AFM362 Chapter 10: Chapter 10

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lemonbeetle804

16 Dec 2018

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM362

Professor

Andy Bauer

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Document Summary

Division c deductions: deductions from net income for tax purposes to arrive at taxable income. Stock option deduction: equal to 50% of the employment income generated by the stock option . The full amount of employment income is included in division b and the. General ordering rules for division c: other deductions, such as empl oyee stock options, lump-sum payments, loss carryovers, such as non -cl, net-cl, and capital gains deductions, deductions for residing in prescribed zones. Tax credits: credit for items paid that can be applied against income tax payable. Non-refundable tax credits: if the amount of a non-refundable credit exceeds the amount of tax owing, the excess credit is not refunded to the taxpayer and in the majority of cases will expire. Refundable tax credits: any excess credit is always refunded to the taxpay. Tuition amount transferred from a c hild.

Related Questions

The stockholdersâ equity section of Nash Inc. at the beginning of the current year appears below. Common stock, $10 par value, authorized 1,066,000 shares, 319,000 shares issued and outstanding $3,190,000 Paid-in capital in excess of parâcommon stock 569,000 Retained earnings 552,000 During the current year, the following transactions occurred. 1. The company issued to the stockholders 98,000 rights. Ten rights are needed to buy one share of stock at $31. The rights were void after 30 days. The market price of the stock at this time was $33 per share. 2. The company sold to the public a $188,000, 10% bond issue at 103. The company also issued with each $100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at $29 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $7. 3. All but 4,900 of the rights issued in (1) were exercised in 30 days. 4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing. 5. During the current year, the company granted stock options for 10,100 shares of common stock to company executives. The company, using a fair value option-pricing model, determines that each option is worth $10. The option price is $29. The options were to expire at year-end and were considered compensation for the current year. 6. All but 1,010 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract. Prepare general journal entries for the current year to record the transactions listed above. Prepare the stockholdersâ equity section of the balance sheet at the end of the current year. Assume that retained earnings at the end of the current year is $775,000

coffeeweasel613

Choose the correction answer

7. Stock warrants outstanding shouldbe classified as

a. liabilities.

b. reductions of capital contributed in excess ofpar value.

c. assets.

d. None of these answers are correct.

8. The date on which to measure thecompensation element in a stock option granted to a corporateemployee ordinarily is the date on which the employee

a. is granted the option.

b. has performed all conditions precedent toexercising the option.

c. may first exercise the option.

d. exercises the option.

9. Which of the following isnot a characteristic of a noncompensatory stockpurchase plan?

a. It is open to almost all full-time employees.

b. The discount from market price is small.

c. The plan offers no substantive optionfeature.

d. All of these are characteristics.

10. On January 1, 2014, Trent Companygranted Dick Williams, an employee, an option to buy 400 shares ofTrent Co. stock for $30 per share, the option exercisable for 5years from date of grant. Using a fair value option pricing model,total compensation expense is determined to be $3,600. Williamsexercised his option on September 1, 2014, and sold his 400 shareson December 1, 2014. Quoted market prices of Trent Co. stock during2014 were:

January1 $30 per share

September1 $36 per share

December1 $40 per share

The service period is for two years beginning January 1, 2014. As aresult of the option granted to Williams, using the fair valuemethod, Trent should recognize compensation expense for 2014 on itsbooks in the amount of

a. $4,000.

b. $3,600.

c. $1,800.

d. $0.

11. Incomputing earnings per share for a simple capital structure, if thepreferred stock is cumulative, the amount that should be deductedas an adjustment to the numerator (earnings) is the

a. preferred dividends in arrears.

b. preferred dividends in arrears times (one minusthe income tax rate).

c. annual preferred dividend times (one minus theincome tax rate).

d. None of these answers are correct.

12. The following information isavailable for Barone Corporation:

January 1,2015 Sharesoutstanding 2,000

April 1,2015 Sharesissued 320,000

July 1,2015 Treasury sharespurchased 120,000

October 1,2015 Shares issued in a 100%stockdividend 2,200

The number of shares to be used incomputing earnings per common share for 2015 is

a. 4,520,800.

b. 4,380,000.

c. 4,360,000.

d. 2,730,000.

13. Incomputing earnings per share, the equivalent number of shares ofconvertible preferred stock are added as an adjustment to thedenominator (number of shares outstanding). If the preferred stockis cumulative, which amount should then be added as an adjustmentto the numerator (net earnings)?

a. Annual preferred dividend

b. Annual preferred dividend times (one minus theincome tax rate)

c. Annual preferred dividend times the income taxrate

d. Annual preferred dividend divided by the incometax rate

14. Fugate Company had 900,000 sharesof common stock issued and outstanding at December 31, 2014. OnJuly 1, 2015 an additional 750,000 shares were issued for cash.Fugate also had stock options outstanding at the beginning and endof 2015 which allow the holders to purchase 225,000 shares ofcommon stock at $20 per share. The average market price of Fugate'scommon stock was $25 during 2015. What is the number of shares thatshould be used in computing diluted earnings per share for the yearended December 31, 2015?

a. 1,695,000

b. 1,455,000

c. 1,331,250

d. 1,320,000

ochremallard702

Which of the following is correct?

NPV will be higher if sunk costs are included in a project's cash flows

A good example of a sunk cost is a situation where a company builds a restaurant and that results in lower sales by another of its restaurants.

A good example of a sunk cost is a situation where a company builds a restaurant and closes another of its restaurants.

A good example of a sunk cost is a situation where a company evaluated a site for a new restaurant last year, expensed the cost on its income statement, and now builds the restaurant

none of the above

TUNDRA Corporation's stock sells for $50 per share. A call option on the stock has a strike price of $55. A put option on the stock also has a strike price of $55. Which of the following is correct?

The call option is in-the-money

The put option is in-the-money

Both the call option and the put option are out-of-the money

The call option has a value of $5

none of the above

A firm plans to purchase equipment for $1.5 million. It will cost 200,000 to modify it for use in the firm's facility. The equipment is in the 3-year MACRS class. Calculate depreciation expense for Year 3.

none of the above

A proposed project is much riskier than average. The best way to account for its added risk is:

Ignoring it because project risk cannot be measured accurately.

Decreasing the discount rate to account for the higher risk

Increasing the discount rate to account for the higher risk

Reducing the NPV by 5% to account for the higher risk

none of the above

A company needs to decide whether to invest in a project now or wait a year until better information is available. The project has a positive expected NPV, but it could be negative if cash flows are less than expected. No competitors are likely to invest in a similar project if the company decides to wait. Which of the following best describes the issues the company is facing in making its decision?

The more uncertainty about the future cash flows, the more reason to go ahead with the project today.

NPV should be even higher by waiting a year, since it is positive today.

The project should be adopted now to lock in the expected positive NPV.

Waiting would probably reduce the project's risk.

none of the above

A stock is currently selling for $25. A 6-month call option on the stock has a strike price of $30 and sells for $0.50. Calculate the exercise value of the option?

none of the above

Which of the following is not a real option?

The option to switch the type of vehicle manufactured in a plant

The option to expand into a foreign country

The option to buy shares of stock if its price goes up.

The option to abandon a project.

none of the above

The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value?

$3.62

A company purchases equipment for $5 million, incurs shipping costs of $30,000 and installation costs of $50,000. It also requires additional net working capital of $100,000. What is the depreciable base?

none of the above

10.

Which of the following is an example of a real option?

An option to buy stock at a specified price for a specified period of time

An option to sell stock at a specified price for a specified period of time

An option to invest in a project today or to wait a year.

An option to buy either an American or European option

none of the above