Chapter 17 QUIZ—Earnings Per Share and Retained Earnings
MULTIPLE CHOICE
QUESTION # 1
1. Which one of the following indicators is intended to show the potential impacts of possible future events on a corporation’s performance?
a. | basic earnings per share |
b. | cash flow per share |
c. | diluted earnings per share |
d. | price/earnings ratio |
QUESTION # 2
6. Basic earnings per share is computed as
a. | Net Income / Total Number of Common Shares Outstanding |
b. | (Net Income- Preferred Dividends) / Total Number of Common Shares Outstanding |
c. | (Net Income- Preferred Dividends) / Weighted-Average Number of Common Shares Outstanding |
d. | Net Income / Weighted-Average Number of Common Shares Outstanding |
QUESTION # 3
8. Which of the following items would not be included in a basic earnings per share calculation?
a. | undeclared dividends on noncumulative preferred stock |
b. | declared dividends on noncumulative preferred stock |
c. | undeclared dividends on cumulative preferred stock |
d. | declared dividends on cumulative preferred stock |
QUESTION # 4
9. On January 1, 2010, Walters Corporation had 24,000 shares of common stock outstanding. On April 1, it reacquired 2,400 shares; on July 1, it issued 10,800 shares; on October 1, it issued another 9,600 shares; and on December 1, it reacquired 600 shares. The weighted average number of common shares outstanding for 2010 was
a. | 26,950 |
b. | 28,900 |
c. | 29,950 |
d. | 41,400 |
QUESTION # 5
10. On January 1, 2010, Brennen Corporation had 20,000 shares of common shares outstanding. During the year, it sold another 2,600 shares on July 1 and reacquired 600 shares on November 1. The corporation earned $337,600 net income. The company also has 15,000 shares of $10 par value, 6%, cumulative preferred stock on which no dividends have been declared for the last two years. The basic earnings per share for the year is
a. | $15.92 |
b. | $15.65 |
c. | $15.50 |
d. | $15.08 |
QUESTION # 6
12. On January 1, a corporation had 10,380 shares of common stock outstanding. On August 1, it sold an additional 6,000 shares. During the year, dividends of $4,800 and $56,000 were declared and paid on the common and preferred stock, respectively. Net income for the year was $240,000. The basic earnings per share for the year was
a. | $10.56 |
b. | $11.23 |
c. | $14.29 |
d. | $18.63 |
QUESTION # 7
13. On January 1, 2010, a corporation had 10,380 shares of common stock outstanding, and on June 1, it reacquired 6,000 shares. Despite a net loss for the year of $180,000, the company declared and paid cash dividends of $24,000 and $28,000 on common and preferred stock, respectively. The earnings per share for 2010 was
a. | ($33.72) |
b. | ($30.24) |
c. | ($22.10) |
d. | ($18.60) |
QUESTION # 8
15. On January 1, 2010, Smith Company had 21,000 shares of common stock outstanding and issued an additional 4,500 shares on May 1. The company declared and paid a cash dividend of $30,000 and earned $330,000 net income. The earnings per share for the year was
a. | $15.00 |
b. | $13.75 |
c. | $12.94 |
d. | $12.50 |
QUESTION # 9
16. Common shares outstanding are increased as a result of a stock dividend or stock split. For purposes of calculating the earnings per share, when is the stock dividend or stock split considered to have occurred?
a. | at the beginning of the earliest comparative period for which earnings per share information is presented |
b. | at the end of the earliest comparative period for which earnings per share information is presented |
c. | at the beginning of the year declared |
d. | as of the date of declaration |
QUESTION # 10
17. On January 1, a corporation had 20,000 shares of common stock outstanding. An additional 4,000 shares were issued on July 1, and on November 1, the company declared a 3-for-1 stock split. The denominator in the earnings per share calculation would be
a. | 36,000 |
b. | 56,000 |
c. | 66,000 |
d. | 72,000 |
QUESTION # 11
18. On January 1, a corporation had 60,000 shares of common stock outstanding. On March 1, the company reacquired 12,000 shares, and it declared a 10% stock dividend on October 1. The denominator in the earnings per share calculation would be
a. | 44,200 |
b. | 40,800 |
c. | 55,000 |
d. | 60,000 |
QUESTION # 12
22. Reporting diluted earnings per share is required for which type of corporate capital structure?
a. | simple |
b. | complex |
c. | diluted |
d. | primary |
QUESTION # 13
25. The potential dilutive effect of the exercise of stock options or warrants will affect which of the following when calculating diluted earnings per share?
a. | the earnings per share numerator |
b. | the earnings per share denominator |
c. | both the numerator and the denominator |
d. | neither the numerator nor the denominator |
QUESTION # 14
27. Dual presentation of the basic and diluted earnings per share amounts is
a. | required for corporations with simple capital structures |
b. | optional for corporations with simple capital structures |
c. | optional for corporations of any structure |
d. | required for corporations with complex capital structures |
QUESTION # 15
29. Smock Corporation had 30,000 shares of common stock outstanding during the year. In addition, there were compensatory stock options to purchase 3,000 shares of common stock at $20 a share outstanding the entire year. The average market price for the common stock during the year was $36 a share. The unrecognized compensation cost (net of tax) relating to these options was $4 a share. The denominator to compute the diluted earnings per share is
a. | 31,000 |
b. | 31,333 |
c. | 31,667 |
d. | 33,000 |
QUESTION # 16
30. Under the treasury stock method, the number of shares of common stock assumed to be reacquired is determined by using the
a. | ending market price of the stock |
b. | average market price of the stock |
c. | beginning market price of the stock |
d. | par value of the stock |
QUESTION # 17
31. The assumed conversion of convertible debt and preferred stock in diluted earnings per share calculations affects
a. | the numerator only |
b. | the denominator only |
c. | both the numerator and denominator |
d. | neither the numerator nor the denominator |
QUESTION # 18
34. In the determination of the diluted earnings per share, convertible securities are
a. | included if they are dilutive |
b. | included whether they are dilutive or not |
c. | included if they are antidilutive |
d. | not included |
QUESTION # 19
35. Interest expense on convertible bonds that are dilutive is included in the numerator of the diluted earnings per share calculation at an amount equal to
a. | interest expense |
b. | interest payable |
c. | interest expense times the tax rate |
d. | interest expense times one minus the tax rate |
QUESTION # 20
36. The term deficit in financial accounting means
a. | net loss |
b. | a negative retained earnings balance |
c. | a negative cash balance |
d. | a negative stockholders’ equity total |
QUESTION # 21
37. How will a company’s working capital and net income be affected by the recording of a cash dividend on the declaration date? (Assume the dividend is paid on a later date.)
Working Capital | Net Income | |
I. | decrease | decrease |
II. | decrease | no effect |
III. | no effect | no effect |
IV. | no effect | decrease |
a. | I |
b. | II |
c. | III |
d. | IV |
QUESTION # 22
45. The Carol Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $600,000 and common stock with a total par value of $900,000. No dividends are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $141,000 are distributed?
a. | $ 60,000 and $90,000 |
b. | $114,000 and $27,000 |
c. | $ 51,000 and $90,000 |
d. | $ 60,000 and $81,000 |
QUESTION # 23
46. The Farmer Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $300,000 and common stock with a total par value of $900,000. Dividends for one previous year are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $222,000 are distributed at the end of the current year?
a. | $85,500 and $136,500 |
b. | $78,000 and $144,000 |
c. | $60,000 and $162,000 |
d. | $55,500 and $166,500 |
QUESTION # 24
49. On November 1, 2010, the Metal Construction Company declared a property dividend payable in the form of bonds held for long-term investment purposes. The bonds will be distributed to the common stockholders on December 15, 2010. The bonds to be distributed to the common stockholders originally cost Metal $210,000. Fair value of the bonds on various dates is as follows:
December 31, 2009 | $220,000 |
November 1, 2010 | 225,000 |
December 15, 2010 | 230,000 |
Which one of the following amounts should be used to record the appropriate credit to Property Dividends Payable?
a. | $210,000 |
b. | $220,000 |
c. | $225,000 |
d. | $230,000 |
QUESTION # 25
51. How will a company’s total current liabilities and total stockholders’ equity be affected by the declaration of a stock dividend? (Assume the stock dividend is distributed at a later date.)
Total | Total | |
Current Liabilities | Stockholders’ Equity | |
I. | increase | decrease |
II. | increase | no effect |
III. | no effect | decrease |
IV. | no effect | no effect |
a. | I |
b. | II |
c. | III |
d. | IV |
Exhibit 17-1
The Zoeller Corporation’s stockholders’ equity accounts have the following balances as of December 31, 2010:
Common stock, $10 par (30,000 shares issued | |
and outstanding) | $ 300,000 |
Additional paid-in capital | 2,000,000 |
Retained earnings | 5,700,000 |
Total stockholders’ equity | $8,000,000 |
QUESTION # 26
52. Refer to Exhibit 17-1. On January 2, 2011, the board of directors of Zoeller declared a 30% stock dividend to be distributed on January 31, 2011. The market price per share of Zoeller’s common stock was $30 on January 2 and $32 on January 31. As a result of this stock dividend, the retained earnings account should be decreased by
a. | $ 90,000 |
b. | $270,000 |
c. | $288,000 |
d. | zero; only a memorandum entry is required |
QUESTION # 27
54. The Martin Company’s stockholders’ equity accounts have the following balances as of December 31, 2010:
Common stock, $20 par (25,000 shares issued of which | ||
2,000 are being held as treasury stock) | $ 500,000 | |
Additional paid-in capital | 750,000 | |
Retained earnings | 2,250,000 | |
$3,500,000 | ||
Less: Treasury stock (2,000 shares at cost) | (120,000) | |
Total stockholders’ equity | $3,380,000 | |
On January 2, 2011, the board of directors of Martin declared a 10% stock dividend to be distributed on February 15, 2011. The market price of Martin Company’s common stock was $65 per share on January 2, 2011. On the date of declaration, the retained earnings account should be decreased by
a. | zero; only a memorandum entry is required |
b. | $ 50,000 |
c. | $149,500 |
d. | $162,500 |
QUESTION # 28
55. A dividend that represents a return of capital rather than a distribution of retained earnings is called a
a. | property dividend |
b. | stock dividend |
c. | capital dividend |
d. | liquidating dividend |
QUESTION # 29
56. When a company is determining its dividend policy, the company must adhere to legal requirements. The legal requirements are determined by the
a. | Financial Accounting Standards Board (FASB) |
b. | state in which the company was incorporated |
c. | Securities and Exchange Commission (SEC) |
d. | Federal Trade Commission (FTC) |
QUESTION # 30
57. If a company makes a prior period adjustment, which of the following describes how it must be reported?
a. | The adjustment is recorded in retained earnings, and previous years’ financial statements presented for comparative purposes are not changed. |
b. | The adjustment is recorded in retained earnings, and previous years’ financial statements presented for comparative purposes are adjusted. |
c. | The adjustment is reported in the current period’s income statement as a separate item. |
d. | The adjustment is recorded as a deferred asset or deferred liability and amortized using the straight-line method. |
QUESTION # 31
60. Which of the following could be a component of other comprehensive income (loss)?
a. | realized gains or losses from sale of investments in available-for-sale securities |
b. | translation adjustments from converting the financial statements of a company’s foreign operations into U.S. dollars |
c. | gains (losses) on extraordinary items |
d. | warranty liability adjustments |
QUESTION # 32
61. How may a corporation report its types of comprehensive income?
a. | It may report the amount of accumulated other comprehensive income for each item as part of stockholders’ equity. |
b. | It may report the total amount of accumulated other comprehensive income for all the items as part of stockholders’ equity. |
c. | It may make footnote disclosures of totals only. |
d. | It may report the amount of accumulated other comprehensive income for each item or in total as part of stockholders’ equity. |
QUESTION # 33
63. The following information is provided for the Columbus Company:
Deferred compensation payable-stock appreciation rights | $ 10 |
Bonds payable | 120 |
Additional paid-in capital on common stock | 20 |
Donated capital | 16 |
Treasury stock (at cost) | 8 |
Common stock, $1 par | 100 |
Common stock option warrants | 40 |
Unrealized increase in value of available for sale securities | 28 |
Additional paid-in capital from treasury stock | 3 |
Retained earnings | 57 |
What is the total stockholders’ equity of Columbus Company?
a. | $212 |
b. | $228 |
c. | $256 |
d. | $272 |
e. | none of these |
QUESTION # 34
65. When recording the receipt of donated assets, the credit could be to
a. | Retained Earnings |
b. | Donated Capital |
c. | Gain on Donations |
d. | a contra account to the asset |
QUESTION # 35
67. Which of the following stockholders’ equity disclosures are required under both GAAP and IFRS?
a. | capital not yet paid in |
b. | restrictions on the repayment of capital |
c. | dividend preferences |
d. | shares reserved for future issuances under sales contracts |
QUESTION # 36
68. The two defined sections of stockholders’ equity under IFRS are
a. | contributed capital and other equity |
b. | share capital and retained earnings |
c. | contributed capital and retained earnings |
d. | share capital and other equity |
QUESTION # 37
69. Differences exist between IFRS and GAAP in the reporting of EPS. Which of the following areas is not an area of difference?
a. | adjustment in options calculations for unrecognized compensation cost |
b. | treatment of unvested contingently issued shares |
c. | treatment of dividends in arrears for convertible preferred stock |
d. | treatment of contracts that may be settled in shares or for cash |
QUESTION # 38
70. Specific EPS disclosure is regularly reported for extraordinary items under
IFRS | GAAP | |
I. | yes | no |
II. | no | yes |
III. | yes | yes |
IV. | no | no |
a. | I |
b. | II |
c. | III |
d. | IV |