[Vanessachy]

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

Incorrect B.

10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock

C.

7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock

D.

6%, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock

The answer is C

Far 10/26/2015, 64, 1/4/2016, 82
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Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[Vanessachy]

I don't see the difference between B and C, why the answer is C?

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[Vanessachy]

Dahl Co. traded a delivery van and $5,000 cash for a newer van owned by West Corp. The following information relates to the values of the vans on the exchange date:

Carrying Value Fair Value
————– ———-
Old van $30,000 $45,000
New van 40,000 50,000

Dahl's income tax rate is 30%. What amounts should Dahl report as gain on exchange of the vans?
Incorrect A.

$0
B.

$1,000
C.

$700
D.

$15,000

the answer is D, but why? Why it is using new FV not the old FV given up?
My calculation is that 5000/(45000+5000)=0.3, >25%, so it is monetary exchange, use FV
My entry for Dahl is
Van 45000
gain 10000
Cash 5000
Van 30000

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[Missy]

For the 2nd question its the carrying value of the old van plus the $5k cash (35k total) for the fair value of the new van (50k)

The entry is:

New van dr 50,000
old van cr 30,000
cash cr 5,000
gain cr 15,000

Can't use the fv of the old van because its not what is on your books, have to use book value. To use the fair value of the old van would be the same as writing up an asset, you'd have to theoretically increase its value on the books to take it off the books at the higher amount and the net result would be the same.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Vanessachy]

@Mla, I forgot that thank you!

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[Vanessachy]

Which of the following subsequent events must be recognized in the financial statements?
A.

Loss on an uncollectible trade account receivable as a result of a customer's deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued
B.

Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
Incorrect C.

Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
D.

Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued

The correct answer is “loss on an uncollectible trade account receivable as a result of a customer's deteriorating financial condition leading to bankruptcy after the balance sheet date but before the financial statements are issued or are available to be issued.” An entity must recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet.

The other answer choices are incorrect because an entity must not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date but before financial statements are issued or are available to be issued.

None of them exist at balance date, why the answer is A?

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[Gabe]

It's been a while, but…this would be simple process of elimination. B, C, and D are wrong because they all state “after the balance sheet date in their answers. In theory, for A, you would know if your customer's financial condition is so unstable that it's a possible going concern, so you'd recognize it in the financial statements. Again, a lot of the times, it's a process of elimination.

CPA, CFE
CISA- Experience will be completed by August 2016

[Vanessachy]

@Gabe, thank you! I didn't even think about this, I would thinking about a more straight forward answer.

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[monikernc]

Vanessachy, for the EPS question above. At EPS = $1.29, NI=129 and #Shares = 100, 129/100=$1.29

B. the effect of conversion of the bonds will increase NI= 100(1-.30)= $70, and #Shares will increase by 20, 70/20 + 129/100 = 199/120 for EPS $1.66. EPS increased so this will antidilutive.

C. the effect of conversion of the bonds will increase NI=700(1-.30)=$49, and #Shares will increase by 40, 49/40 + 129/100 = 178/140 for EPS $1.27. EPS decreased so this is dilutive.

Because each of these answers is an independent event, the quick way is to get the ratio of each conversion and compare to the Basic EPS amount.

For B the ratio of the conversion is 70/20 = $3.50. $3.50>$1.29 therefore, the overall effect of only this event will be an increase in EPS.

For C the ratio of the conversion is 49/40 = $1.23. $1.23<$1.29 therefore, the overall effect of only this event will be a decrease in EPS.

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[Vanessachy]

@Monkiernc, thank you!This is a great analysis.

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[monikernc]

that analysis was a miracle because it occurred w/in 5 minutes of waking up at 5:30 this morning. thank you dr forsyth, my intermediate 3 professor, for hammering this one through my thick skull.

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[Vanessachy]

Are you guys watching the free webinar, how to pass CPA within 3months?

Far 10/26/2015, 64, 1/4/2016, 82
Reg 7/10/2015, 60, 2/27/2016, 86
Aud, 5/9/2016, 74 (ouch), 7/26/2016, I cannot wait to take this test again
Bec, 6/10/2016, 70,9/8 retake

[Author]

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