Solution
Robert answered on
Dec 24 2021
Ques no. 1 -On October 15, Year 1, Kam Corp. informed
Finn Co. that Kam would be unable to repay its $100,000 note
due on October 31 to Finn. Finn agreed to accept title to
Kam's computer equipment in full settlement of the note. The
equipment's ca
ying value was $80,000 and its fair value was
$75,000. A similar event occu
ed last year with another
creditor. What amounts should Kam report as ordinary gain
(loss) and extraordinary gain for the year ended September 30,
Year 2?
Ordinary gain (loss) Extraordinary gain
A. $ (5,000) $17,500
B. $0 $20,000
C. $0 $14,000
D. $20,000 $0
Solution:- Answer (A) is co
ect
Ordinary gain (loss) = $(5000)
Extraordinary gain =$17500
Explanation :- Kam recognizes an ordinary loss of $5,000 on
disposal of the equipment. This is the difference between the
equipment's $80,000 ca
ying value, and its $75,000 fair
value. Extraordinary gain has been calculated assuming
company’s tax rate is 30%. Otherwise extraordinary gain
would have been $ 25000.
Ques 2- Zinc Co.'s adjusted trial balance at December 31
includes the following account balances:
Common stock, $3 par $600,000
Additional paid-in capital 800,000
Treasury stock, at cost 50,000
Net unrealized loss on available-for-sale marketable equity
securities 20,000
Retained earnings: Appropriated for uninsured earthquake
losses 150,000
Retained earnings: Unappropriated 200,000
What amount should Zinc report as total stockholders' equity
in its December 31 balance sheet?
A. $1,680,000
B. $1,720,000
C. $1,780,000
D. $1,820,000
Solution: Answer (A) is co
ect.
Explanation :- Stockholders' equity is $1,680,000= $600,000
+ $800,000 - $50,000 - $20,000 + $150,000 + $200,000.
Each item listed belongs to stockholders equity. The treasury
stock and net unrealized loss are negative items (debits), but
the rest are positive items (credits).
Ques 3:- During the previous year, Brad Co. issued 5,000
shares of $100 par convertible prefe
ed stock for $110 per
share. One share of prefe
ed stock can be converted into three
shares of Brad's $25 par common stock at the
option of the prefe
ed shareholder. On December 31 of the
cu
ent year, when the market value of the
common stock was $40 per share, all of the prefe
ed 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?
Common stock Additional paid-in capital
A.$375,000 $ 175,000
B.$375,000 $ 225,000
C.$500,000 $ 50,000
D.$600,000 $ 0
Solution :- Answer (A) is co
ect
Common stock = $375,000
Additional paid-in capital =$175,000
Explanation :- One share of prefe
ed stock can be converted
into three shares. Therefore 15000 (i.e 5000*3) shares were
issued.
The common stock account is credited for the par value of
these shares i.e $375000 (15000*$25).
Additional paid in capital – common stock ($550000-
$375000= $175000) is credited for the difference between the
ca
ying amount of prefe
ed stock and par value of common
stock (5000*110 =$550000) and par value of the common
stock.
Note:- the market value of the common stock of $40 per share
is ignored . and book value method has been used for
conversion.
Ques 4- Beck Corp. issued 200,000 shares of common stock
when it began operations two years ago and issued an
additional 100,000 shares in the past year. Beck also issued
prefe
ed stock convertible to 100,000 shares of
common stock. In the cu
ent year Beck purchased 75,000
shares of its common stock and held it in
Treasury. At December 31 of the cu
ent year, how many
shares of Beck's common stock were outstanding?
(A) 400,000
(B) 325,000
(C) 300,000
(D) 225,000
Solution:- Answer (B) is co
ect
Explanation :- (200,000+100,000+100,000-75,000)=
325000
Ques 5:- Grid Corp. acquired some of its own common shares
at a price greater than both their par value and original
issue price but less than their book value. Grid uses the cost
method of accounting for treasury stock. What is
the impact of this acquisition on total stockholders' equity and
the book value per common share?
Total stockholders' Equity Book value per share
(A) Increase Increase
(B) Increase Decrease
(C) Decrease Increase
(D) Decrease Decrease
Solution :- Answer (C) is co
ect
Total stockholders' equity =Decrease
Book value per share= Increase
Explanation :- The acquisition of treasury stock at a price
less than their book value will-
1. Decrease stockholders' equity in total. All treasury stock
transactions decrease total equity.
2. Increase book value per share.
As under cost method of accounting for treasury stock,
treasury stock account is debited, for the purchase price. Such
account is contra stockholder’s equity account , therefore
stockholders' equity in total will decrease and treasury stock
was purchased at price below book value per share ,the
overall book value per share will increase because the
difference between book value and purchase price will be
added to remaining outstanding shares
Ques 6:- A company should report the marketable equity
securities that it has classified as trading at
(A) Lower of cost or market, with holding gains and losses
included in earnings.
(B) Lower of cost or market, with holding gains included
in earnings only to the extent of previously recognized
holding losses.
(C) Fair value, with holding gains included in earnings
only to the extent of previously recognized holding
losses
(D) Fair value, with holding gains and losses included in
earnings
Solution :- Answer (D) is co
ect
Explanation :-A company should report the marketable
equity securities that it has classified as trading at Fair value,
with holding gains and losses included in earnings. Trading
securities are those held principally for sale in near term. They
are classified as cu
ent and consist of debt securities and
equity securities with readily determinable fair values.
Unrealised holding gains and losses on trading securities are
eported in earnings. On a statement of financial position,
these securities are reported at fair value.
Ques 7:- At year end, Rim Co. held several investments with
the intent of selling them in the near term. The
investments consisted of $100,000, 8%, five-year bonds,
purchased for $92,000, and equity securities
purchased for $35,000. At year end, the bonds were selling on
the open market for $105,000 and the equity
securities had a market value of $50,000. What amount should
Rim report as trading securities in its year-end
alance sheet?
(A) $ 50,000
(B) $ 127,000
(C) $ 142,000
(D) $ 155,000
Solution:- Answer (D) is co
ect
Explanation:- Trading securities, both debt and equity, are to
e reported at fair value at the end of the cu
ent reporting
period.
Bonds FMV at year end is equal to $105,000
Equities FMV at year end is equal to $50,000
Total reportable amount is equal to $155,000
Ques 8:- Whether recognized or unrecognized in an entity’s
financial statements, disclosure of the fair values of the
entity’s financial instruments is required when.
It is practicable to Aggregated fair values
estimate those values are material to the entity
(A) No No
(B) No Yes
(C) Yes No
(D) Yes Yes
Solution :- Answer (D) is co
ect
It is practicable to estimate those values :Yes
Aggregated fair values are material to the entity: Yes
Explanation:- Whether recognized or unrecognized in an
entity’s financial statements, disclosure of the fair values of
the entity’s financial instruments is required when.
1- It is practicable to estimate those values
2-Aggregated fair values are material to the entity
Entities must disclose the fair market value of financial
instruments, both assets and liabilities whether recognized or
not recognized in the statement of financial position, for
which it is practicable to estimate fair value. Pertinent
descriptive information as to the fair value of the instrument is
to be disclosed if an estimate of fair value cannot be made
without incu
ing excessive costs.
Ques 9:- Porter Co. began its business last year and issued
10,000 shares of common stock at $3 per share. The par
value of the stock is $1 per share. During...