A firm issued 2 million warrants with an exercise price of 102 on June 15, 1996. The maximum price of the stock in 1996 was 129, the average price was 110. The stock closed out the year at 99. How many additional shares must be used in the computation of Diluted EPS as a result of these warrants?
Answer(s): C
The conversion assumptions for options and warrants are as follows:1. They are assumed to be exercised at the beginning of the period or at the time of issuance, whichever is later.2. They enter into the Diluted EPS calculations only if the average stock price during the period exceeds the exercise price. With the Treasury stock method, the total shares repurchased using exercise proceeds = 2*102/110 = 1,854,546. Thus, additional shares issued = 2 million - 1,854,546 = 145,454. These are outstanding for 6.5 months. Therefore, additional weighted shares = 145,454*6.5/12 = 78,788.
Which of the following correctly defines an element directly related to measuring the performance and status of a business entity?
Answer(s): B
Equity in a business is considered a residual interest and represents the ownership (total assets minus total liabilities) in the firm.
A piece of equipment costs $200,000, has a useful life of 5 years and an estimated salvage value of $50,000. How much depreciation expense should the company recognize in year 4 if it is using the sum-of-the- years' digits method of depreciation?
Answer(s): D
Using the sum-of-the-years' digits the sum of the years is 15. In year 4 you would take 2/15 of the cost less the salvage value. 2/15 of $150,000 is equal to $20,000.
In the successful effort method, oil firms:
In extractive industries, firms are allowed to use either the full-cost method, in which all search and development costs can be capitalized, or the successful-efforts method, where all such costs are expensed unless they result in revenue-generating assets, in which case, they are capitalized. If an oil drilling firm uses the successful-efforts method, it expenses costs incurred on dry holes and capitalizes those resulting in oil- producing wells.
MacDonald Inc. reported net income of $300,000 for 1996. Changes occurred in several balance sheet accounts as follows:Equipment $25,000 increaseAccumulated depreciation 40,000 increaseNote payable 30,000 increaseAdditional information:During 1996, MacDonald sold equipment costing $25,000, with accumulated depreciation of $12,000, for a gain of $5,000.In December 1996, MacDonald purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of $30,000.Depreciation expense for the year was $52,000.In MacDonald's 1996 statement of cash flows, net cash used in investing activities is ________.
Answer(s): E
The purchase and sale of equipment are investing activities. The firm spent $20,000 cash to buy equipment and received $18,000 cash (net book value was $13,000 plus $5,000 gain) by selling its old equipment.Therefore, the net cash used in investing is $2,000. The issuance of a note payable is part of the acquisition price of equipment and is classified as a noncash financing and investing activity.
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