Week 4 Quiz All Questions Details given below (Please Check) Question 1 Treasury stock was acquired for cash at a price in excess of its original issue price. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the par value method of accounting for treasury stock transactions is used, what is the effect on total stockholders’ equity of each of the following events? Question 2 Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct? Question 3 On January 1, 2005, Celt Corp. issued 9% bonds in the face amount of $1,000,000, which mature on January 1, 2015. The bonds were issued for $939,000 to yield 10%, resulting in a bond discount of $61,000. Celt uses the effective interest method of amortizing bond discount. Interest is payable annually on December 31. At December 31, 2005, Celt’s unamortized bond discount should be Question 4 In 2000, May Corp. acquired land by paying $75,000 down and signing a note with a maturity value of $1,000,000. On the note’s due date, December 31, 2005, May owed $40,000 of accrued interest and $1,000,000 principal on the note. May was in financial difficulty and was unable to make any payments. May and the bank agreed to amend the note as follows: The $40,000 of interest due on December 31, 2005 was forgiven. The principal of the note was reduced from $1,000,000 to $950,000 and the maturity date extended 1 year to December 31, 2006. May would be required to make one interest payment totaling $30,000 on December 31, 2006. As a result of the troubled debt restructuring, May should report a gain, before taxes, in its 2005 income statement of Question 5 � Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders’ equity for the dividend? Question 6 On July 1, 2005, Day Co. received $103,288 for $100,000 face amount, 12% bonds, a price that yields 10%. Interest expense for the six months ended December 31, 2005 should be Question 7 On July 1, 2005, Vail Corp. issued rights to stockholders to subscribe to additional shares of its common stock. One right was issued for each share owned. A stockholder could purchase one additional share for 10 rights plus $15 cash. The rights expired on September 30, 2005. On July 1, 2005, the market price of a share with the right attached was $40, while the market price of one right alone was $2. Vail’s stockholders’ equity on June 30, 2005 comprised the following: By what amount should Vail’s retained earnings decrease as a result of issuance of the stock rights on July 1, 2005? Question 8 On January 1, 2005, Wolf Corp. issued its 10% bonds in the face amount of $1,000,000, which mature on January 1, 2015.The bonds were issued for $1,135,000 to yield 8%, resulting in bond premium of $135,000. Wolf uses the effective interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2005, Wolf’s adjusted unamortized bond premium should be Question 9 Earl was engaged by Farm Corp. to perform consulting services. Earl’s compensation for these services consisted of 1,000 shares of Farm’s $10 par value common stock, to be issued to Earl on completion of Earl’s services. On the execution date of Earl’s employment contract, Farm’s stock had a market value of $40 per share. Six months later, when Earl’s services were completed and the stock issued, the stock’s market value was $50 per share. Farm’s management estimated that Earl’s services were worth $100,000 in cost savings to the company. As a result of this transaction, additional paid-in capital should increase by Question 10 During 2005, Eddy Corp. incurred the following costs in connection with the issuance of bonds: What amount should be recorded as a deferred charge to be amortized over the term of the bonds? Question 11 The primary purpose of a quasi-reorganization is to give a corporation the opportunity to Question 12 Clay Corp. had $600,000 of convertible 8% bonds outstanding at June 30, 2005. Each $1,000 bond was convertible into 10 shares of Clay’s $50 par value common stock. On July 1, 2005, the interest was paid to bondholders and the bonds were converted into common stock, which had a fair market value of $75 per share. The unamortized premium on these bonds was $12,000 at the date of conversion. Under the book value method, this conversion increased the following elements of the stockholders’ equity section by Question 13 On December 31, 2003, Moss Co. issued $1,000,000 of 11% bonds at 109. Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to purchase one share of $5 par common stock for $25. Immediately after issuance, the market value of each warrant was $4. On December 31, 2003, what amount should Moss record as discount or premium on issuance of bonds? Question 14 During 2005, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the option of the preferred shareholder. On December 31, 2006, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to Common Stock and to Additional Paid-in Capital — Common Stock as a result of the conversion? Question 15 A company declared a cash dividend on its common stock on December 15, 2003, payable on January 12, 2004. How would this dividend affect stockholders’ equity on the following dates? Question 16 Beck Corp. issued 200,000 shares of common stock when it began operations in 2003 and issued an additional 100,000 shares in 2004. Beck also issued preferred stock convertible to 100,000 shares of common stock. In 2005, Beck purchased 75,000 shares of its common stock and held it in Treasury. At December 31, 2005, how many shares of Beck’s common stock were outstanding? Question 17 On January 2, 2005, Nast Co. issued 8% bonds with a face amount of $1,000,000 that mature on January 2, 2011. The bonds were issued to yield 12%, resulting in a discount of $150,000. Nast incorrectly used the straight-line method instead of the effective interest method to amortize the discount. How is the carrying amount of the bonds affected by the error? Question 18 Deb Co. records all sales using the installment method of accounting. Installment sales contracts call for 36 equal monthly cash payments. According to the FASB’s conceptual framework, the amount of deferred gross profit relating to collections 12 months beyond the balance sheet date should be reported in the Question 19 Mirr, Inc. was incorporated on January 1, 2005, with proceeds from the issuance of $750,000 in stock and borrowed funds of $110,000. During the first year of operations, revenues from sales and consulting amounted to $82,000, and operating costs and expenses totaled $64,000. On December 15, Mirr declared a $3,000 cash dividend, payable to stockholders on January 15, 2006. No additional activities affected owners’ equity in 2005. Mirr’s liabilities increased to $120,000 by December 31, 2005. On Mirr’s December 31, 2005 balance sheet, total assets should be reported at Question 20 The following information pertains to Meg Corp.: Dividends on its 1,000 shares of 6%, $10 par value cumulative preferred stock have not been declared or paid for 3 years. Treasury stock that cost $15,000 was reissued for $8,000. What amount of retained earnings should be appropriated as a result of these items?