stockholder equity - Question STK-0001 A company wishes to...

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Unformatted text preview: Question: STK-0001 A company wishes to raise funds by issuing either bonds or cumulative preferred stock. How will the annual interest or dividend affect annual net earnings available to common stockholders each year? Answers A : Annual net earnings available to common stockholders are reduced by annual interest but not by preferred dividends. B : Annual net earnings available to common stockholders are reduced by preferred dividends but not by annual interest. C : Annual net earnings available to common stockholders are reduced by annual interest and preferred dividends. D : Annual net earnings available to common stockholders are not reduced by annual interest or preferred dividends. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. C. Answer C is correct. Annual net earnings available to common stockholders (e.g., the numerator in EPS calculations) are reduced by both bond interest and preferred dividends. The interest reduces income in the income statement (and also reduces tax expense). The preferred dividends are subtracted from net income in computing net earnings available to common stockholders. This answer is incorrect. Refer to the correct answer explanation. Question: STK-0002 A company wishes to raise funds by issuing either bonds or cumulative preferred stock. How will the annual interest or dividend affect total liabilities each year? Answers A : Interest is a current liability each year (until paid). B : Cumulative preferred dividends are a current liability each year (until paid). C : Both interest and cumulative preferred dividends are current liabilities each year (until paid). D : Interest and cumulative preferred dividends in arrears are current liabilities each year (until paid). Answer Explanations A. Answer A is correct. When bonds are issued, any interest that has not been paid will be accrued and accounted for as a current liability. In addition, cumulative preferred dividends are not considered liabilities until declared by the board of directors. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Question: STK-0003 The excess of the fair value of the consideration received over the stated value of no par common stock should be credited to Answers A : A liability account. B : Common stock. C : Additional paid-in capital. D : Retained earnings. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. B. Answer B is incorrect. If the no par stock did not have a stated value, then common stock would be credited for the total issue price....
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This note was uploaded on 12/09/2009 for the course FAR 5745 taught by Professor Philoreily during the Spring '09 term at Nova Southeastern University.

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stockholder equity - Question STK-0001 A company wishes to...

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