Final Exam

CPA EXAM QUESTIONS & ADDITIONAL EXERCISES

CPA Exam
Questions
CHAPTERS 16 & 17
Peter Corp.’s capital structure was follows:
December 31

Year 1 Year 2

Outstanding shares of stock:

Common 110,000 110,000

Convertible preferred 10,000 10,000
8% convertible
During Year 2, Peters paid dividends bonds
of $3.00 per $1,000,000
share on its preferred stock. The preferred$1,000,000
shares are convertible into 20,000 shares of
common stock. The 8% bonds are convertible into 30,000 shares of common stock. Net income for Year 2 was $850,000. Assume that the
income tax rate is 30%. The basic earnings per share for Year 2 is:
(A) $6.54 (B) $7.08 (C) $7.45 (D) $6.31
Net Income available to common shareholders: $850,000 - $30,000 = $820,000
Weighted average shares outstanding: 110,000 shares
Earnings per share: $820,000 ÷ 110,000 shares = $7.45
Jones Corp.’s capital structure was follows:
December 31

Year 1 Year 2

Outstanding shares of stock:

Common 110,000 110,000

Convertible preferred 10,000 10,000
8% convertible
During Year 2, Peters paid dividends bonds
of $3.00 per $1,000,000
share on its preferred stock. The preferred$1,000,000
shares are convertible into 20,000 shares of
common stock. The 8% bonds are convertible into 30,000 shares of common stock. Net income for Year 2 was $850,000. Assume that the
income tax rate is 30%. The diluted earnings per share for Year 2 is:
(A) $5.48 (B) $5.66 (C) $5.81 (D) $6.26
Net Income available to common shareholders: $850,000 - $30,000 = $820,000
Preferred Dividends Avoided: $30,000
Interest Savings: $1,000,000 x 8% = $80,000 – Tax Cost @ 30% = $56,000
Numerator: $820,000 + $30,000 + $56,000 = $906,000

Weighted average shares outstanding: 110,000 shares

Conversion of preferred shares: 20,000 shares
Conversion of convertible debt: 30,000 shares
Denominator: 110,000 + 20,000 + 30,000 = 160,000 shares

Earnings per share: $906,000 ÷ 160,000 shares = $5.66

A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?

(A) Cumulative 8%, $50 par preferred stock

(B) 6%, $100 par cumulative convertible pref. stock, issued at par, with each pref. share convertible into four shares of common stock
(C) 10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock
(D) 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock
A- Preferred stock is not cumulative – no potentially dilutive impact

B- Numerator = $6 in dividends saved

Denominator = 4 shares of common stock
EPS Impact = $6 ÷ 4 shares = $1.50 – not dilutive

C- Numerator = $100 interest saved – 30% additional tax = $70

Denominator = 20 shares
EPS Impact = $70 ÷ 20 shares = $3.50 – not dilutive

D- Numerator = $70 interest saved – 30% additional tax = $49

Denominator = 40 shares
EPS Impact = $49 ÷ 40 shares = $1.225 - DILUTIVE
Chape Co. had the following information related to common and preferred shares during the year:

Common shares outstanding Jan 1 700,000

Common shares repurchased Mar 31 20,000
Conversion of preferred shares Jun 30 40,000
Common shares repurchased Dec 1 36,000

Chape reported net income of $2,000,000 at December 31. What amount of shares should Chape use as the denominator in the
computation in basic earnings per share?
(A) 702,000 (B) 740,000 (C) 700,000 (D) 684,000
Jan 1 – Mar 31 700,000 shares 3 / 12 months 175,000 shares
Mar 31 – Jun 30 680,000 shares 3 / 12 months 170,000 shares
Jun 30 – Dec 1 720,000 shares 5 / 12 months 300,000 shares
Dec 1 – Dec 31 684,000 shares 1 / 12 months 57,000 shares
702,000 shares
The following information pertains to Ceil Co., a company whose common stock trades in a public market:

Shares outstanding at 1/1 100,000

Stock dividend at 3/31 24,000
Stock issuance at 6/30 5,000

What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share for the year ended December 31?
(A) 120,500 (B) 126,500 (C) 123,000 (D) 129,000
Jan 1 – Jun 30 124,000 shares 6 / 12 months 62,000 shares
Jun 30 – Dec 31 129,000 shares 6 / 12 months 64,500 shares
126,500 shares
When the fair value of an investment in debt securities exceeds its amortized cost, how should each of the following debt securities be
reported at the end of the year?

Debt securities classified as

Held-to-maturity Available-for-sale
(A) Amortized cost Amortized cost
(B) Fair value Amortized cost
(C) Amortized cost Fair value
(D) Fair value Fair value
The following data pertains to Tyne Co.’s investments in marketable equity securities:

Market Value
Cost 12/31/Y2 12/31/Y1
Trading $150,000 $155,000 $100,000
Available-for-sale 150,000 130,000 120,000

What amount should Tyne report as unrealized gain (loss) in its Year 2 income statement?
(A) $55,000 (B) $50,000 (C) $65,000 (D) $60,000

Trading securities holding gains/losses impact the income statement; Available-for-sale securities holding gains/losses impact OCI
Change in trading securities = $155,000 - $100,000 = $55,000
On July 2, Year 1, Wynn, Inc., purchased as an available-for-sale security a $1,000,000 face value Kean Co. 8% bond for 910,000 plus accrued
interest to yield 10%. The bonds mature on January 1, Year 7, and pay interest annually on January 1. On December 31, Year 1, the bonds
had a market value of $945,000. On February 13, Year 2, Wynn sold the bonds for $920,000. In its December 31, Year 1, balance sheet, what
amount should Wynn report for available-for-sale investments in debt securities?

(A) $910,000 (B) $945,000 (C) $950,000 (D) $920,000

All that matters is the fair value at December 31, Year 1 - $945,000
At year-end, Rim Co. held several investments with the intent of selling them in the near term. The investments consisted of $100,000, 8%,
five-year bonds, purchased for $92,000, and equity securities purchased for $35,000. At year-end, the bonds were selling on the open
market for $105,000 and the equity securities had a market value of $50,000. What amount should Rim report as trading securities in its
year-end balance sheet?

(A) $127,000 (B) $155,000 (C) $50,000 (D) $142,000

Market value of the bonds = $105,000
Market value of the equity securities = $50,000
Total value on the balance sheet = $105,000 + $50,000 = $155,000
Which of the following is not a characteristic that is used to determine the primary beneficiary of a variable interest entity (VIE) under US
GAAP?

(A) Greater than 50% ownership of the VIE

(B) The obligation to absorb expected VIE losses
(C) The power to direct the activities of the VIE
(D) The right to receive the expected VIE residual returns
A – Typically a VIE is NOT owned at 50%+ since in that case it would ordinarily be consolidated
B/C/D – Are all attributes which define a VIE that should be consolidated
Exercise 16-15
WEIGHTED-AVERAGE NUMBER OF SHARES
The company is authorized to issue 9,000,000 shares of $10 par common stock. At not time has Newton issued
any potentially dilutive securities. Listed below is a summary of Newton’s common stock activities.

1) Number of common shares issued and outstanding at December 31, 2012 2,000,000
2) Shares issued as a result of a 10% stock dividend on September 30, 2013 200,000
3) Shares issued for cash on March 31, 2014 2,000,000
4) Number of common shares issued and outstanding 4,200,000
5) A 2-for-1 stock split of Newton’s common stock took place on March 31, 2015

Compute the weighted-average number of common shares used in computing earnings per common share for 2013 on the 2014 comparative
income statement.
Dates Shares Restatement Weight Weighted-Shares
Jan 1, 2013 – Sep 30, 2013 2,000,000 1.10 9 / 12 1,650,000
Oct 1, 2013 – Dec 31, 2013 2,200,000(+200,000) 3 / 12 550,000
2,200,000
Dates Shares Restatement Weight Weighted-Shares
Jan 1, 2014 – Mar 31, 2014 2,200,000 3 / 12 550,000
Apr 1, 2014 – Dec 31, 2014 4,200,000(+2,000,000) 9 / 12 3,150,000
3,700,000
Dates Shares Restatement Weight Weighted-Shares
Jan 1, 2014 – Mar 31, 2014 2,200,000 2.0 3 / 12 1,100,000
Apr 1, 2014 – Dec 31, 2014 4,200,000 2.0 9 / 12 6,300,000
7,400,000
Dates Shares Restatement Weight Weighted-Shares
Jan 1, 2015 – Mar 31, 2015 4,200,000 2.0 3 / 12 2,100,000
Apr 1, 2015 – Dec 31, 2015 8,400,000(+4,200,000) 9 / 12 6,300,000
8,400,000
Exercise 16-23
EPS WITH CONVERTIBLE BONDS
On June 1, 2012, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were
issued to complete the merger.
On April 1, 2014, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were
outstanding on December 31, 2014.
Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2014. Each $1,000 bond converts to 40
shares of common at any interest date. None of the bonds have been converted to date.
Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2014. The annual report will show
earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%).
Determine the following for 2014: Number of shares to be used for calculating (1) basic and (2) diluted earnings per share.
Dates Shares Restatement Weight Weighted-Shares
Jan 1, 2014 – Apr 1, 2014 800,000 3 / 12 200,000
Apr 1, 2014 – Dec 31, 2014 1,200,000 9 / 12 900,000
1,100,000

Jan 1, 2014 – Apr 1, 2014 800,000 3 / 12 200,000

Apr 1, 2014 – Jul 1, 2014 1,200,000 3 / 12 300,000
July 1, 2014 – Dec 31, 2014 1,224,000 6 / 12 612,000
$600,000 ÷ $1,000 x 40 shares = 24,000 additional shares “if-converted” 1,112,000
Basic Net Income $1,540,000

Diluted Net Income $1,540,000

Interest Savings 24,000 = $600,000 x 8% x ½ year
Additional Tax 9,600 = $24,000 x 40%
Adjusted Net Income $1,554,400
Exercise 17-12
JOURNAL ENTRIES FOR FAIR VALUE AND EQUITY
METHOD
Conchita Cosmetics acquired 10% of the 200,000 shares of common stock of Martinez Fashion at a total cost of $13 per share on March 18,
2014. On June 30, Martinez declared and paid a $75,000 cash dividend. On December 31, Martinez reported net income of $122,000 for the
year. At December 31, the market price of Martinez Fashion was $15 per share. The securities are classified as available-for-sale.

Prepare all necessary journal entries in 2014.

Mar 18 – To record the purchase of 20,000 shares of Martinez Fashion at a cost of $13 per share
Equity Investments (available-for-sale) 260,000 200,000 shares x 10% ownership x $13 per share
Cash 260,000

Jun 30 – To record the dividend income from Martinez Fashion

Cash 7,500 $75,000 x 10% ownership
Dividend Income 7,500

Dec 31 – To record the investment at fair value

Fair Value Adjustment (available-for-sale) 40,000 ( $15 - $13 ) x 20,000 shares
Unrealized Holding Gain – Equity 40,000
Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles’s 30,000 outstanding shares of common stock at a
total cost of $9 per share on January 1, 2014. On June 15, Seles declared and paid a cash dividend of $36,000. On December 31, Seles
reported a net income of $85,000 for the year.

Prepare all necessary journal entries in 2014.

Jan 1 – To record the purchase of 30% of Seles Corporation’s common stock
Equity Investments (Seles Corp.) 81,000 30,000 shares x 30% ownership x $9 per share
Cash 81,000

Jun 15 – To record the receipt of cash dividends from Seles Corporation

Cash 10,800 $36,000 x 30% ownership
Equity Investments (Seles Corp.) 10,800

Dec 31 – To record Monica’s share (30%) of Seles Corporation’s net income of $85,000
Equity Investments (Seles Corp.) 25,500 $85,000 x 30% ownership
Investment Income 25,500
Exercise 17-15
EQUITY INVESTMENTS - TRADING
Kenseth Company has the following securities in its trading portfolio of securities on December 31, 2013.

Investments (Trading) Cost Fair Value

1,500 shares of Gordon, Inc., Common $ 73,500 $ 69,000
5,000 shares of Wallace Corp., Common 180,000 175,000
400 shares of Martin, Inc., Preferred 60,000 61,600
$313,500 $305,600

All of the securities were purchased in 2014. In 2014, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., Common $45 per share – Fees of $1,200
April 1 Bought 700 shares of Earnhart Corp., Common $75 per share + Fees of $1,300

Kenseth Company’s portfolio of trading securities appeared as follows on December 31, 2014.

Investments (Trading) Cost Fair Value

5,000 shares of Wallace Corp., Common $180,000 $175,000
700 shares of Earnhart Corp., Common 53,800 50,400
400 shares of Martin, Inc., Preferred 60,000 58,000
$293,800 $283,400

Prepare the general journal entries for Kenseth Company for: The 2013 adjusting entry.

Unrealized Holding Loss – Income 7,900

Fair Value Adjustment (Trading) 7,900
Kenseth Company has the following securities in its trading portfolio of securities on December 31, 2013.

Investments (Trading) Cost Fair Value

1,500 shares of Gordon, Inc., Common $ 73,500 $ 69,000
5,000 shares of Wallace Corp., Common 180,000 175,000
400 shares of Martin, Inc., Preferred 60,000 61,600
$313,500 $305,600

All of the securities were purchased in 2014. In 2014, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., Common $45 per share – Fees of $1,200
April 1 Bought 700 shares of Earnhart Corp., Common $75 per share + Fees of $1,300

Kenseth Company’s portfolio of trading securities appeared as follows on December 31, 2014.

Investments (Trading) Cost Fair Value

5,000 shares of Wallace Corp., Common $180,000 $175,000
700 shares of Earnhart Corp., Common 53,800 50,400
400 shares of Martin, Inc., Preferred 60,000 58,000
$293,800 $283,400

Prepare the general journal entries for Kenseth Company for: The sale of Gordon stock.

Cash 66,300 ( 1,500 shares x $45 per share ) - $1,200

Loss on Sale of Investments 7,200
Equity Investments (Trading) 73,500
Kenseth Company has the following securities in its trading portfolio of securities on December 31, 2013.

Investments (Trading) Cost Fair Value

1,500 shares of Gordon, Inc., Common $ 73,500 $ 69,000
5,000 shares of Wallace Corp., Common 180,000 175,000
400 shares of Martin, Inc., Preferred 60,000 61,600
$313,500 $305,600

All of the securities were purchased in 2014. In 2014, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., Common $45 per share – Fees of $1,200
April 1 Bought 700 shares of Earnhart Corp., Common $75 per share + Fees of $1,300

Kenseth Company’s portfolio of trading securities appeared as follows on December 31, 2014.

Investments (Trading) Cost Fair Value

5,000 shares of Wallace Corp., Common $180,000 $175,000
700 shares of Earnhart Corp., Common 53,800 50,400
400 shares of Martin, Inc., Preferred 60,000 58,000
$293,800 $283,400

Prepare the general journal entries for Kenseth Company for: The purchase of Earnhart stock.

Equity Investments (Trading) 53,800

Cash 53,800
Kenseth Company has the following securities in its trading portfolio of securities on December 31, 2013.

Investments (Trading) Cost Fair Value

1,500 shares of Gordon, Inc., Common $ 73,500 $ 69,000
5,000 shares of Wallace Corp., Common 180,000 175,000
400 shares of Martin, Inc., Preferred 60,000 61,600
$313,500 $305,600

All of the securities were purchased in 2014. In 2014, Kenseth completed the following securities transactions.

March 1 Sold the 1,500 shares of Gordon, Inc., Common $45 per share – Fees of $1,200
April 1 Bought 700 shares of Earnhart Corp., Common $75 per share + Fees of $1,300

Kenseth Company’s portfolio of trading securities appeared as follows on December 31, 2014.

Investments (Trading) Cost Fair Value

5,000 shares of Wallace Corp., Common $180,000 $175,000
700 shares of Earnhart Corp., Common 53,800 50,400
400 shares of Martin, Inc., Preferred 60,000 58,000
$293,800 $283,400

Prepare the general journal entries for Kenseth Company for: The 2014 adjusting entry for the trading portfolio.

Unrealized Holding Loss - Income 2,500 $10,400 total difference - $7,900 prior year difference
Fair Value Adjustment (Trading) 2,500