ACCT 3621 Intermediate Accounting II

Correct Answer

B) Decrease by $2,000

Explanation

When the company repurchases shares at a price higher than the original issue price, the excess amount is deducted from additional paid-in capital. In this case, the company issued 1,000 shares at $10 each, so the original paid-in capital is $10,000 (1,000 shares * $10). When it repurchases 200 shares at $12 each, it pays $2,400 for the repurchase (200 shares * $12). The difference between the repurchase price ($12) and the original issue price ($10) is $2 per share. For the 200 shares repurchased, this results in a total decrease of $2,000 from additional paid-in capital (200 shares * $2).

Why other options are wrong

A) Increase by $8,000

This is incorrect because the repurchase price is higher than the issue price, which results in a decrease in additional paid-in capital, not an increase.

C) No effect on additional paid-in capital

This is incorrect because the repurchase price exceeds the issue price, which directly impacts additional paid-in capital.

D) Increase by $2,000

This is incorrect because the difference between the repurchase price and the issue price leads to a decrease in additional paid-in capital, not an increase.

Correct Answer

B. Reduces total shareholders' equity

Explanation

Treasury stock represents shares that a company has repurchased from the open market. These shares are recorded as a contra-equity account, meaning they reduce the total shareholders' equity on the balance sheet. They do not represent an asset, nor do they affect liabilities directly. The reduction in equity reflects the use of resources to repurchase the stock.

Why other options are wrong

A. Increases total shareholders' equity

This is incorrect because treasury stock is a reduction from shareholders' equity. It does not increase ownership value; instead, it reduces the company's total equity due to the repurchase.

C. Has no effect on total shareholders' equity

This option is wrong because treasury stock is reported as a deduction from equity. Ignoring its impact would misstate the company’s financial position.

D. Increases total liabilities

This is not accurate because repurchasing stock does not create a liability. It’s simply a reclassification within the equity section, where resources used to buy back stock reduce equity rather than increase obligations.

Correct Answer

C. EPS will decrease due to higher expenses

Explanation

When a company revises its estimate of share-based compensation expense upward, the total compensation expense increases. This increase in expenses reduces the company's net income for the reporting period, leading to a decrease in earnings per share (EPS). Since EPS is calculated by dividing net income by the weighted average number of shares outstanding, any increase in expenses (which reduces net income) will lower the EPS.

Why other options are wrong

A. EPS will increase due to lower expenses

This is incorrect because revising the share-based compensation expense upward increases the expenses, not reduces them. Therefore, EPS will not increase due to lower expenses.

B. EPS will remain unchanged as it does not affect net income

This is incorrect because an upward revision in compensation expense directly affects net income, which in turn affects EPS. Therefore, EPS will not remain unchanged.

D. EPS will increase due to additional revenue

This is incorrect because revising the share-based compensation expense does not generate additional revenue. Instead, it increases expenses, which leads to a reduction in net income and consequently decreases EPS.

Correct Answer

C) It increases by the amount received over the par value of the shares issued.

Explanation

When a company issues stock at a price higher than its par value, the excess amount is credited to additional paid-in capital. The par value is recorded as common stock, and any amount received above the par value is classified as additional paid-in capital. This represents the extra value that shareholders are willing to pay above the nominal value of the stock.

Why other options are wrong

A) It decreases by the amount of the par value of the shares issued.

This is incorrect because additional paid-in capital increases when the stock is sold at a price above par. The par value is recorded separately under common stock, not deducted from additional paid-in capital.

B) It remains unchanged regardless of the stock price.

This is incorrect because additional paid-in capital will change when the stock is issued at a price above par. The difference between the issue price and par value is credited to additional paid-in capital.

D) It is recorded as a liability on the balance sheet.

This is incorrect because additional paid-in capital is an equity account, not a liability. It represents ownership in the company, not an obligation.

Correct Answer

B. It only considers shares that are currently outstanding.

Explanation

Basic earnings per share (EPS) is calculated based on the shares that are currently outstanding, excluding any potential shares that could be issued in the future through options, warrants, or convertible securities. Basic EPS only reflects the earnings allocated to the actual shares in circulation, not those that could potentially be issued if options or convertible securities were exercised or converted.

Why other options are wrong

A. It includes all shares issued by the company.

This is incorrect because basic EPS does not include all shares issued by the company, only those that are outstanding. Shares that are held as treasury stock or those that could be issued in the future (such as convertible securities) are not considered in the basic EPS calculation.

C. It excludes shares that are convertible or options that are not exercised.

This is incorrect because, while basic EPS excludes potential shares that could be issued (like convertible shares or options), this answer does not fully explain why basic EPS does not account for all potential common shares. It is more precise to say that basic EPS only considers shares that are outstanding, not yet converted or exercised.

D. It includes treasury shares in the calculation.

This is incorrect because treasury shares are not included in the calculation of basic EPS. Treasury shares are shares that the company has repurchased and are not considered outstanding. Only shares that are actively held by shareholders are included in the calculation.

Correct Answer

A. $10,000 to Stock A and $5,000 to Stock B

Explanation

To allocate the cash received, we use the proportion of each stock's total market value relative to the combined total market value.

Stock A's total market value = 1,000 shares * $10 = $10,000

Stock B's total market value = 500 shares * $20 = $10,000

Combined market value = $10,000 (Stock A) + $10,000 (Stock B) = $20,000

Stock A's proportion = $10,000 / $20,000 = 0.5

Stock B's proportion = $10,000 / $20,000 = 0.5

The total cash received is $15,000.

Stock A's allocation = 0.5 * $15,000 = $7,500

Stock B's allocation = 0.5 * $15,000 = $7,500

Why other options are wrong

B. $7,500 to Stock A and $7,500 to Stock B

This is incorrect. While both stocks should receive an equal proportion of the total, this allocation does not accurately reflect the specific market prices of each stock.

C. $12,000 to Stock A and $3,000 to Stock B

This is incorrect because it overestimates the allocation to Stock A and underestimates the allocation to Stock B.

D. $9,000 to Stock A and $6,000 to Stock B

This is incorrect. This allocation does not respect the proportions based on the market prices and does not reflect the correct allocation method.

Correct Answer

A) They change the total number of shares issued and outstanding, affecting earnings per share calculations.

Explanation

Stock dividends and stock splits increase the number of shares outstanding, which directly affects the weighted-average shares outstanding used in the earnings per share (EPS) calculation. Since the total number of shares increases, the weighted average for the period must be adjusted to account for the higher number of shares, ensuring accurate EPS reporting. This recalculation reflects the changes in the number of shares and their impact on earnings, which is a crucial aspect of financial reporting.

Why other options are wrong

B) They only affect the market price of the shares, not the number of shares outstanding.

This is incorrect because stock dividends and stock splits actually change the total number of shares outstanding, which is essential for calculating weighted-average shares. They may also impact the market price per share, but that is secondary to the number of shares outstanding.

C) They are irrelevant to the calculation of weighted-average shares outstanding.

This is incorrect because stock dividends and stock splits are very relevant to the calculation of weighted-average shares outstanding. They directly impact the total number of shares, requiring adjustments in the EPS calculation.

D) They only impact the company's cash flow statements.

This is incorrect because stock dividends and stock splits do not directly affect cash flow. These actions only impact the number of shares outstanding and the calculation of EPS, which are reflected in the income statement and shareholders' equity section of the balance sheet.

Correct Answer

A) Basic EPS would be $2.00 and diluted EPS would be $1.82.

Explanation

Basic EPS is calculated as the net income divided by the weighted average shares outstanding, which in this case would be $2,000,000 / 1,000,000 = $2.00. Diluted EPS includes potential common shares (such as stock options) that could be exercised, increasing the total number of shares. In this case, the company has 200,000 potential common shares from stock options. Diluted EPS is calculated as net income divided by the total shares outstanding, including the 200,000 potential shares, so $2,000,000 / (1,000,000 + 200,000) = $1.82.

Why other options are wrong

B) Basic EPS would be $2.00 and diluted EPS would be $2.00.

This is incorrect because diluted EPS considers the potential increase in shares from stock options, which reduces the EPS value. Therefore, the diluted EPS would be lower than the basic EPS.

C) Basic EPS would be $1.82 and diluted EPS would be $2.00.

This is incorrect because basic EPS is calculated without considering potential shares from stock options, so the basic EPS is higher than the diluted EPS.

D) Basic EPS would be $1.50 and diluted EPS would be $1.82.

This is incorrect because the basic EPS is calculated by dividing net income by the outstanding shares, resulting in $2.00, not $1.50.

Correct Answer

A. EPS would increase due to a decrease in the number of shares outstanding

Explanation

When a company repurchases its own shares and records them as treasury stock, the number of shares outstanding decreases. Since EPS is calculated by dividing net income by the number of shares outstanding, a lower denominator leads to a higher EPS, assuming net income remains the same.

Why other options are wrong

B. EPS would decrease due to an increase in the number of shares outstanding

This is incorrect because share repurchases reduce, not increase, the number of outstanding shares. A decrease in outstanding shares would not cause EPS to drop; it would typically increase EPS.

C. EPS would remain unchanged as treasury stock does not affect net income

While treasury stock does not affect net income directly, it affects EPS through the share count. By reducing the number of outstanding shares, it indirectly increases EPS even though net income stays the same.

D. EPS would increase due to an increase in net income

This statement incorrectly attributes the increase in EPS to net income. In this scenario, net income has not changed; only the number of outstanding shares has, which is the actual reason for the EPS increase.