Simon Steel Inc. had the following unusual financial events occur this year: Bonds payable were retired 5 years before their scheduled maturity, resulting in a $260,000 gain, Simon has frequently retired bonds early when interest rates declined significantly. A steel forming segment suffered $255,000 in losses from hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. A segment of Simon's operations, steel transportation, was sold at a net loss of $350,000. This was Simon's first divestiture of one of its operating segments. Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary times for this year?
Answer(s): A
Accounting rules require that any gain or loss from early retirement of debt must be recognized as an extraordinary item. For all other transactions to be classified as extraordinary items, they must be both unusual and infrequent. In this case, none of the other gains or losses qualify.
A credit entry to Allowance for Uncollectible Accounts
Allowance for Uncollectible Accounts, sometimes referred to as Bed Debt Reserve, is a contra account to Accounts Receivable. A credit entry increases its balance and the balance reduces the amount of net Accounts Receivable.
The following is a sign that a company is a "growth company":
Answer(s): C
Companies characterized as "growth companies" are those that do make money, but they keep the money within the company so as to grow the company. Companies that pay dividends are not maximizing the funds available to fund future growth. Companies that limit earnings by paying employees exorbitant salaries are not growth companies. Companies like this are giving funds to employees rather than holding them within the corporation to fund future growth.
New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March 31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, New Gestalt's Basic EPS equals ________.
The preferred dividends = 100,000*5%*100*9/12 = 375,000 (they were outstanding for 9 months). Therefore, Basic EPS = (Net Income - Preferred dividends)/weighted # of common shares = (1,700,000 - 375,000)/200,000 = 6.62
Dilutive warrants are ________ included in the calculation of Diluted EPS.
Diluted EPS reflects all securities that are potential shares and which decrease earnings per share. Also remember that all anti-dilutive securities are ignored. A dilutive security, by definition, is one that decreases EPS. Therefore, dilutive warrants are always included in the calculation of Diluted EPS.
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