Question 1. For a compensatory stock option plan for which the date

1. For a compensatory stock option plan for which the date of grant and measurement date are the same, compensation cost should be recognized in the income statement

a. At the date of retirement

b. Of each period in which services are rendered

c. At the exercise date

d. At the adoption date of the plan

2. Payment of a dividend in stock

a. Increases the current ratio

b. Decreases the amount of working capital

c. Increases total stockholders’ equity

d. Decreases book value per share of stock outstanding

3. The directors of Corel Corporation, whose $40 par value common stock is currently selling at $50 per share, have decided to issue a stock dividend. The corporation has an authorization for 200,000 shares of common, has issued 110,000 shares of which 10,000 shares are now held as treasury stock, and desires to capitalize $400,000 of the retained earnings balance. To accomplish this, the percentage of stock dividend that the directors should declare is

a. 10

b. 8

c. 5

d. 2

4. When a stock dividend is small, for example a 10% stock dividend,

a. Retained earnings is not reduced because the dividend is immaterial .

b. Retained earnings is reduced by the fair value of the stock.

c. Retained earnings is reduced to the par value of the stock.

d. Paid-in capital in excess of par value is unaffected.

5. The par value method of reporting a treasury stock transaction

a. Will be reported in the balance sheet as a reduction of total stockholders’ equity.

b. Results in no change to total stockholders’ equity.

c. Results in a reduction in the number of shares that are available to be sold to prospective investors.

d. Assumes constructive retirement of the treasury shares.

6. On December 31, 2010, when the Conn Company’s stock was selling at $36 per share, its capital accounts were as follows

Capital stock (par value $20,

100,000 shares issued) $2,000,000

Premium on capital stock 800,000

Retained Earnings 4,550,000

If a 100 percent stock dividend were declared and the par value per share remained at

$20

a. No entry would need to be made to record the dividend

b. Capital stock would increase to $5,600,000

c. Capital stock would increase to $4,000,000

d. Total capital would decrease

7. A company has not paid dividends on its cumulative nonvoting preferred stock for 20 years.

Healthy earnings have been reported each year, but they have been retained to support the growth of the company. The board of directors appropriately authorized management to offer the preferred shareholders an exchange of bonds and common stock for all the preferred stock. The exchange is about to be consummated. Which of the following best describes the effect of the exchange on the company?

a. The statute of limitations applies; hence, cumulative dividends of only seven years need to be paid on the preferred stock exchanged.

b. The company should record an extraordinary gain for income determination purposes to the extent that dividends in arrears do not have to be paid in the exchange transaction.

c. Gain or loss should be recognized on the exchange by the company, and the exchange would have to be approved by the Securities and Exchange Commission.

d. Regardless of the market value of the bonds and common stock, no gain or loss should be recognized by the company on the exchange, and no dividends need to be paid on the preferred stock exchanged.

8. A restriction of retained earnings is most likely to be required by the

a. Exhaustion of potential benefits of the investment credit

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