QUESTION: 2113

A firm pays out half its earnings as dividends. If its net income is $50, then

Its assets increase by $25
II. Its equity increases by $25
III. Its equity increases by $50
IV. The book value of the firm increases by $50
III & IV
I & II
I & IV
II & IV

Answer(s): B

Explanation:

Since half of $50 is paid out as dividends and the other half retained, the book value and equity increase by $25 and so do assets. Remember the basic equation, Assets = Liabilities + Equity.

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Birch Ltd. had net income for the year of $101,504 and a simple capital structure consisting of the following

common shares outstanding:

Months OutstandingNumber of Shares

January February 24,000
March June 29,400
July November 36,000
December 35,040

Assume Birch issued a 20% stock dividend on August 1st. In this case, earnings per share (rounded to the nearest cent) were

$2.72
$2.67
$2.88
$4.23
$2.41

Answer(s): B

Explanation:

Following is the calculation for the weighted average number of shares outstanding (before the 20% stock dividend):
24,000 X (2 / 12) = 4,000
29,400 X (4 / 12) = 9,800
36,000 X (5 / 12) = 15,000
35,040 X (1 /12) = 2,920
weighted average 31,720
Stock dividends are assumed to have occurred at the beginning of the year. Thus, the weighted average number of shares equals the amount before the stock dividend plus 20% more which is equal to 38,064 (31,720 + 20% X 31,720). EPS equals net income divided by the weighted average number of shares outstanding which is $2.67 ($101,504 / 38,064).

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QUESTION: 2115

A firm has a high debt-to-equity ratio. In order to improve this ratio in earlier years, it will prefer:

LIFO accounting and accelerated depreciation.
LIFO accounting and straight-line depreciation.
FIFO accounting and straight-line depreciation.
FIFO accounting and accelerated depreciation.

Answer(s): C

Explanation:

The company will use FIFO (assuming prices are increasing) and straight line depreciation to increase income and hence, retained earnings. This improves the debt-to-equity ratio.

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QUESTION: 2116

Bungling, Inc., is currently facing a lawsuit as a defendant. Its honest lawyers estimate that there is a 60-40 chance that Bungling will lose the lawsuit. The jury could award the plaintiff punitive damages ranging from $10,000 to $50,000. Bungling should

not recognize any liability but disclose the details in footnotes.
not do anything since the lawsuit is still not decided and considerable uncertainty exists.
recognize a liability of $50,000 on its balance sheet as a conservative estimate.
recognize a liability of $10,000 on its balance sheet.

Answer(s): A

Explanation:

If considerable uncertainty exists in measurement of an asset or a liability arising from events like a lawsuit, disclosure must occur in footnotes. The disclosure includes the nature of the contingency and an estimate or a range of estimates about the possible losses.

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QUESTION: 2114

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QUESTION: 2115

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QUESTION: 2116

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