On january 1 2020 when the market value of their

12. On January 1, 2020, when the market value of their common shares was $10 per share, Crooks Inc. declared a 15%
common stock dividend. Shareholders' equity before the stock dividend was declared was:
Common shares, no par value, authorized 300,000 shares,
issued and outstanding 188,000 shares .............................................. $2,125,000
Retained earnings ...................................................................................... 2,550,000
Total shareholders' equity .......................................................................... $ 4,675,000
What was the effect on Crook’s retained earnings as a result of the stock dividend?
a) $270,000 decrease.
b) $282,000 decrease . 188,000 × 15% × $10 = $ 282,000 decrease
c) $450,000 decrease.
d) $2,820,000 decrease.
13. Goya Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred shares issued at $5 each.
The preferred shares are cumulative and non-participating. Dividends have been paid every year except the past two years
and the current year. Assuming that $21,000 will be distributed as a dividend in the current year, how much will the
preferred shareholders receive?
a) $0.
b) $8,000.
c) $16,000.
d) $21,000. 20,000 × $ 0.40 × 3 = $ 24,000 > $ 21,000
14. Fanatic Corp. has outstanding 20,000 no par value, $ 0.80, preferred shares and 100,000 no par value common shares.
Dividends have been paid every year except last year and the current year. The carrying value of the preferred shares is $
200,000 and of the common shares is $ 300,000. If the preferred shares are cumulative and non-participating and $
100,000 is distributed as a dividend, the common shareholders will receive:
a) $0.
b) $68,000. $100,000 – (20,000 × $ 0.80 × 2) = $ 68,000
c) $84,000.
d) $100,000.
15. On April 1, 2020, Gamma Corp. purchases a call option for $ 500, which gives Gamma the right to buy 1,000 shares of
Delta Inc. for $ 30 each until December 1, 2020. Delta Inc. shares are currently trading for $ 30. At June 30, 2020, the
options are trading at $ 4,800 and the shares at $ 32 each. At December 1, 2020, the options expire with no value.
21. The time value of the option at April 1, 2020 is
a) $ 0.
b) $ 500.
c) $ 4,800.
d) $ 30,000.
16. A common reason for issuing convertible bonds is
a) to obtain debt financing at cheaper rates.
b) to avoid paying dividends on common shares.
c) to give the purchaser the option of buying preferred shares.
d) to reduce the debt-to-total assets ratio.

BUS 344 Midterm Examination VERSION 12 Page 6
17 At December 31, 2020, the 10% bonds payable of Paisley Inc. had a carrying value of $ 760,000. The bonds, which had
a face value of $ 800,000, were issued at a discount to yield 12%. The amortization of the bond discount had been recorded
using the effective-interest method. Interest was being paid on January 1 and July 1 of each year. The July 1, 2021 interest