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ACCT 3432 and ACCT 5134 Exam 3, Fall 2013

A solved Exam 3 from Fall 2013 covering key accounting concepts in financial reporting.

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    1 ACCT 3432 and ACCT 5134 Exam 3 , Fall 201 3 First Name Suggested Solution Last Name The Thomas Instructions: 1. You have 120 minutes to complete this exam . 2. The exam has 1 1 pages, including this cover page . Ch eck to make sure you have all 1 1 pages. 3. There are 2 0 multiple choices and 3 problem solving questions. Each multiple choice problem is worth 3 points and maximum points for each problem solving question are shown at each question . 4. Closed notes, closed books. Only the exam , writing utensils, and a calculator are permitted on your desk. 5. Please write your answers for multiple choices CAREFULLY on the ANSWER SHEET. 6. Please write answers CLEARLY on the exam for problem solving questions. If I cannot read them, I will NOT GIVE YOU ANY PARTIAL CREDIT . 7. DO NOT START EXAM UNTIL I TELL YOU TO BEGIN. ANSWER SHEET Question No. 1 2 3 4 5 6 7 8 9 10 11 12 Answer C C D C C B A B B D A A Question No. 13 14 15 16 17 18 19 20 Multi Prob. Total Answer B A B D D B A D

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    2 Part I. Multiple Choices: 1. The Thomas Company's net income for the year ended December 31 was $30,000. During the year, Thomas declared and paid $3,000 in cash dividends on preferred stock and $5,250 in cash dividends on common stock. At December 31, 36,000 shares of common stock were outstanding, 30,000 of which had been issued and outstanding throughout the year and 6,000 of which were issued on July 1. There were no other common stock transactions during the year, and there is no potential dilution of earnings per share. What should be the year's basic earnings per common share of Thomas, rounded to the nearest penny? a. $0.66 b. $0.75 c. $0.82 d. $0.91 ANS. C Basic earnings per common share = (Net income - cash dividends on preferred stock) / weighted - average number of common shares = ($30,000 - $3,000) / (30,000*6/12+36,000*6/12)=$0.82 2. On December 31, 2013, Overachiever, Inc. had 3 00,000 shares of common stock issued and outstanding. Overachiever issued a 10 percent stock dividend on June 1, 2014. On November 1, 2014, Overachiever reacquired 30,000 shares of its common stock and recorded the purchase using the cost method of accounting for treasury stock. What number of shares should be used in computing basic earnings per share for the year ended December 31, 2014? a. 310 , 000 b. 314,167 c. 32 5 , 000 d. 330,000 ANS. C Event Period Shares Fraction of Year Adjustment Weighted Average Shares Beginning Jan 1 - June 1 3 00,000 5/12 1.1 1 37 , 500 Stock Dividend (10%) June 1 – Nov 1 330 ,000 5/12 1 1 37 , 500 Repurchase Nov 1 – Dec 31 3 0 0 ,000 2/12 1 5 0 , 000 Total 32 5 , 000

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    3 3. When computing diluted EPS for a company with a complex capital structure, what is the denominator in the computation? a. Number of common shares outstanding at year - end b. Weighted - average number of common shares outstanding c. Weighted - average number of common shares outstanding plus all other potentially antidilutive securities d. Weighted - average number of common shares outstanding plus all other potentially dilutive securities ANS. D 4. On January 2, 201 3 , Worley Co. issued at par $60,000 of 5 percent bonds convertible, in total into 5,000 shares of Worley’s common stock. No bonds were convertible during 201 3 . Throughout 201 3 Worley had 5,000 of common stock outstanding. Worley’s net income was $6,200. Worley’s income tax rate is 40%. No potentially dilutive securities other than convertible bonds were outstanding during 201 3 . Worley’s diluted earnings per share for 201 3 would be a. $0.78 b. $0.62 c. $0.8 0 d. $0.90 ANS. C Diluted EPS = (Net income+ Interest savings after tax)/ weighted avg. no. of outstanding Shares = [$6,200 + ( 5% *$60,000 )* (1 - 0.40)]/ (5,000 shares + 5,000 shares) = ($6,200+$1,800) / 10,000 shares = $0.80 per share 5. When we compute earnings per share (EPS) data, we assume conversion of convertible securities at the a. Ending of the earliest period reported ( regardless of time of issuance). b. Middle of the earliest period reported (regardless of time of issuance). c. Beginning of the earliest period reported (or at time of issuance, if later). d. Beginning of the earliest period reported (regardless of time of issuance). ANS C Use the following information for questions 6 and 7 . At December 31, 201 3 , Lefton, Inc. had 4 00,000 shares of common stock outstanding. On April 1, 201 4 , an additional 1 4 0,000 shares of common stock were issued for cash. Lefton also had $ 3 ,000,000 of 8% convertible bonds outstanding at December 31, 201 3 , which are convertible into 1 2 0,000 shares of common stock. The bonds are dilutive in the 201 4 EPS computation. No bonds were issued or converted into common stock during 201 4 .

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