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Exam 8: Liabilities and Stockholders Equity

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Question 41

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If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount:

A) less than face value.
B) equal to the face value.
C) greater than face value.
D) that cannot be determined.

E) A) and B)
F) A) and C)

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Question 42

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Stockholders' equity:

A) is usually equal to cash on hand.
B) includes paid-in capital and total liabilities.
C) includes retained earnings and paid-in capital.
D) is shown on the income statement.

E) B) and C)
F) C) and D)

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Question 43

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When a corporation issues bonds, it executes a contract with the bondholders known as a bond indenture.

The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares.

Smith Co. is considering the following alternative plans for financing the company: $\begin{array}{|l|l|l|}\hline\text { Plan II } & \text { PlanI } & \\\hline \$ 1,000,000 & - & \text { Issue } 10 \% \text { Bonds (at face) } \\\hline \$ 2,000,000 & \$ 3,000,000 & \text { Issue } \$ 10 \text { Common Stock } \\\hline\end{array}$ Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.

A corporation has 10,000 shares outstanding of $25 par value and a current market value of $100 per share. If the corporation issues a 5-for-1 stock split, the market value of the stock will fall to approximately $20.

A 10% stock dividend will increase the book value per share.

If a corporation issues only one class of stock, it is called:

A company sold 200 shares of common stock with a par vale of $5 at a price of $12 per share. Which section of the statement of cash flows will contain this transaction?

During the first year of operations, a company granted warranties on its products. The estimated cost of the product warranty liability at the end of the year is $12,750. The product warranty expense of $12,750 should be recorded in the year the related product sale is made.

Income tax based on taxable income may differ from the income tax based on "Income before Taxes" on the income statement. Which of the following could be a reason for this difference?

The issuance of common stock affects both paid-in capital and retained earnings.

Federal unemployment compensation tax becomes an employer's liability at the time the employees are paid.

If paid-in capital in excess of par--preferred stock is $80,000, preferred stock is $500,000, paid-in capital in excess of par--common stock is $50,000, common stock is $1,000,000, and retained earnings is $230,000, the total stockholders' equity is $1,860,000.

An employee receives an hourly rate of $30, with time and a half for all hours worked in excess of 40 during a week. Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $300; cumulative earnings for year prior to current week, $90,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare tax rate, 1.5% on all earnings. What is the net pay for the employee?

FICA tax becomes a liability to the federal government at the time the employees are paid.

Most employers are required to withhold federal unemployment taxes from employee earnings.

Most employers are required to withhold from employees for:

The primary purpose of a stock split is to:

If prior to the last weekly payroll period of the calendar year, the cumulative earnings for an employee are $75,200, earnings subject to social security tax are $106,800, and the tax rate is 7.5%, the employer's social security tax on the $800 gross earnings paid on the last day of the year is $60.