EX 7 1. The Vernon Corporation was formed on January 2, 2014. The company sold 20,000 shares of $8.00 par value stock for $20.00 per share. On July 1, 2014, Vernon bought back 4,000 shares of stock for $24.00 per share. The treasury stock was resold on September 1, 2014 for $32.00 per share. Which one of the following is the correct entry to record the purchase of treasury stock? A. DR Treasury stock 96,000 CR Cash 96,000 B. DR Investments 96,000 CR Cash 96,000 C. DR Common stock 96,000 CR Cash 96,000 D. DR Retained earnings 96,000 CR Cash 96,000 2. Cheery Company follows IFRS for its financial reporting. On January 1, 2015 Cheery issued 250 million of 10-year convertible notes that pay interest at 5% annually. Investors pay 250 million for the notes even though the companys credit risk at the time implies a 10% interest rate for traditional debt of similar duration. When the cash flows associated with the debt are discounted at 10%, the resulting value is 175 million. When Cheery records interest expense on December 31, 2015 the entry will include a: A. debit to interest expense for 25 million. B. credit to Convertible notes payable for 12.5 million. C. debit to Convertible notes payable for 17.5 million. D. credit to Convertible notes payable for 5 million 3.As a result of the passage of the 1984 Revised Model Business Corporation Act, it may be fair to state that the book value of _____ an accurate picture of potentially legal distributions. A. owners equity may not give B. owners equity gives C. owners equity never gives D. assets gives 4. By examining the statement of shareholders equity an investor can determine all of the following EXCEPT: A. shares issued to employees for share-based compensation. B. unrealized losses on available-for-sale securities. C. the amount of convertible bonds issued during the year. D. dividends declared on common stock. 5. Shareholders who sell back shares of the company stock as treasury stock are: A. not taxed. B. taxed at ordinary rates. C. taxed at capital gains rates. D. subject to tax penalties. 6. Which of the following statements is correct if treasury stock costing $25,000 was sold for $27,500? A. Total owners equity increases $2,500. B. Total owners equity increases $27,500. C. Net income increases $2,500. D. Total owners equity increases $25,000. 7. The Vernon Corporation was formed on January 2, 2014. The company sold 20,000 shares of $8.00 par value stock for $20.00 per share. On July 1, 2014, Vernon bought back 4,000 shares of stock for $24.00 per share. The treasury stock was resold on September 1, 2014 for $32.00 per share. Which one of the following is the entry to record the original sale of the stock? A. DR Cash 400,000 CR Common stock 160,000 CR Paid in capital in excess of par 240,000 B. DR Cash 400,000 CR Common stock 240,000 CR Paid in capital in excess of par 160,000 C. DR Common stock 240,000 DR Paid in capital in excess of par 160,000 CR Cash 400,000 D. DR Common stock 160,000 DR Paid in capital in excess of par 240,000 CR Cash 400,000 8. To record newly issued stock shares upon conversion of debt, managers most often choose the method known as the _____ method. A. market value B. book value C. Black-Scholes D. par value 9. The Heath Corporation reported net income for 2015 of $177,500. Heath began the year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000 shares of common stock for $6 per share. Heath paid dividends to the common shareholders in December. If each share of preferred stock is convertible into 8 shares of common stock, the diluted earnings for 2015 is (rounded): A. $1.29 per share. B. $1.45 per share. C. $1.54 per share. D. $1.73 per share. 10. Current GAAP specifies that the compensation costs for stock options are measured at the: A. grant date only. B. grant date and again at the vesting date. C. vesting date only. D. grant date and again at the exercise date 11. A 3-for-1 stock split will reduce the per share par value and will: A. decrease the number of shares proportionately. B. decrease earnings per share. C. increase owners equity. D. increase the total par value of the common stock. 12. Cash dividends paid by a corporation: A. are an expense of the corporation that declared the dividend. B. reduce the net income of the corporation that declared the dividend. C. reduce the retained earnings of the corporation that declared the dividend. D. reduce the retained earnings of the corporation that declared the dividend because net income is reduced by the amount of the dividend. 13. The following information has been provided to you by the Smith Corporation for the year ending December 31, 2015: The numerator used in the calculation of basic earnings per share was $797,000. Cash dividends were paid to the common shareholders. 8% convertible bonds with a par value of $1,000,000 were issued on July 1, 2015. The corporations marginal income tax rate is 40%. 6% convertible preferred stock with a par value of $800,000 were outstanding during the entire year. Assuming that both the bonds and preferred stock are dilutive, what is the numerator that should be used in the calculation of diluted earnings per share? A. $893,000 B. $869,000 C. $773,000 D. $821,000 14. Which of the following is NOT a reason why a company would purchase its own stock? A. The company needs shares in order to meet employee stock option plans. B. The companys management may have concluded that the companys stock is undervalued at the prevailing market price. C. The company wants to increase its earnings per share. D. The company wants to manipulate its net income. 15. The denominator used in the calculation of basic earnings per share is the: A. number of common shares outstanding at the end of the year. B. number of preferred shares outstanding at the end of the year. C. weighted average number of common shares outstanding during the year. D. weighted average number of common shares and preferred shares outstanding during the year. 16. Which of the following statements does NOT accurately reflect the financial accounting for compensatory stock option plans? A. Compensation expensed is allocated equally over the service (vesting) period. B. The compensation expense is not adjusted for changes in the market value of the stock options during the service (vesting) period. C. The paid-in capital stock options account is credited when compensation expense is recorded each year. D. Total owners equity is increased by the par value of the common stock issued when the options are converted. 17. Companies with a history of net operating losses are prone to issue which one of the following to raise money? A. Debenture bonds B. Serial bonds C. Preferred stock D. Notes payable 18. When a publicly traded company issues both common stock and preferred stock, the SEC requires that: A. preferred and common stock be combined in the equity section. B. preferred and common stock be clearly differentiated on the balance sheet. C. all preferred stock be shown as a liability. D. mandatorily redeemable preferred stock be shown as a liability. 19. The Heath Corporation reported net income for 2015 of $177,500. Heath began the year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000 shares of common stock for $6 per share. Heath paid dividends to the common shareholders in December. The basic earnings for 2015 is: A. $1.43 per share. B. $1.50 per share. C. $1.54 per share. D. $1.73 per share. 20. Stock options are granted to the employees of Young Company on March 10, 2014. The employees must wait until March 10, 2018 to exercise the options. The four-year waiting period is the: A. expected life of the options. B. grant period. C. vesting period. D. holding period 21. Under IFRS, SPEs are consolidated when evidence indicates that the reporting company controls the SPE. Control is presumed if which of the following conditions exist? I. The reporting entity performs activities on behalf of the SPE. II. The SPE has decision-making powers over the activities of the reporting entity. III. The reporting company has the right to obtain the majority of the benefits of the SPE activities. IV. The reporting company retains the majority of the residual or ownership risks related to the SPE or its assets. A. I and II only B. I, II, and III only C. III and IV only D. I, II, III, and IV 22. Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1, 2015, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2015 for $24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31, 2015. At the end of 2015, the market value of the Able stock was $18,000 and the market value of the Baker stock was $28,000. The stocks were purchased for short-term speculation. Perry owns 10% of each company. The entry to record the purchase of Able, Inc. common stock would be: A. DR Trading securities-Able common 20,000 CR Cash 20,000 B. DR Available-for-sale securities-Able common 20,000 CR Cash 20,000 C. DR Held to maturity securities-Able common 20,000 CR Cash 20,000 D. DR Cash 20,000 CR Available-for-sale securities Able common 20,000 23. The unrealized holding gain or loss on trading securities is recorded on the: A. income statement in the period after the security price change. B. income statement in the period of the security price change. C. balance sheet as a deferred charge in the period of the security price change. D. balance sheet as a separate component of stockholders equity. 24. The difference between the amortized cost basis of a debt security and the present value of expected cash flows for that security discounted at the effective interest rate implicit in the debt instrument when it was originally acquired is called the: A. amount representing the credit loss. B. amount related to all other factors. C. other-than-temporary impairment. D. subsequent recovery in fair value 25. Minority passive equity securities designated by the investor to be held for the long-term are _____ securities. A. trading B. available-for-sale C. fair value D. adjusted historical cost 26. Palmon Industries owns an investment that experienced a decline during 2015 that has been judged to be other than temporary. The investment is held in Palmons available-for-sale debt portfolio, and Palmon expects to sell the security before recovery of its amortized cost basis less current-period credit loss. It was purchased in March 2014 at a cost of $460,000. At the end of 2014, the fair value of the investment was $520,000 and its amortized cost basis was $454,000. At the end of 2015, the fair value of the investment is $410,000 and its amortized cost is $448,000. What amount of loss will Palmon Industries report on its income statement for the year ending December 31, 2015 related to this investment? A. An unrealized loss $110,000 B. An unrealized loss of $38,000 C. An unrealized loss of $44,000 D. An unrealized loss of $50,000 27. On January 1, 2015, the Husky Corporation purchased 90% of the Spartan Companys voting stock for $2,700,000. Spartans net assets had a book value of $2,450,000; the fair value of Spartans building was $325,000 greater than its book value. The book value of Huskys net assets immediately after the acquisition of Spartan totaled $6,850,000. Husky used the acquisition method to prepare its consolidated balance sheet. What is total stockholders equity on the January 1, 2015 consolidated balance sheet? A. $9,300,000 B. $6,850,000 C. $7,150,000 D. $7,120,000 28. On January 1, 2015, the Husky Corporation purchased 90% of the Spartan Companys voting stock for $2,700,000. Spartans net assets had a book value of $2,450,000; the fair value of Spartans building was $325,000 greater than its book value. The book value of Huskys net assets immediately after the acquisition of Spartan totaled $6,850,000. Husky used the acquisition method to prepare its consolidated balance sheet. What is the amount of goodwill to be reported on the January 1, 2015 consolidated balance sheet? A. $495,000 B. $202,500 C. $550,000 D. $225,000 29. When an investor is capable of influencing the investee companys dividend policy, the investor is able to augment its own reported income when using: A. minority passive accounting treatment. B. minority active accounting treatment. C. majority active accounting treatment. D. the equity method. 30. The Kerry Company began operations during 2014 and purchased shares of Molson Corporation stock during the year. The market value of the Molson stock had increased as of the end of 2014. Kerry should have classified this investment as a trading security but mistakenly classified it as an available-for-sale security. Which of the following properly describes the impact of this error? A. The 2014 net income was not misstated. B. Total assets as of December 31, 2014 were understated. C. Total stockholders equity as of December 31, 2014 was understated. D. Total stockholders equity as of December 31, 2014 was not misstated. 31. Which of the following does NOT properly describe the accounting for an investment using the equity method when the fair value option has been elected? A. The carrying value of the investment is the fair value of the investment. B. A retroactive adjustment is required if the investor switches from the fair value method. C. Dividends received by the investor increase net income. D. Unrealized gains and losses resulting from changes in market value are reported in the investors income statement. 32. On November 1, 2014, A U.S. company sold merchandise to a foreign company for 375,000 francs. The payment in francs is due on January 31, 2015. The spot rate was as follows: $.20 per franc on November 1, 2014; $.21 per franc on December 31, 2014; and $.19 per franc on January 31, 2015 when the payment was received. Which of the following incorrectly describes the accounting for this foreign currency transaction? A. The receivable was recorded at $75,000 on November 1, 2014. B. The receivable was recorded at $78,750 on the December 31, 2014 balance sheet. C. The foreign currency transaction gain included on the income statement for the year ending December 31, 2014 was $3,750. D. The foreign currency transaction loss included on the income statement for the year ending December 31, 2015 was $3,750. 33. On January 1, 2015, the Regal Company purchased 30% of the outstanding voting stock of the Air Corporation for $300,000; the book value of Airs net assets at the date of purchase was $900,000. Regal was willing to pay more than the book value of the acquired shares because Airs depreciable assets with a ten-year remaining life were undervalued. Regal uses straight-line depreciation. During 2015, Air reported net income of $75,000 and paid dividends of $30,000. The income reported by Regal during 2015 pertaining to the Air investment was: A. $ 9,000. B. $22,500. C. $31,500. D. $19,500. 34. Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1, 2015, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2015 for $24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31, 2015. At the end of 2015, the market value of the Able stock was $18,000 and the market value of the Baker stock was $28,000. The stocks were purchased for short-term speculation. Perry owns 10% of each company. Perry should record the receipt of the Baker dividend as: A. DR Cash 240 CR Dividend income 240 B. DR Dividends receivable 2,400 CR Dividend income 2,400 C. DR Cash 2,400 CR Investment in Baker 2,400 D. DR Cash 2,400 CR Dividends receivable 2,400 35. When the ownership percentage of stock exceeds 20 percent but is less than 50 percent, GAAP presumes that the investor: A. has no influence to exert over the investee company. B. is only investing for a short term trading position. C. is able to exert influence over the investee company. D. is trying to take over the investee company. 36. Which of the following statements does NOT accurately describe the current accounting standards for goodwill? A. If the fair value of the reporting unit is greater than its book value there is not a goodwill impairment. B. Goodwill should not be amortized. C. If the fair value of the reporting unit is less than its book value there will always be a goodwill impairment. D. Goodwill should be tested for impairment on at least an annual basis and in certain conditions between annual dates. 37. When consolidating foreign subsidiaries, the foreign subsidiarys financial numbers must be translated into the parents currency unit. Under U.S. GAAP if the foreign subsidiary is a self-contained unit the _____ method is used. A. current rate B. temporal C. present value D. historical cost 38. Which of the following properly describes a difference between the accounting for a trading security relative to the accounting for an available-for-sale security for a particular investment? A. Total stockholders equity at any point in time differs between the two alternatives. B. Total assets at any point in time differs between the two alternatives. C. Net income for a particular period may differ between the two alternatives. D. Net income over the life of the investment will differ. 39. Perry Investments bought 2,000 shares of Able, Inc. common stock on January 1, 2015, for $20,000 and 2,000 shares of Baker, Inc. common stock on July 1, 2015 for $24,000. Baker paid $2,400 of previously declared dividends to Perry on December 31, 2015. At the end of 2015, the market value of the Able stock was $18,000 and the market value of the Baker stock was $28,000. The stocks were purchased for short-term speculation. Perry owns 10% of each company. If the securities purchased are classified as available-for-sale securities, Perry should record the year-end adjustment as: A. DR Fair value adjustment-Available-for- sale securities 2,000 CR Unrealized change in value of available-for-sale securities Equity 2,000 B. DR Unrealized holding gain on available-for-sale securities 2,000 CR Fair value adjustment-available- for-sale securities 2,000 C. DR Fair value adjustment-available-for-sale securities 2,000 CR Realized holding gain on trading securities 2,000 D. DR Unrealized holding gain 2,000 CR Fair value adjustment-available-for-sale securities 2,000 40. Susqua, Inc. has held-to-maturity debt securities it purchased in 2014. At December 31, 2015, Susqua, Inc. reported a $120,000 impairment loss related to these securities. During 2016, the debtor was successful in registering a new patent which improved the debtors operating outlook. This change of events resulted in a reversal of $45,000 of the impairment loss. At December 31, 2016, the fair value of the debt securities had increased by $68,000 over the impaired value previously recorded. Susqua, Inc. uses IFRS for its external reporting. How much, if any, of this reversal can Susqua, Inc. report in its income for 2016? A. $ - 0 - B. $120,000 C. $68,000 D. $45,000