Chapter 15: Contributed Capital
54. Assume common stock is issued to employees as a result of exercising stock purchase rights issued under a
noncompensatory share purchase plan. Which of the following accurately describes the effect on the company‘s
income, paid-in capital, and retained earnings, respectively?
a.
decreased, increased, and decreased
b.
no effect, increased, and increased
c.
decreased, increased, and no effect
d.
no effect, increased, and no effect
d
1
Easy
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Bloom’s: Remembering
55. How will shareholders’ equity and net income be affected by the issuance of stock purchase rights to employees under
a noncompensatory share purchase plan?
Shareholders’ Equity
Net Income
I.
no effect
no effect
II.
no effect
decreased
III.
decreased
decreased
IV.
decreased
no effect
a.
b.
c.
d.
a
1
Moderate
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Bloom’s: Understanding
56. For a noncompensatory employee stock option plan, a formal journal entry or entries would be required for which of
the following events?
Issuance of Stock
Issuance of Stock
Purchase Rights
Under the Plan
I.
Yes
Yes
II.
Yes
No
III.
No
No
IV.
No
Yes
a.
b.
c.
d.
d
1
Moderate
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Bloom’s: Understanding
57. A share option plan will be defined as compensatory if it has which one of the following characteristics?
a.
The discount from market price for the stock option is greater than either what would be reasonable in an offer
of stock to shareholders or others or the per-share amount of issuance costs avoided by not issuing the stock to
the public.
b.
Employees have 31 days or less from the date the purchase price is set to decide whether or not to enroll in the
plan.
c.
Almost all full-time employees are able to participate in the plan.
d.
The purchase price is based solely on the market price of the stock on the purchase date.
a
1
Moderate
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Chapter 15: Contributed Capital
58. Which one of the following statements is not true with regard to employee compensatory share option plans?
a.
When a stock option is exercised under a compensatory stock option plan, the newly issued common stock is
recorded at the exercise price and the value of the options at the grant date.
b.
When stock warrants are issued under a noncompensatory stock option plan, no formal journal entry is
required to record the stock warrants.
c.
When a stock option is exercised under a compensatory stock option plan, the newly issued common stock is
recorded at the exercise price and the previously recorded value of the warrants.
d.
For federal income tax purposes, any gains resulting from stock options earned by employees are taxed at
ordinary income tax rates.
a
1
Moderate
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59. When share options are exercised by an employee under a compensatory share option plan, the issuance of the
common stock is recorded at the
a.
amount of cash received.
b.
amount of cash received less the previously recorded value of the options received.
c.
amount of cash received plus the previously recorded value of the options received.
d.
market price minus the share option price.
c
1
Easy
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60. How is Paid-in Capital from Share Options classified in the financial statements?
a.
expense account
b.
liability account
c.
deferred expense account
d.
shareholders’ equity account
d
1
Moderate
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61. Which of the following share option plans would involve the creation of a liability account over the life of the plan?
a.
all share option plans
b.
fixed compensatory share option plans
c.
performance-based compensatory share option plans
d.
share option plans with stock appreciation rights
d
1
Moderate
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62. Which of the following should normally be accounted for under the fair value method?
a.
share option plan with share appreciation rights
b.
fixed share option plan
c.
performance-based share option plan
d.
All of these answer choices would normally be accounted for under the fair value method.
d
1
Easy
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63. Under the fair value method, the grant date is the date:
a.
of the compensation agreement.
b.
the options are issued.
c.
the options are exercised.
d.
the options vest.
a
1
Easy
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64. Under the fair value method, if an executive does not exercise a stock option and it is allowed to lapse, the account –
Paid-in Capital Share Options – is debited. What account is credited?
a.
Additional Paid-In Capital from Expired Share Options
b.
Compensation Expense
c.
Gain from Expired Share Options
d.
Deferred Compensation
a
1
Easy
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65. When accounting for a fixed compensatory share option plan, a company must record which of the following on the
date of grant?
a.
a journal entry recognizing the common stock issued
b.
a journal entry recognizing the compensation expense
c.
a memorandum entry explaining the terms of the compensatory share option plan
d.
a memorandum entry of the expected annual compensation expense amount
c
1
Easy
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Bloom’s: Remembering
66. On January 1, 2016, Watchtower Corporation granted Emma Freegross, its president, a compensatory stock option
plan to purchase 8,000 shares of Watchtower’s $10 par common stock. The option price is $25 per share and the
option has a fair value of $7 per option. The option is exercisable on January 1, 2020, after four years of service. How
much compensation expense should Watchtower recognize on December 31, 2016?
a.
$0
b.
$14,000
c.
$56,000
d.
b
1
Moderate
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$80,000
Exhibit 15-3
On January 1, 2016, Howard, Inc. granted to a key executive a fixed compensatory share option plan for 1,000 shares
of $4 par common stock for $30 a share. The fair value per option on that date was $14. The service period extended
through December 31, 2017.
67. Refer to Exhibit 15-3. What entry, if any, was required on December 31, 2016?
a.
no entry was necessary
b.
Compensation Expense 7,000
Paid-in Capital Share Options 7,000
c.
Compensation Expense 6,000
Paid-in Capital Share Options 6,000
d.
Compensation Expense 9,000
Deferred Compensation 9,000
b
1
Moderate
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68. Refer to Exhibit 15-3. Which balance sheet disclosure would be correct at December 31, 2016?
a.
Shareholders’ equity:
Paid-in Capital Share Options $ 7,000
b.
Liabilities:
Employee stock option plan $ 7,000
c.
Shareholders’ equity:
Paid-in Capital Share Options $ 7,000
Less: Deferred compensation 7,000
$14,000
d.
a
1
Moderate
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Bloom’s: Understanding
footnote disclosure only
Exhibit 15-4
On January 1, 2016, Masters, Inc., grants a compensatory share option plan to 15 of its executives. The plan allows
each executive to buy 1,000 shares of its $1 par common stock at $30 per share after a three-year service period. At
January 1, 2016, the value of each option is estimated to be $9. The company also estimates it will have an annual 3%
employee turnover rate during the service period.
69. Refer to Exhibit 15-4. What is the compensation expense for the year ended December 31, 2017?
a.
$0
b.
$ 41,070
c.
$135,000
d.
$123,211
b
1
Moderate
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70. Refer to Exhibit 15-4. By how much has contributed capital increased as of the beginning of 2019?
a.
$0
b.
$ 41,070
c.
$135,000
d.
$123,211
d
1
Moderate
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71. For a compensatory share option plan, any compensation cost related to the plan must be recognized over the service
period. The underlying financial accounting concept that supports this approach is
a.
revenue recognition.
b.
matching.
c.
conservatism.
d.
historical cost.
b
1
Easy
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72. For a compensatory share option plan, a formal journal entry or entries would be required for which of the following
dates?
Issuance of Share
Options on the
Issuance of Stock on
Grant Date
the Exercise Date
I.
Yes
Yes
II.
Yes
No
III.
No
No
IV.
No
Yes
a.
b.
c.
d.
d
1
Moderate
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Exhibit 15-5
On January 1, 2016, Roberts Company adopts a compensatory share option plan and grants 40 executives 1,000
shares each at $30 a share. The fair value per option is $7 on the grant date. The company estimates that its annual
employee turnover rate during the service period of three years will be 4%.
73. Refer to Exhibit 15-5. The journal entry to record compensation expense for 2016 will be (Round your final answer to
the nearest whole dollar.)
a.
Compensation Expense 247,726
Paid-in Capital Share Options 247,726
b.
Compensation Expense 82,575
Paid-in Capital Share Options 82,575
c.
Compensation Expense 91,467
Paid-in Capital Share Options 91,467
d.
Compensation Expense 93,333
Common Stock Option Plan 93,333
b
1
Moderate
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74. Refer to Exhibit 15-5. At the end of 2017, the company estimates that the employee turnover will be 5% a year for the
entire service period. The compensation expense for 2017 will be (Round your answer to the nearest whole dollar.)
a.
$77,468
b.
$80,022
c.
$82,575
d.
$160,043
a
1
Moderate
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75. Refer to Exhibit 15-5. At the end of 2017, the company estimates that the employee turnover will be 5% a year for the
entire service period. At the end of 2018, only 30,000 options vest as only 30 of the 40 executives actually remain.
The compensation expense for 2018 will be (Round off turnover calculations to three decimal places and answer to
the nearest dollar.)
a.
$49,957
b.
$70,000
c.
$80,022
d.
$82,575
a
1
Moderate
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Chapter 15: Contributed Capital
Exhibit 15-6
On January 1, 2016, 50 executives were given a performance-based share option plan that would award them with a
maximum of 300 shares of $10 par common stock for $20 a share. On the grant date, the fair value of an option was
$16.50. The number of options that will vest depends on the size of the annual average increase in sales over the next
three years according to the following table:
Annual Average Increase in Sales
No. of Shares
Greater than 5%
50
Greater than 10%
150
Greater than 15%
300
On the grant date, the company estimates the annual average sales increase will be 14%.
76. Refer to Exhibit 15-6. The estimated total compensation cost will be
a.
$55,000.
b.
$123,750.
c.
$27,500.
d.
$247,500.
b
1
Moderate
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77. Refer to Exhibit 15-6. In 2017, the company determined that the actual annual average increase was 16%. The
compensation expense for 2017 will be
a.
$123,750
b.
$247,500
c.
$82,500
d.
$55,000
a
1
Moderate
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Chapter 15: Contributed Capital
Exhibit 15-7
On January 1, 2016, 70 executives were granted a performance-based share option plan that would award them each a
maximum of 300 shares of $5 par common stock for $12 a share based on the increase in sales over the next three
years. The fair value per option on the grant date was $16. The award table is as follows:
Increase in Sales
No. of Shares
10%
100
15%
200
20%
300
The company estimates that the sales increase will be 22% and that the annual employee turnover rate will be 2%.
78. Refer to Exhibit 15-7. The compensation expense for 2016 is (to the nearest dollar)
a.
$82,320.
b.
$105,414.
c.
$109,760.
d.
$210,828.
b
1
Moderate
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79. Refer to Exhibit 15-7. In 2017 the actual sales increase was determined to be 18%, and the overall turnover rate was
exactly 2%. The compensation expense for 2017 is (to the nearest dollar)
a.
$210,828.
b.
$140,552.
c.
$70,276.
d.
$35,138.
d
1
Moderate
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80. For a stock appreciation rights (SAR) compensation plan, the measurement date is the date
a.
on which the options (SARs) are granted to the employees.
b.
when the employees may first exercise the options (SARs).
c.
on which the options (SARs) are exercised.
d.
of the adoption of the plan.
c
1
Moderate
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81. The accounting method that is used for share appreciation rights (SARs) compensation plans is similar to the
accounting procedures that can be used for
a.
fixed compensatory share option plans.
b.
performance-based share option plans.
c.
noncompensatory share option plans.
d.
both fixed compensatory and performance-based share option plans.
d
1
Easy
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82. For share appreciation rights (SARs) compensation plans where the employee is expected to receive cash on the
exercise date, the account that is credited in the year-end adjusting journal entry to recognize the compensation
expense is
a.
Deferred Compensation.
b.
SAR Compensation Payable.
c.
Common Stock Option Warrants: SARs.
d.
Compensation Expense.
b
1
Easy
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Chapter 15: Contributed Capital
Exhibit 15-8
On January 1, 2016, Margarita Company granted share appreciation rights (SARs) to the president, which permitted
her to receive cash or stock for the difference between the quoted market price and $50 for 2,000 shares of the
company’s stock on the exercise date. The service period ends on December 31, 2018, and the rights must be
exercised by December 31, 2021. Assume that on December 31, 2019, the president exercises all of her rights and
receives cash. Using an options pricing model, the estimated fair values of the SARs were as follows:
January 1, 2016
$10
December 31, 2016
15
December 31, 2017
20
December 31, 2018
19
December 31, 2019
23
83. Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2016?
a.
$3,333
b.
$10,000
c.
$30,000
d.
$33,333
b
1
Moderate
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84. Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2017?
a.
$13,333
b.
$16,667
c.
$26,667
d.
$40,000
b
1
Moderate
United States – BUSPORG: Analytic
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Bloom’s: Analyzing
85. Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2018?
a.
$11,333
b.
$12,667
c.
$13,333
d.
$38,000
a
1
Moderate
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86. Refer to Exhibit 15-8. What is the compensation expense related to the SARs for the year ending December 31, 2019?
a.
$0
b.
$8,000
c.
$11,500
d.
$15,333
b
1
Moderate
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87. Preferred shareholders share with common shareholders in any “extra” dividends when the preferred stock is
a.
cumulative.
b.
callable.
c.
participating.
d.
convertible.
c
1
Easy
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88. Which of the following methods should be used to account for the conversion of preferred stock to common stock?
Book Value
Market Value
I.
Yes
No
II.
Yes
Yes
III.
No
Yes
IV.
No
No
a.
b.
c.
d.
a
1
Easy
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89. Dividends in arrears pertain to
a.
non-cumulative preferred stock.
b.
non-participating preferred stock.
c.
cumulative preferred stock.
d.
convertible preferred stock.
c
1
Easy
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90. Budget Leasing issued 500 shares of $20 par value convertible preferred stock at $22 per share. Each preferred share
is converted to 7 shares of $4 par value common stock. The entry to record this conversion would include a
a.
debit to Additional Paid-in Capital on Preferred Stock for $11,000.
b.
credit to Common Stock for $11,000.
c.
debit to Retained Earnings for $3,000.
d.
credit to Additional Paid-in Capital from Preferred Stock Conversion for $3,000.
c
1
Moderate
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91. Wally, Inc. issued 500 shares of $10 par preferred stock at $83 a share. Each share had a warrant attached that allowed
the holder to purchase one share of $5 par common stock for $15. Soon after the preferred stock was issued, the
preferred stock was selling ex-rights for $64 a share, and the warrants were selling for $16 each. The entry to record
the issuance of the preferred stock would include a
a.
debit to Retained Earnings for $8,300.
b.
credit to Additional Paid-in Capital on Preferred Stock for $28,200.
c.
debit to Common Stock Warrants for $8,300.
d.
credit to Additional Paid-in Capital on Common Stock for $8,300.
b
1
Moderate
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92. Since its organization in January of 2016, Mars Corp. began with the issuance of 15,000 shares of $5 par, cumulative,
8% preferred stock and 15,000 shares of common stock shares, which are still outstanding. It declared its first
dividend of $40,000 at the end of 2018. This means that
a.
all of the $40,000 dividends available are paid to the preferred shareholders.
b.
all of the $40,000 dividends available are paid to the common shareholders.
c.
an equal dollar amount is paid to each class of shareholder.
d.
3 years’ worth of dividends will be paid to preferred shareholders prior to paying anything to common
shareholders.
d
1
Moderate
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Bloom’s: Applying
93. When recording the conversion of preferred stock into common stock, if the total contributed capital eliminated in
regard to the preferred stock is less than the common stock par value, the difference is debited to
a.
Additional Paid-in Capital on Preferred Stock.
b.
Additional Paid-in Capital on Common Stock.
c.
Shareholders’ Equity.
d.
Retained Earnings.
d
1
Easy
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94. The preference to dividends that preferred shareholders have is
a.
the right to receive the appropriate dividend before common shareholders are paid any dividends when
dividends are declared.
b.
the right to accumulate dividends that have not been declared.
c.
the right to share dividends equally with common shareholders when dividends are declared.
d.
the right to be paid a minimum dividend each year.
a
1
Easy
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95. When callable preferred stock is recalled, if the recall price exceeds the total of the par value in the preferred stock
account and the additional paid-in capital associated with the recalled preferred stock, the difference is
a.
credited to Retained Earnings.
b.
credited to Additional Paid-in Capital on Preferred Stock.
c.
debited to Retained Earnings.
d.
credited to Loss from Recall of Preferred Stock.
c
1
Easy
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96. Which of the following statements is true regarding dividends on preferred stock?
a.
Preferred shareholders are guaranteed an annual dividend.
b.
Preferred shareholders will receive a dividend if common shareholders are paid.
c.
Preferred dividends in arrears are a current liability.
d.
Preferred dividends in arrears are either a current or long-term liability, depending upon when the corporation
last declared a dividend.
b
1
Moderate
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97. Norwalk Corporation issued 10,000 shares of $50 par preferred stock at $74 a share. A stock warrant attached to each
preferred share allows the holder to buy one share of $10 par common stock for $20. Right after issuance, the
preferred stock sells ex–rights for $63 per share. The warrants began selling at $7 per warrant. The amount credited to
Common Stock Warrants at issuance of the preferred stock is
a.
$0.
b.
$70,000.
c.
$74,000.
d.
$160,000.
c
1
Moderate
ACCT.WHAL.16.15.6 – LO: 15.6
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Measurement
Bloom’s: Analyzing
98. Which of the following is not a reason for a corporation to acquire treasury stock?
a.
to reduce the likelihood of being acquired by another company
b.
to maintain the market price of the company’s stock
c.
to reduce the earnings per share
d.
to be used in the acquisition of other companies
c
1
Easy
ACCT.WHAL.16.15.7 – LO: 15.7
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling
Bloom’s: Analyzing
99. Which of the following statements concerning treasury stock is true?
a.
It carries voting rights.
b.
It participates in stock splits.
c.
It receives dividend distributions.
d.
It retains the preemptive right.
b
1
Easy
ACCT.WHAL.16.15.7 – LO: 15.7
United States – BUSPORG: Analytic
United States – OH – Default City – AICPA: FN-Decision Modeling