As a general rule, revenue is normally recognized when it is ________.
Answer(s): D
Revenue is generally recognized when it is realizable and earned.
Cricketers, Inc. recently purchased Baseball Corp. for $3 million using debt financing. Analysts are in agreement that the fair value for Baseball's assets was around $2.7 million and that the overpayment was for strategic reasons. When Cricketers' accountants record the transaction, they must record:
Answer(s): C
Goodwill is defined as the price paid in excess of the fair market value of the assets of the target firm. Under US GAAP, Goodwill can and should be capitalized only when purchased externally (i.e. internally developed goodwill cannot be capitalized). Therefore, the over-payment of $0.3 million must be recognized separately as goodwill on the balance sheet of Cricketers, Inc.
Which of the following would be considered a liability that arises from financing activities?
Notes payable represents a liability that originates from financing activities. Liabilities that arise from financing activities typically require compensation in the form of interest. This can be contrasted with liabilities that arise from operating activities where interest bearing credit is not being extended but the liability arises from the "normal course of business."
Termite Terminators has a debt-to-equity ratio of 50%. The equity consists of 80,000 common stock, valued at the year-end at 65. The preferred equity consists of 30,000 shares of par value 25 and coupon of 6%. The debt carries a coupon rate of 8%. During the year, Termite earned 1.2 million and had an average stock price of 75. It also has 40,000 warrants attached to the debt, each exercisable at 68. Termite's reported Diluted EPS shouldbe:
Answer(s): B
For Diluted EPS, the average price is used in the treasury stock method. Since the average price of 75 is more than the strike price of 68 of the warrants, the warrants are dilutive for DEPS calculations. The preferred dividend is 30,000*25*6% = 45,000. The additional shares using the treasury stock method equal 40,000 - 40,000*68/75 = 3,733. The DEPS then equals (1,200,000-45,000)/(80,000+3,733) = 13.79.
Which of the following is/are problems with comparing firm ratios with industry ratios?
II is not a problem, but rather the relationship among firms in an industry with homogenous products is significant.
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