased for an amount

greater than its par value, what is the effect on
total shareholders' equity under the cost method?
A. Incre
ase
B. Decrease
C. No effect
D. Cannot tell from the given information.
26. When stock is issued in exchange for property, the

best evidence of market value might be any of the
following except:
A. The appraised value of

the property received.
B. The selling price of the stock in a recent transaction.
C. The price of the stock quoted on the stock exchange.
D. The average book value of outstanding stock.
27. When stock is issued under a stock subscription:
A. No entry is recorded until

the shares are fully paid for.
B. An asset is recorded for the receivable from share purc
C. A credit is made to common stock upon receipt of the s
D. A debit is made to paid-in capital - excess of par.
28. The SEC requires that a receivable from a share

purchase contract be reported:
A. As a reduction of
paid-in capital.
B. As a current asset.
C. As a noncurrent asset.
D. As an increase in shareholders' equity.
29. When preferred stock is purchased by the issuing

corporation at a price below the original issue
price and the stock is retired, the transaction:
A. Increases net
income for the
year.
B. Increases retained earnings.
C. Increases revenue for the year.
D. Increases paid-in capital share repurchase.
30. When more than one security is sold for a single

price and the total selling price is not equal to the
sum of the market prices, the cash received is
allocated between the securities based on:
A. Relative
book
values.
B. Par values.
C. Relative market values.
D. The earnings per share.
31. The retained earnings balance reported on the

balance sheet typically is not affected by:
A. Net
income
.
B. A prior period adjustment.
C. Dividends paid.
D. Restrictions.
32. When dividends are declared in one fiscal year

and paid in the next fiscal year, the liability for the
dividend should be recorded as of the:
A. Date the
dividend is
declared.
B. Last day of the fiscal year.
C. Date of record.
D. Date of payment.
33. When a property dividend is declared, the

reduction in retained earnings is for:
A. The book value of the

property on the date of
declaration.
B. The book value of the property on the date of distributio
C. The fair market value of the property on the date of dist
D. The fair market value of the property on the date of dec
34. Any dividend that is considered to be a liquidating

dividend will:
A. Reduce
retained
earnings.
B. Reduce additional paid-in capital.
C. Increase additional paid-in capital.
D. Reduce the common stock account.
35. Retained earnings represent a company's:
A. Undistributed
net income.
B. Undistributed net assets.
C. Extra paid-in capital.
D. Undistributed cash.
36. When a property dividend is declared, the property

to be distributed should be revalued to fair market
value as of the:
A. Record
date.
B. Date of distribution.
C. Date of declaration.
D. Announcement date.
37. The declaration and issuance of a common stock

dividend:
A. Has no effect on assets,
liabilities, or total shareho
equity.
B. Decreases total shareholders' equity and increases com
C. Decreases assets and decreases total shareholders' eq
D. Does not change retained earnings or paid-in capital.
38. Stock splits are issued primarily to:
A. Increase the number of

outstanding shares.
B. Increase the number of authorized shares.
C. Increase legal capital.
D. Induce a decline in market value per share.
39. A small stock dividend is defined as one that is:
A. Less than or
equal to 25%.
B. Less than 20%.
C. Less than or equal to 20%.
D. Less than 25%.
40. The common stock account on a company's

balance sheet is measured as:
A. The number of co
outstanding x the
share.
B. The number of common shares outstanding x the stock
C. The number of common shares issued x the stock's pa
41. How many of Levi's common shares were
outstanding on 12/31/05?
A. 14
millio
n
B. 9 million
C. 5 million
Use the following to answer questions 91-94:

The following partial information is taken from the comparative balance sheet of Levi
Corporation:
Spiceland - Chapter 18
42. What was the average price of the additional

shares issued by Levi in 2006?
A. $5 per
share
B. $26 per share
C. $39 per share
43. What was the average price (rounded) of the

additional treasury shares purchased by Levi
during 2006?
A. $11 per
share
B. $12 per share
C. $12.50 per share
44. What was the amount of net income earned by

Levi during 2006?
A. $0
B. $40 million
C. $62 million
The 12/31/05 balance sheet of Despot Inc. included the following:
45. In January, 2006, Despot recorded a transaction

with this journal entry:
The transaction was:
A. Issue of 2 million shares of

common stock at par value
B. Issue of common stock for $150 million in cash
C. Receipt of $20 per share for a new stock issue
46. In February, 2006, Despot declared cash

dividends of $12 million to be paid in April of that
year. What effect did the April transaction have on
Despot's accounts?
A. Decreased
assets and
liabilities
B. Decreased assets and shareholders' equity
C. Increased liabilities and decreased shareholders' equity
47. In October, 2006, Despot's Board of Directors

declared and distributed a 1% common stock
dividend when the market value of the common
stock was $60 per share. In recording this
transaction, Despot would:
A. Debit retained
earnings for $18
million
B. Credit paid-in capital--excess of par for $18 million
C. Credit common stock for $18 million
48. Which of the following Despot transactions

decreases its retained earnings?
A. A property
dividend
B. A stock dividend
C. A cash dividend
49. Despot declared a property dividend to give

marketable securities to its common stockholders.
The securities had cost Despot $7 million and
currently had a fair value of $16 million. Which of
the following would be included in recording the
property dividend declaration?
A. Increase in a
liability for $16
million.
B. Decrease in retained earnings for $7 million.
C. Decrease in marketable securities by $16 million.
50. Pug Corporation has 10,000 shares of $10 par

$100 par, 6% noncumulative, nonparticipating
dividends per share for preferred and common,
respectively?
A. $7.50;
$0.
B. $6; $3.
C. $6; $1.50.
51. Beagle Corporation has 20,000 shares of $10 par

$100 par, 6% cumulative, nonparticipating
dividends per share payable to preferred and
common, respectively?
A. $6;
$12.
B. $18; $6.
C. $6; $6.
52. The changes in account balances for Elder

Company for 2006 are as follows:
Assuming the only charges in retained earnings in

A. $40,0
00.
B. $60,000.
C. $70,000.
D. $90,000.
53. The changes in account balances for Allen Inc. for

2006 are as follows:
Assuming the only changes in retained earnings in

A. $30,0
00
B. $20,000
C. $15,000
D. $ 5,000
54. Poodle Corporation was organized on January 3,
Poodle had the following transactions relating to
share.
share.
What is total contributed capital at the end of
2006?
A. $420,
000.
B. $370,000.
C. $470,000.
D. $320,000.
55. Roberto Corporation was organized on January 1,

Roberto had the following transactions relating to
share.
share.
Purchased 2,000 shares of treasury stock at $10
(part of the 20,000 shares issued at $8).
What is total shareholders' equity at the end of
2006?
A. $270,
000.
B. $300,000.
C. $250,000.
D. $200,000.
56. Boxer Company owned 20,000 shares of King
Company that were purchased in 2004 for
$500,000. On May 1, 2006, Boxer declared a
property dividend of 1 share of King for every 10
shares of Boxer stock. On that date, there were
50,000 shares of Boxer stock outstanding. The
market value of the King stock was $30 per share
on the date of declaration and $32 per share on
the date of distribution. By how much is retained
earnings reduced by the property dividend?
A. $0
.
B. $150,000.
C. $160,000.
D. $300,000.
57. On January 1, 2006, the board of directors of

Goby Inc. declared a $540,000 dividend. The
following data are from the balance sheet of Goby
on that date:
How much is the liquidating dividend?
A. $140,
000
B. $240,000
C. $290,000
58. ABC declared a property dividend. The dividend

consisted of 10,000 common shares of its
investment in XYZ Company. The shares had
originally been purchased at $4 per share and had
a $1 par value. The value of the shares on the
declaration date is $7 per share. What is the first
entry that should be recorded related to this
dividend?
A. Item
A
B. Item B
C. Item C
D. Item D
59. The board of directors of Capstone Inc. declared a

$0.60 per share cash dividend on its $1 par
common stock. On the date of declaration, there
were 50,000 shares authorized, 20,000 shares
issued, and 5,000 shares held as treasury stock.
What is the entry for the dividend declaration?
A. Item
A
B. Item B
C. Item C
D. Item D
60. On October 1, 2006, Chief Corporation declared

and issued a 20% stock dividend. Prior to this
date, Chief had 40,000 shares of common stock
outstanding with a $5 par value. The market value
of Chief Corporation on the date of declaration
was $10 per share. As a result of this dividend,
Chief's retained earnings will:
A. Decrease
by $80,000.
B. Not change.
C. Decrease by $40,000.
D. Increase by $80,000.
61. Lucid Company declared a property dividend of

20,000 shares of $1 par Polk Company common
stock. The Polk stock was purchased for $5 per
share. Market value was $10 per share on the
declaration date and $11 per share on the
distribution date. What is the amount of the
dividend?
A. $100,
000.
B. $200,000.
C. $220,000.
D. $300,000.
As of December 31, 2006, Warner Corporation reported the following:
During 2007, half of the treasury stock was resold for $240,000; net income was $600,000;
cash dividends declared were $1,500,000; and stock dividends declared were $500,000.
62. What was shareholders' equity as of December

31, 2006?
A. $7,020
,000.
B. $6,440,000.
C. $6,420,000.
D. $6,400,000.
63. The 2007 sale of half of the treasury stock would:
A. Reduce income
before tax by
$60,000.
B. Reduce retained earnings by $60,000.
C. Increase total shareholders' equity by $300,000.
D. Decrease retained earnings by $40,000.
64. What would shareholders' equity be as of

December 31, 2007?
A. Amount is
not shown.
B. $5,760,000.
C. $5,820,000.
D. $6,760,000.
65. Olsson Corporation received a check from its

underwriters for $72 million. This was for the issue
of one million of its $5 par value stock that the
underwriters expect to sell for $52 per share.
Which is the correct entry to record the issue of
the stock?
A. Item
A
B. Item B
C. Item C
D. Item D
Black Enterprises reported the following (in thousands of dollars) as of December 31, 2006. All
accounts have normal balances.
During 2007 (in thousands of dollars), net income was $9,000; 25% of the treasury stock was
resold for $450; cash dividends declared were $600; cash dividends paid were $500; and all of
the stock options expired.

A. $29,6
00.
B. $35,600.
C. $30,400.
D. $28,600.

A. $38,1
00.
B. $37,450.
C. $38,450.
D. $38,350.
68. Montgomery & Co., a well established law firm,

provided 500 hours of its time to Fink Corporation
in exchange for 1,000 shares of Fink's $5 par
common stock. Mitchell's usual billing rate is $700
per hour, and Fink's stock has a book value of
$250 per share. By what amount will Fink's
additional paid-in capital increase for this
transaction?
A. $345,
000.
B. $295,000.
C. $350,000.
D. $300,000.
69. Three years ago, Emily Corporation issued 12,000

shares of $100 par, convertible, preferred stock for
$105 per share. Each share of preferred can be
converted into 4 shares of $1 par common stock.
Half of the preferred shares were converted in the
current year when the common stock was trading
for $40 per share. How much will total paid-in
capital increase as a result of the conversion?
A. $630,
000.
B. $960,000.
C. $330,000.
D. $0.
70. The single accounting number in the annual report
that receives the most attention by investors is:
A. Total
revenue
.
B. Book value per share.
C. Equity per share.
D. Earnings per share.
71. A primary goal of earnings per share determination

is:
A. Conserv
atism.
B. Comparability.
C. Materiality.
D. Objectivity.
72. ABC declared and paid cash dividends in January

of the current year to its common shareholders.
The dividend:
A. Will be added
earnings per s
year.
B. Will be added to the denominator of the earnings per sh
year.
D. Has no effect on the earnings per share for the coming
73. The reporting of earnings per share is required

only for:
A. Private
companies
.
B. Companies with complex capital structures.
C. Publicly traded corporations.
D. Medium-sized and large corporations.
74. When a company's only potential common shares

are convertible bonds:
A. Diluted EP
actually co
converted.
B. Diluted EPS will be smaller if the bonds are actually con
converted.
C. Diluted EPS will be the same whether or not the bonds
D. The effect of conversion on diluted EPS cannot be dete
information.
75. If convertible bonds were issued at a discount,

when computing diluted EPS, the amortization of
the bond discount:
A. Will have
no effect.
B. Will decrease the numerator.
C. Will increase the numerator.
D. May increase or decrease the numerator, depending on
76. XYZ paid $10,000 in dividends in January of the

current year to its preferred shareholders. The
preferred stock is nonconvertible and
noncumulative. The dividend:
A. Will be added
earnings per
year.
B. Will be added to the numerator of the earnings per shar
year.
D. May not affect earnings per share depending on the de
77. When computing earnings per share,

noncumulative preferred dividends not declared
should be:
A. Ignor
ed.
B. Deducted from earnings for the year.
D. Deducted, net of tax effect, from earnings for the year.
78. When computing earnings per share, cumulative

preferred dividends not declared should be:
A. Deducted from
earnings for the
year.
B. Deducted, net of tax effect, from earnings for the year.
D. Ignored.
79. Basic earnings per share is computed using:
A. The actual number o

shares outstanding
year.
B. A weighted-average of preferred and common shares.
C. The number of common shares outstanding plus comm
D. Weighted-average common shares outstanding for the
80. Which of the following is a correct statement
concerning earnings per share?
A. Earnings per share can

never be a negative
number.
B. Earnings per share must be reported for all corporation
C. If a company has an extraordinary loss, at least two EP
D. Reported earnings per share is the result of dividing we
income.
81. When a company's income statement includes an

extraordinary gain, the company should report per
share information on:
A. Item
A
B. Item B
C. Item C
D. Item D
82. When a company's income statement includes

discontinued operations and a gain on the sale of
machinery, the company should report per share
information on:
A. Item
A
B. Item B
C. Item C
D. Item D
83. The result of a stock split is:
A. A larger number of
more valuable shares.
B. An increase in corporate assets.
C. An increase in shareholders' equity.
D. A larger number of less valuable shares.
84. When computing diluted earnings per share, which

of the following will be omitted from the
calculation?
A. Dividends paid on
common stock.
B. The weighted average common shares.
C. The effect of stock splits.
D. The number of common shares represented by stock p
85. When computing diluted earnings per share, stock

options:
A. Are included if
they are
antidilutive.
B. Should be ignored.
C. Are included if they are dilutive.
D. Increase the numerator while not affecting the denomin
86. Basic and diluted earnings per share data are

required to be reported:
A. In footnotes to the
financial statements.
B. Only if they add to the relevance of the income stateme
C. In the summary section of the annual report.
D. On the face of the income statement.
87. Which of the following will require a recalculation

of weighted-average shares outstanding for all
years presented?
A. Stock dividends
and stock splits.
B. Stock dividends but not stock splits.
C. Stock splits but not stock dividends.
D. Stock rights.
88. All other things equal, what is the effect on

earnings per share when a corporation acquires
shares of its own stock on the open market?
A. Decre
ase.
B. No effect if the shares are held as treasury shares.
C. Increase only if the shares are considered to be retired.
D. Increase.
89. If a stock dividend were distributed, when

calculating the current year's EPS, the shares
distributed are treated as having been issued:
A. At the end
of the year.
B. At the beginning of the year.
C. On the declaration date.
90. If a stock split occurred, when calculating the

current year's EPS, the shares are treated as
issued:
A. At the end
of the year.
B. On the first day of the next fiscal year.
C. At the beginning of the year.
91. The adjustment to the weighted-average shares

for retired shares is the same as for issuing new
shares except:
A. The shares are

deducted rather than
added.
B. The shares are added rather than deducted.
C. The shares are treated as being acquired at the end of
D. The shares are treated as being acquired at the beginn
92. Preferred dividends are subtracted from earnings

when computing earnings per share whether or
not the dividends are declared or paid if the
preferred stock is:
A. Calla
ble.
B. Convertible.
C. Participating.
D. Cumulative.
93. Preferred dividends would not be subtracted from

earnings when computing earnings per share in a
year when the dividends are not declared if the
preferred stock is:
A. Noncum
ulative.
B. Convertible.
C. Participating.
D. Cumulative.
94. How many types of potential common shares must

a corporation have in order to be said to have a
complex capital structure?
A. 3.
B. 2.
C. 1.
D. 0.
95. Which of the following is not a potential common

stock?
A. Convertible
preferred
stock.
C. Stock rights.
D. Participating preferred stock.
96. Basic earnings per share ignores:
A. All potential
common
shares.
B. Some potential common shares, but not others.
C. Dividends declared on noncumulative preferred stock.
D. Stock splits.
97. Stock options, rights, and warrants are different

from convertible securities in that they:
A. Typically increase
cash upon exercise.
B. Usually reduce total assets upon exercise.
C. Often reduce liabilities upon exercise.
D. Normally increase retained earnings upon exercise.
98. Stock options do not affect the calculation of:
A. Diluted
EPS.
B. Weighted-average common shares.
C. The denominator in the diluted EPS fraction.
D. Basic EPS.

that the proceeds were used to:
A. Buy common stock

as an investment.
B. Retire preferred stock.
C. Buy treasury stock.
D. Increase net income.

that the proceeds were used to buy treasury stock
at:
A. The end-of-year
market price.
B. The average market price during the period.
C. The purchase price stated on the options.
D. The stock's par value.
101. When we assume conversion of convertible

bonds, the numerator is increased by:
A. The amount of
after-tax interest.
B. The gross amount of interest.
C. The weighted-average interest.
D. The amount of cash paid during the current year for inte

stock options, rights, and warrants in the
calculation of EPS, the method used is called the:
A. Optional
method.
C. Dilution method.
D. Treasury stock method.

convertible securities in the calculation of EPS, the
method used is called the:
A. Treasury
stock
method.
C. Optional method.
D. Dilution method.
104. Nonconvertible bonds affect the calculation of:
A. Basic
earnings per
share.
B. Diluted earnings per share.
C. Both A and C.
105. A simple capital structure might include:
A. Stock
rights.
C. Nonconvertible preferred stock.
D. Stock purchase warrants.
106. In computing diluted earnings per share, the

treasury stock method is used for:
A. Stock
warrants.
B. Stock splits.
C. Reverse stock splits.
D. Convertible preferred stock.
107. When several types of potential common shares

exist, the one that enters the computation of
diluted EPS first is the one with the:
A. Highest
incremental
effect.
B. Higher numerator.
C. Median incremental effect.
D. Lowest incremental effect.
108. Contingently issuable shares may be included in:
A. Basic
EPS.
B. Diluted EPS.
C. Both A and C.
109. Which of the following results in increasing basic

earnings per share?
A. Paying more than carrying

value to retire outstanding
bonds.
B. Issuing cumulative preferred stock.
C. Purchasing treasury stock.
D. All of the above decrease basic earnings per share.
110. The most important accounting objective for

executive stock options is:
A. Measuring a
compensatio
period.
B. Measuring their fair value for balance sheet purposes.
C. To disclose increases or decreases in the stock options
period.
111. Executive stock options should report as
compensation expense:
A. Using the
intrinsic value
method.
B. Using the fair value method.
C. Using either the fair value method or the intrinsic value
D. Only on rare occasions.
112. Which of the following statements is true regarding

SARS payable in cash?
A. Any change in es
compensation is
adjustment.
B. The total amount of compensation is not known for cert
exercised.
C. The liability is adjusted only to reflect each additional ye
113. The compensation associated with a share of

restricted stock under a stock award plan is:
A. The market price of a sha

similar fixed income secur
B. The market price of an unrestricted share of the same s
C. The book value of an unrestricted share of the same sto
D. The book value of a share of similar stock.
114. If restricted stock is forfeited because an

employee leaves the company, the appropriate
accounting procedure is to:
A. Reverse related
entries made
previously.
B. Do nothing.
C. Prepare correcting entries.
D. Record an income item.
115. Under the fair value approach for recognizing

compensation under a stock option plan,
unanticipated forfeitures are treated as:
A. A change in
accounting
principle.
B. A loss.
C. An income item.
D. A change in estimate.
During 2006, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6%
cumulative preferred stock outstanding. The preferred stock has a par value of $100 per
share. Falwell did not declare or pay any dividends during 2006.
Falwell's net income for the year ended December 31, 2006, was $2.5 million. The income tax
rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year.
Each option gives its holder the right to buy 20 shares of common stock at an exercise price of
$29 per share. The market price of the common stock averaged $30 per share during 2006,
and the price on 12/31/06 was $33.
116. What is Falwell's basic earnings per share for

A. $3.
14
B. $4.40
C. $5.00
117. What is Falwell's diluted earnings per share for

A. $3.
14
B. $4.90
C. $4.34
D. Cannot determine from the given information.
During 2006, Angel Corporation had 900,000 shares of common stock and 50,000 shares of
6% preferred stock outstanding. The preferred stock does not have cumulative or convertible
features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and
preferred shareholders, respectively, during 2006.
On January 1, 2005, Angel issued $2,000,000 of convertible 5% bonds at face value. Each
$1,000 bond is convertible into 5 common shares.
Angel's net income for the year ended December 31, 2006, was $6 million. The income tax
rate is 20%.
118. What is Angel's basic earnings per share for 2006,

rounded to the nearest cent?
A. $5.
29
B. $5.57
C. $6.50
119. What will Angel report as diluted earnings per

share for 2006, rounded to the nearest cent?
A. $6.
43
B. $6.25
C. $6.22
Wilson Inc. developed a business strategy that used stock options as a major compensation
incentive for is top executives. On 1/1/05, 20 million options were granted, each giving the
executive owning them the right to acquire five $1 par value common shares. The exercise
price is the market price on the grant date--$10 per share. Options vest on 1/1/07. They
cannot be exercised before that date and will expire on 12/31/10. The fair value of the 20
million options, estimated by an appropriate option pricing model, is $40 per option.
120. Wilson's compensation expense in 2005 for these

stock options was:
A. $0
B. $200 million
C. $800 million
121. On March 1, 2009, when the market price of

Wilson's stock was $14 per share, 3 million of the
options were exercised. The journal entry to record
this would include:
A. A debit to paid-in capital--

stock options for $42 million.
B. A credit to paid-in capital (excess of par) for $285 millio
C. A credit to common stock for $75 million
122. Assume that all compensation expense from the

stock options granted by Wilson has already been
recorded. Further assume that 200,000 options
expire without being exercised in 2010? The
journal entry to record this would include:
A. Debit to paid-in capital -

stock options for $8 million.
B. A debit to common stock for $5 million.
C. A debit to paid-in capital - expiration of stock options for
Pastore Inc. granted options for one million shares of its $1 par common stock at the
beginning of the current year. The exercise price is $35 per share, which was also the market
value of the stock on the grant date. The fair value of the options was estimated at $8 per
option.
123. What would be the total compensation indicated

by these options?
A. $3
million
.
B. $27 million.
C. $ 8 million.
D. $35 million.
124. If the options have a vesting period of five years,

what would be the balance in "Paid-in Capital-
Stock Options" three years after the grant date?
A. A credit of
$4.8 million.
B. A credit of $16.2 million.
C. A debit of $4.8 million.
D. A debit of $16.2 million.
Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2006,
options were granted for sixty thousand $1 par common shares. The exercise price equals the
$5 market price of the common stock on the grant date. The options cannot be exercised
before January 1, 2009, and expire December 31, 2010. Each option has a fair value of $1
based on an option pricing model.
125. What is the total compensation cost for this plan?
A. $0
.
B. $60,000.
C. $240,000.
D. $300,000.
126. Which is the correct entry to record compensation

expense for the year 2006?
A. Item
A
B. Item B
C. Item C
D. Item D
127. Which is the correct entry to record the exercise of

90% the options on April 15, 2009, when the
market price of the stock was $8?
A. Item
A
B. Item B
C. Item C
D. Item D
128. What is the entry to record the expiration of 10%

of the options on December 31, 20010?
A. Item
A
B. Item B
C. Item C
D. Item D
129. On December 31, 2005, Albacore Company had

outstanding. Albacore issued a 10% stock
dividend on June 30, 2006. On September 30,
2006, 12,000 shares of common stock were
reacquired as treasury stock. What is the
appropriate number of shares to be used in the
basic earnings per share computation for 2006?
A. 303,0
00.
B. 342,000.
C. 312,000.
D. 327,000.
130. On December 31, 2005, Beta Company had

outstanding. Beta issued a 5% stock dividend on
June 30, 2006. On September 30, 2006, 40,000
shares of common stock were reacquired as
treasury stock. What is the appropriate number of
shares to be used in the basic earnings per share
computation for 2006?
A. 315,0
00.
B. 307,500.
C. 305,000.
D. 267,500.
131. On December 31, 2005, the Bennett Company

had 100,000 shares of common stock issued and
outstanding. On July 1, 2006, the company sold
20,000 additional shares for cash. Bennett's net
income for the year ended December 31, 2006
was $650,000. During 2006, Bennett declared and
A. $5.9
1.
B. $5.61.
C. $5.10.
132. On December 31, 2005, the Frisbee Company had

outstanding. On March 31, 2006, the company
sold 50,000 additional shares for cash. Frisbee's
net income for the year ended December 31, 2006
was $700,000. During 2006, Frisbee declared and
A. $2.1
6.
B. $3.50.
C. $3.10.
D. $2.80.
133. Flyaway Travel Company reported net income for

Flyaway declared and paid $2,125 in cash
Flyaway also paid $10,000 cash dividends on its
common stock. Flyaway had 40,000 common
new shares were sold for cash on April 1, 2006.
A. $1.8
5.
B. $1.64.
C. $1.76.
D. None of the above is correct
134. Getaway Travel Company reported net income for

Getaway declared and paid $2,000 in cash
Getaway also paid $10,000 cash dividends on its
common stock. Getaway had 40,000 common
new shares were sold for cash on July 1, 2006. A
2-for-1 stock split was granted on July 5, 2006.
A. $.4
2.
B. $.47.
C. $.53.
D. $.56.
135. Baldwin Company had 40,000 shares of common

2006 the company issued 20,000 shares of
What number of shares of stock should be used in
computing diluted earnings per share?
A. 65,0
00.
B. 56,667.
C. 55,000.
D. 61,667.
136. Blue Cab Company had 50,000 shares of common

The company reported net income in the amount
of $269,915 for 2006. What is the diluted earnings
per share?
A. $3.6
0.
B. $4.10.
C. $4.50.
D. $3.81.
137. Purple Cab Company had 50,000 shares of

common stock outstanding on January 1, 2006.
On April 1, 2006, the company issued 20,000
shares of common stock. The company had
outstanding stock options for 5,000 shares
exercisable at $10 that had not been exercised by
its executives. The end-of-year market price of
common stock was $11 while the average price for
the year was $12. The company reported net
income in the amount of $269,915 for 2006. What
is the basic earnings per share?
A. $4.1
0.
B. $3.86.
C. $3.60.
D. $4.15.
138. Burnet Company had 30,000 shares of common

end-of-year market price of common stock was $8
while the average for the year was $9. The
company reported net income in the amount of
$189,374 for 2006. What is the effect of the
options?
A. The options
are antidilutive.
B. The options will dilute EPS by $.09 per share.
C. The options will dilute EPS by $.33 per share.
D. The options will dilute EPS by $.17 per share.
139. At December 31, 2006, Hansen Corporation had

50,000 shares of common stock and 5,000 shares
of 6%, $100 par cumulative preferred stock
outstanding. No dividends were declared or paid in
2006. Net income was reported as $200,000.
What is basic EPS?
A. $4.0
0.
B. $3.40.
C. $3.64.
D. $4.02.
Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100
par convertible preferred stock outstanding during the year. Net income for the year was
$400,000 and dividends were paid to both common and preferred shareholders. Rudyard's
effective tax rate is 40%. Each share of preferred stock is convertible into 5 shares of
common.
140. What is Rudyard's basic EPS?
A. $2.1
3.
B. $4.80.
C. $4.00.
D. $3.20.
141. What is Rudyard's diluted EPS?
A. $2.
13
B. $2.67
C. $3.20
D. $4.80
142. Dulce Corporation had 200,000 shares of common

stock outstanding during the current year. At the
beginning of the year, options for 10,000 shares of
common stock were granted with an exercise price
of $20. The average market price of the common
stock during the year was $25. Net income was $4
million. What is diluted EPS?
A. $20.
00.
B. $19.80.
C. $19.23.
D. $18.18.
143. Cracker Company had 2 million shares of common

stock outstanding all through 2005. On April 1,
2006, an additional 100,000 shares were sold and
issued. On September 30, 2006, Cracker declared
a 2-for-1 stock split. Net income in 2006 and 2005
was $10 million and $8 million, respectively. On
the 2006, comparative financial statements, EPS
would be reported as follows:
A. Item
A
B. Item B
C. Item C
D. Item D
144. Dublin Inc. had the following common stock record

during the current calendar year:
A 10% stock dividend was paid on December 1.

A. 2,075,
000.
B. 2,282,500.
C. 2,475,000.
D. 2,620,000.
145. During the current year, East Corporation had 2
million shares of common stock outstanding. Two
East reported income before tax of $3 million and
is convertible into ten shares of common stock.
What is diluted EPS?
A. $.9
0.
B. $.95.
C. $.89.
D. $.94.
146. Morrison Corporation had the following common

stock record during the current calendar year:

A. 2,000,
000.
B. 2,200,000.
C. 2,307,500.
D. 2,310,000.
147. Gear Corporation had the following common stock

record during the current calendar year:
A. 5,500,
000.
B. 5,557,500.
C. 5,555,000.
D. 5,050,000.
148. During the current year, High Corporation had 3

million shares of common stock outstanding. Five
High reported income before tax of $4 million and
is convertible into ten shares of common. What is
diluted EPS?
A. $.8
5.
B. $.86.
C. $.80.
D. $.79.
149. Ignatius Corporation had 7 million shares of

common stock outstanding during the current
calendar year. It issued ten thousand, $1,000,
convertible bonds on January 1. On June 30,
Ignatius issued 100,000 shares of $100 par 6%
cumulative preferred stock. Dividends are
declared and paid semiannually. The bonds were
issued at face amount and pay interest quarterly at
an annual rate of 10%. Each bond is convertible
into 50 shares of common stock. Ignatius has an
effective tax rate of 40%. Ignatius would report the
following EPS data on its net income of $20
million.
A. Item
A
B. Item B
C. Item C
D. Item D
150. Jet Corporation had 8 million shares of common

stock outstanding during the current calendar year.
On July 1, Jet issued ten thousand, $1,000 face
value, convertible bonds. The bonds were issued
at face amount and pay interest quarterly for 20
years. They have a stated rate of 12%. Each bond
is convertible into 50 shares of common stock. Jet
had income before tax of $30 million and a net
income of $18 million. Jet would report the
following EPS data:
A. Item
A
B. Item B
C. Item C
D. Item D
151. The investment category for which the investor's

"positive intent and ability to hold" is important is:
under the equity
method.
C. Securities classified as held to maturity.
152. The fair value of debt securities not regularly

traded can be reasonably approximated by:
A. Calculating the d
of the principal a
B. Determining the value using similar securities in the NA
C. Using the relative fair value method.
D. Calling a licensed and registered stockbroker.
153. Securities that are purchased with the intent of

selling them in the near future to take advantage
of short-term price changes are classified as:
A. Securities
available for
sale.
154. Both fair values and subsequent growth of the

investee are irrelevant for investments in which of
the following categories?
under the equity
method.
155. All investments in debt and equity securities that

don't fit the definitions of the other reporting
categories are classified as:
A. Trading
securities.
B. Securities available for sale.
D. Consolidated securities.
156. Investments in securities available for sale are

reported at:
A. Discounted
present value.
B. Lower of cost or market.
C. Historical cost.
D. Fair value on the reporting date.
157. The income statement reports changes in fair

value for which type of securities?
under the equity
method.
B. Trading securities
158. The shareholders' equity section of the balance

sheet reflects changes in the fair value of
securities for which type of securities?
A. Securities
available for
sale.
C. Consolidated securities.
D. Held-to-maturity securities.
159. Which category completely excludes equity

securities?
A. Securities
available for
sale.
160. The rules of FASB Statement No. 115,

"Accounting for Certain Debt and Equity
Securities," generally apply when the percentage
of ownership of another company is:
A. Less
than
20%.
B. 20% to 50%.
C. Over 50%.
D. Exactly 100%.
161. If the fair value of equity securities is not

determinable and the equity method is not
appropriate, the securities should be reported at:
A. Amortize
d cost.
B. Cost.
C. Consolidated value.
D. Net present value.
162. When an investor uses the cost method to account

for an investment in common stock, cash
dividends are classified by the investor as:
A. A return of
capital.
B. A loss.
C. A deduction from the investment account.
D. Dividend income.
163. When an equity security is appropriately carried

and reported using the cost method, a gain should
be reported:
A. When the fair market value

of the security changes.
B. When the present value of the security changes.
C. Only when the Dow Jones Industrial Average increases
D. Only when the security is sold.
164. Investments in securities to be held for an

unspecified period of time are reported at:
A. Historica
l cost.
B. Present value.
C. Lower of cost or market.
D. Fair value.
165. All investment securities are initially recorded at:
A. Cos
t.
B. Present value.
C. Equity value.
166. Unrealized holding gains and losses on securities

available for sale would have the following effects
on shareholders' equity:
A. Item
A
B. Item B
C. Item C
D. Item D
167. When an impairment of securities available for

sale occurs for a reason that is judged to be "other
than temporary," the investment is written down to
its fair market value and the amount of the write-
down is:
A. Recorded as a
deferred credit.
B. Included in income.
C. Recorded as deferred asset.
D. Treated as unrealized.
168. Trading securities are most commonly found on

the books of:
A. Oil
compani
es.
B. Manufacturing companies.
C. Banks.
D. Foreign subsidiaries.
169. For trading securities, unrealized holding gains

and losses are included in earnings:
A. Only at the end of

the fiscal year.
B. On each reporting date.
C. Only when they exceed 10% of the underlying investme
D. Based on a vote of the board of directors.
170. Holding gains and losses on trading securities are

included in earnings because:
A. They measure
taking advant
changes.
B. The IRS mandates the inclusion.
C. The SEC mandates the inclusion.
D. They measure the book value of the securities on the b
171. Trading securities, by definition, are properly

classified on the balance sheet as:
A. Invest
ments.
B. Intangibles.
C. Current assets.
D. Other assets.

outflows of cash from buying and selling trading
securities typically are considered:
A. Investing
activities.
B. Operating activities.
C. Financing activities.

outflows of cash from buying and selling available
for sale securities are considered:
A. Operating
activities.
B. Financing activities.
C. Investing activities.
174. The equity method of accounting for investments

in voting common stock is appropriate when:
A. The investor can

significantly influence the
investee.
B. The investor has voting control over the investee.
C. The investor intends to vote the common stock.
D. The investor is assured of a continued supply of a valua
175. Consolidated financial statements are prepared

when one company has:
A. Accounted for the

investment using the equity
method.
B. Accounted for the investment using the cost method.
C. Significant influence over another company.
176. When using the equity method to account for an

investment, cash dividends received by the
investor from the investee should be recorded:
A. As a reduction in the
investment account.
B. As an increase in the investment account.
C. As dividend income.
D. As a contra item to stockholders' equity.

investment account is increased when:
A. A cash dividend is
received from the
investee.
B. The investee reports a net income for the year.
C. The investor records additional depreciation related to t
D. The investee reports a net loss for the year.

amortization of additional depreciation due to
differences between book values and fair values of
investee assets on the date of acquisition:
A. Reduces the investme

and increases investm
B. Increases the investment account and increases invest
C. Reduces the investment account and reduces investme
D. Increases the investment account and reduces investm

may be necessary to change from the equity
method to another method. When the level of
ownership falls from a range of 20% to 50% to
less than 20%, the equity method would be
discontinued and the investment account balance
would be carried over at:
A. Amortized cost on the

date of ownership
change.
B. Fair market value on the date of ownership change.
C. Discounted present value on the date of ownership cha
D. The current balance, and this balance would serve as t

may be necessary to change to the equity method
from another method. When the level of ownership
rises from less than 20% to a range of 20% to
50%, the equity method would become
appropriate and the investment account balance
should be:
A. Retroactive
would have
been in eff
B. Carried over as is with no adjustment necessary.
C. Carried over at fair market value on date of transfer.
D. Adjusted to reflect amortized cost.
181. What is the effect on a company's cash flows and

reported profit from using a particular method to
account for an investment in another company?
A. Item
A
B. Item B
C. Item C
D. Item D
182. If Pop Company owns 15% of the common stock

of Son Company, then Pop Company:
A. Would record
Company as
B. Records dividends received from Son Company as inve
C. Would increase its investment account by 15% of Son C
183. If Pop Company exercises significant influence

over Son Company and owns 40% of its common
stock, then Pop Company:
A. Records dividends re
Son Company as inv
revenue.
B. Would increase its investment account when Son Comp
C. Would record 40% of the net income of Son Company
184. Which of the following increases the investment

account under the equity method of accounting?
A. Decreasing the market

price of the investee's
stock
B. Dividends paid by the investee that were declared in the
C. Net loss of the investee company

by Zoogle Inc. may be classified as held-to-
maturity securities in its balance sheet?
A. Long-term
debenture
bonds
B. Common stock
C. Callable preferred stock

by Zoogle Inc. are not reported at fair value in its
balance sheet?
A. Common stock held as

available for sale
securities
B. Debt securities held to maturity
C. Preferred stock held as trading securities
D. All of the above are reported at fair value.
187. Assume that, on 1/1/06, Matsui Co. paid

Yankee Inc. Further, assume that Yankee has
200,000 total shares of stock issued. The book
value and fair value of Yankee's identifiable net
assets were both $4,000,000 at 1/1/06. The
following information pertains to Yankee during
2006:
What amount would Matsui report in its year-end

2006 balance sheet for its investment in Yankee?
A. $1,320
,000
B. $1,260,000
C. $1,242,000
188. Assume that, on 1/1/05, Sosa Enterprises paid

Orioles Co. Further, assume that Orioles has
120,000 total shares of stock issued, and
estimates an 8 year remaining useful life and
straight-line depreciation with no residual value for
its depreciable assets.
The book value and fair value of Orioles'
identifiable net assets were $7,000,000 and
$10,000,000, respectively, at 1/1/05. The
difference between the fair value and book value
of Orioles is attributable to $1,800,000 of goodwill
and the remainder to depreciable equipment.
The following information pertains to Orioles
during 2005:
What amount would Sosa Enterprises report in its

year-end 2005 balance sheet for its investment in
Orioles Co.?
A. $3,200
,000
B. $3,180,000
C. $3,135,000
D. $3,027,000
Beresford Inc. purchased several investment securities during 2005, its first year of operations.
The following information pertains to these securities. The fluctuations in their fair values are
not considered permanent.
189. What balance sheet amount would Beresford

report for its total investment securities at
12/31/05?
A. $637,
000
B. $644,500
C. $645,400
190. What total holding gain would Beresford report in

its 2006 income statement relative to its
investment securities?
A. $55,
900
B. $36,000
C. $80,900
D. $48,200
191. What holding gain would Beresford report in a

special section of shareholders' equity in its
12/31/06 balance sheet?
A. $55,
100
B. $26,500
C. $10,400
192. On January 1, 2006, Nana Company paid

$100,000 for 8,000 shares of Papa Company
common stock. These securities were classified as
trading securities. The ownership in Papa
Company is 10%. Papa reported net income of
$52,000 for the year ended December 31, 2006.
The fair value of the Papa stock on that date was
$45 per share. What amount will be reported on
the balance sheet of Nana Company for the
investment in Papa at December 31, 2006?
A. $284,
400.
B. $300,000.
C. $315,600.
D. $360,000.
193. On January 1, 2006, Everglade Company

purchased the following securities and properly
accounted for them as securities available for sale:
All declines in value are considered temporary.

What amount should the Everglade Company
report relative to these securities in its 2006
income statement?
A. $0.
B. $19,000 unrealized gain.
C. $12,000 net unrealized gain.
D. $7,000 unrealized loss.
194. Goofy Inc. bought 15,000 shares of Crazy Co.'s
stock for $150,000 on May 5, 2005, and classified
the stock as available for sale. The market value of
the stock declined to $118,000 by December 31,
2005. Goofy reclassified this investment as trading
securities in December of 2006 when the market
value had risen to $125,000. What effect on 2006
income should be reported by Goofy for the Crazy
Co. shares?
A. $0
.
B. $25,000 net loss.
C. $7,000 net gain..
D. $32,000 net loss.
195. Boulter, Inc. began business on January 1, 2006.

At the end of December 2006, Boulter had the
following investments in equity securities:
A. Item
A
B. Item B
C. Item C
D. Item D
196. Hobson Company bought the securities listed

below during 2005. These securities were
classified as trading securities. On its December
31, 2005, income statement Hobson reported a
net unrealized loss of $13,000 on these securities.
Pertinent data at the end of December 2006 are
as follows:
What amount of loss on these securities should

Hobson include in its income statement for the
year ended December 31, 2006?
A. $41,0
00.
B. $54,000.
C. $13,000.
D. $ 0.
197. Zwick Company bought 28,000 shares of the

voting common stock of Handy Corporation in
January 2006. In December, Hart announced
$200,000 net income for 2006 and declared and
paid a cash dividend of $2 per share on the
200,000 shares of outstanding common stock.
Zwick Company's dividend revenue from Handy
Corporation in December 2006 would be:
A. $
0.
B. $32,000.
C. $56,000.
198. On January 2, 2005, Howdy Doody Corporation

purchased 12% of Ranger Corporation's common
stock for $50,000 and classified the investment as
available for sale. Ranger's net income for the
years ended December 31, 2005 and 2006, were
$10,000 and $50,000, respectively. During 2006,
Ranger declared and paid a dividend of $60,000.
There were no dividends in 2005. On December
31, 2005, the fair value of the Ranger stock owned
by Howdy Doody had increased to $70,000. How
much should Howdy Doody show on the 2006
income statement as income from this
investment?
A. $26,0
00.
B. $ 7,200.
C. $20,000.
D. $27,200.
199. Anthers Inc. bought the following portfolio of

trading securities near the end of 2006.
A. Item
A
B. Item B
C. Item C
D. Item D
200. Jeremiah Corporation purchased securities during

2006 and classified them as securities available
for sale:
All declines are considered to be temporary. How
much gain will be reported by Jeremiah
Corporation on the December 31, 2006, income
statement relative to the portfolio?
A. $0.
B. $16,000.
C. $20,000.
201. On January 1, 2006, Green Corporation

purchased 20% of the outstanding voting common
stock of Gold Company for $300,000. The book
value of the acquired shares was $275,000. The
excess of cost over book value is attributable to an
intangible asset on Gold's books that was
undervalued and had a remaining useful life of five
years. For the year ended December 31, 2003,
White reported net income of $125,000 and paid
cash dividends of $25,000. What is the carrying
value of Green's investment in Gold at December
31, 2006?
A. $295,
000.
B. $300,000.
C. $315,000.
D. $320,000.
202. Hope Company bought 30% of Faith Corporation

in 2006. During 2006, Faith reported net income in
the amount of $4,000,000 and declared and paid
dividends in the amount of $500,000. Hope
mistakenly accounted for the investment using the
cost method instead of the equity method. What
effect would this error have on the investment
account and net income, respectively, for 2006?
A. Overstated by $1,050,000;
understated by $1,050,000.
B. Understated by $1,050,000; understated by $1,050,000
C. Overstated by $1,200,000; overstated by $1,200,000.
D. Understated by $1,200,000; overstated by $1,050,000.
203. Sox Corporation purchased a 40% interest in Hack

Corporation for $1,500,000 on Jan 1, 2006. On
November 1, 2006, Hack declared and paid $1
million in dividends. On December 31, Hack
reported a net loss of $6 million for the year. What
amount of loss should Sox report on its income
statement for 2006 relative to its investment in
Hack?
A. $1,100,
000.
B. $2,400,000.
C. $1,500,000.
D. $1,600,000.
204. Jack Corporation purchased a 20% interest in Jill

Corporation for $1,500,000 on January 1, 2006.
Jack can significantly influence Jill. On December
10, 2006, Jill declared and paid $1 million in
dividends. Jill reported a net loss of $6 million for
the year. What amount of loss should Jack report
on its income statement for 2006 relative to its
investment in Jill?
A. $1
000,00
0.
B. $1,200,000.
C. $1,400,000.
D. $1,500,000.
205. Hawk Corporation purchased ten thousand shares

of Diamond Corporation stock in 2003 for $50 per
available for sale. Diamond's market value was
$60 per share on December 31, 2004, and $65 on
December 31, 2005. During 2006, Hawk sold all of
its Diamond stock at $70 per share. In its 2006
income statement, Hawk would report:
A. A gain of
$100,000.
B. A gain of $150,000.
C. A gain of $200,000
D. A gain of $300,000.
206. Dim Corporation purchased one thousand shares

of Witt Corporation stock in 2003 for $800 per
available for sale. Witt's market value was $400
per share on December 31, 2004, and $300 on
December 31, 2005. During 2006, Dim sold all of
its Witt stock at $350 per share. For 2006, Dim
would report:
A. A realized gain
of $50,000.
B. A recognition of unrealized losses of $400,000.
C. A loss on the sale of investments of $450,000.
D. A trading gain of $50,000 and an unrealized loss of $50
207. Dicker Furriers purchased one thousand shares of

Loose Corporation stock on January 10, 2005, for
$800 per share and classified the investment as
securities available for sale. Loose's market value
was $400 per share on December 31, 2005. As of
December 31, 2006, Dicker still owned the Loose
stock whose market value has declined to $100
per share. The decline is due to a reason that's
judged to be other than temporary. Dicker's
December 31, 2006, balance sheet and the 2006
income statement would show the following:
A. Item
A
B. Item B
C. Item C
D. Item D
208. In 2004, Osgood Corporation purchased $4 million

in ten-year municipal bonds at face value. On
December 31, 2006, the bonds had a market
value of $3,600,000 and Osgood reclassified the
bonds from held to maturity to trading securities.
Osgood's December 31, 2006, balance sheet and
the 2006 income statement would show the
following:
A. Item
A
B. Item B
C. Item C
D. Item D
At the start of the current year, SBC Corp. purchased 30% of Sky Tech Inc. for $45 million. At
the time of purchase, the carrying value of Sky Tech's net assets was $75 million. The fair
market value of Sky Tech's depreciable assets was $15 million in excess of their book value.
For this year, Sky Tech reported a net income of $75 million and declared and paid $15 million
in dividends.
209. The amount of purchased goodwill is:
A. $18
million.
B. $30 million.
C. $60 million.
210. The total amount of additional depreciation to be

recognized over the remaining life of the assets
is:
A. $4.5
million.
B. $15 million.
C. $27 million.
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Practice For Midterm 1

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Practice For Midterm 1

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practice for midterm 1

1. The net assets of a corporation equal to:

2. Characteristics of the corporate form that have led

3. Retained earnings represent:

4. The two primary components of shareholders'

A. Preferred stock and

5. Unrealized pension cost is included among

6. Details of each class of stock must be reported:

A. On the face of the

7. In terms of business volume, the dominant form of

8. The corporate charter sometimes is known as (a):

9. The preemptive right refers to the shareholder's

10. Common shareholders usually have all of the

11. Corporations are formed in accordance with:

12. Preferred stock is called preferred because it

13. The par value of shares issued is normally

14. Authorized capital stock refers to the total number

15. The par value of common stock represents:

A. The arbitrary dollar amount

16. Which of the following statements is true when

17. Outstanding common stock is:

A. Stock that is performing w

18. Issued stock refers to the number of shares:

A. Vote for the

20. The Model Business Corporation Act:

21. When preferred stock carries a redemption

A. Purchase new shares as

22. Treasury shares are most often reported as:

23. When treasury shares accounted for under the

24. When treasury shares accounted for under the

A. Additional paid-in capital a

25. When treasury stock is purchased for an amount

26. When stock is issued in exchange for property, the

A. The appraised value of

27. When stock is issued under a stock subscription:

A. No entry is recorded until

28. The SEC requires that a receivable from a share

29. When preferred stock is purchased by the issuing

30. When more than one security is sold for a single

31. The retained earnings balance reported on the

32. When dividends are declared in one fiscal year

33. When a property dividend is declared, the

A. The book value of the

34. Any dividend that is considered to be a liquidating

35. Retained earnings represent a company's:

36. When a property dividend is declared, the property

37. The declaration and issuance of a common stock

A. Has no effect on assets,

38. Stock splits are issued primarily to:

A. Increase the number

39. A small stock dividend is defined as one that is:

40. The common stock account on a company's

41. How many of Levi's common shares were

Use the following to answer questions 91-94:

42. What was the average price of the additional

43. What was the average price (rounded) of the

The 12/31/05 balance sheet of Despot Inc. included the following:

45. In January, 2006, Despot recorded a transaction

The transaction was:

A. Issue of 2 million shares of

46. In February, 2006, Despot declared cash

47. In October, 2006, Despot's Board of Directors

48. Which of the following Despot transactions