Question 1

IFRS does not require firms to allocate a portion of the issue price of convertible bonds and convertible preferred stock to the conversion feature.

Accepted Answer

IFRS does require firms to allocate a portion of the issue price of convertible bonds and convertible preferred stock to the conversion feature. This is because the conversion feature represents a separate financial instrument that has its own fair value and should be accounted for separately under IFRS.

Question 2

In most cases U.S.GAAP requires firms to allocate the full issue price of Convertible Bonds or Convertible Preferred Stock to the bonds or preferred stock and none of the price to the conversion feature.

Accepted Answer

This statement is true. According to U.S.GAAP, the full issue price of Convertible Bonds or Convertible Preferred Stock must be allocated to the bonds or preferred stock and none of the price can be allocated to the conversion feature. This is because the conversion feature is considered to be an embedded derivative and must be accounted for separately under U.S.GAAP rules.

Question 3

Shareholders' equity is a residual interest.It represents the shareholders' claim on the assets of a firm after the firm satisfies all higher-priority claims.

Accepted Answer

Shareholders' equity is indeed a residual interest, as it represents what is left over after all liabilities have been paid. This residual interest belongs to the shareholders and represents their claim on the net assets of the company.

Question 4

To settle debts of general partnerships and sole proprietorships, creditors have a claim on the owners' business and personal assets.

Accepted Answer

In a general partnership or sole proprietorship, there is no legal separation between the owners and the business. Therefore, creditors can go after the owners' personal assets to settle any business debts.

Question 5

If a firm issues common stock in return for services other than from employees, the firm records the transaction at the fair value of the services received if it can more reliably measure this amount.Otherwise, the firm records the transaction at the fair value of the shares issued.

Accepted Answer

The statement is true. According to accounting standards, when a firm issues common stock in return for services other than from employees, the transaction is recorded at the fair value of the services received if it can be reliably measured. If the fair value of the services cannot be reliably measured, the transaction is recorded at the fair value of the shares issued.

Question 6

When firms issue common stock for assets other than cash, the firm records the shares exchanged for noncash assets at the fair value of the shares given or, if the firm cannot make a reasonable estimate, at the fair value of the assets received.

Accepted Answer

This statement is true. When firms issue common stock for assets other than cash, the fair value of the shares given is recorded as the value of the noncash assets received. If the firm cannot determine the fair value of the shares given, then the fair value of the assets received is used as the basis for recording the transaction.

Question 7

Firms may periodically distribute net assets generated by earnings to shareholders as a dividend.Firms reduce net assets and retained earnings for the distribution.

Accepted Answer

This statement is true. When a firm distributes its net assets generated by earnings to shareholders, it does reduce its net assets and retained earnings by the amount of the distribution. This reduces the equity available to the firm for future investments and operations.

Question 8

U.S.GAAP and IFRS do not classify preferred stock subject to redemption only at the option of the issuing firm as shareholders' equity.

Accepted Answer

U.S.GAAP and IFRS classify preferred stock subject to redemption only at the option of the issuing firm as a liability, not shareholders' equity.

Question 9

The annual reports to shareholders must explain the changes in all shareholders' equity accounts.

Accepted Answer

According to US GAAP and IFRS guidelines, annual reports to shareholders must include a statement of changes in shareholders' equity that explains the changes in all equity accounts. This is necessary to give shareholders a clear understanding of the company's financial position and how their ownership stake has changed over time.

Question 10

Preferred stock subject to redemption at the option of the preferred shareholders appears between liabilities and shareholders' equity in U.S.GAAP and as a liability in IFRS.

Accepted Answer

This is true. Preferred stock subject to redemption at the option of the preferred shareholders is classified as a liability in IFRS, but in U.S. GAAP, it appears between liabilities and shareholders' equity.

Question 11

In recent years, many partnerships and sole proprietorships have become limited liability companies (LLCs), or limited liability partnerships (LLPs), to limit their owners' personal liability for business debts and other obligations.

Accepted Answer

This statement is true. Many businesses have opted to become LLCs or LLPs to protect their owners from personal liability for business debts and other obligations.

Question 12

Common and preferred stock usually do not have a par or stated value.

Accepted Answer

Common and preferred stocks often have a par or stated value, which is a nominal value assigned to the shares in the corporation's charter and used for accounting purposes.

Question 13

Convertible preferred shares require the holder of preferred shares to convert the preferred shares into a specified number of common shares under certain specified conditions.

Accepted Answer

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Question 14

Both U.S.GAAP and IFRS require the disclosure of information about the rights of each type of capital stock outstanding.

Accepted Answer

Both U.S.GAAP and IFRS require companies to disclose information about the rights and privileges attached to each type of capital stock outstanding, including voting rights, dividend rights, liquidation preferences, and conversion rights, if applicable. This information is typically included in the notes to the financial statements or in the shareholder equity section of the balance sheet.

Question 15

Financial statement notes must disclose significant limitations on dividend declarations.

Accepted Answer

Financial statement notes are required to disclose any significant limitations on dividend declarations to inform shareholders of any restrictions or factors that could affect the company's ability to pay dividends.

Question 16

All corporations must issue preferred stock.

Accepted Answer

Preferred stock is not a requirement for corporations. It is an optional type of stock that provides certain advantages and benefits to the shareholders, such as preference in dividend payments and higher priority in case of liquidation. However, not all corporations choose to issue preferred stock.

Question 17

The issuing firm benefits from issuing convertible preferred shares, because these shares carry a lower dividend rate than purchasers otherwise would have required to buy the shares for a given price.

Accepted Answer

Convertible preferred shares typically have a lower dividend rate than non-convertible preferred shares because investors are willing to accept a lower dividend rate in exchange for the option to convert their shares into common shares. This can be beneficial for the issuing firm because it allows them to raise capital at a lower cost than if they had issued non-convertible preferred shares.

Question 18

Retained earnings on the balance sheet provides a measure of the cumulative net assets generated by earnings in excess of dividends declared.

Accepted Answer

Retained earnings represent the portion of a company's net income that is not distributed as dividends but rather is kept by the company and reinvested in the business. Therefore, it provides a measure of the cumulative net assets generated by earnings in excess of dividends declared.

Question 19

If a corporation becomes insolvent, creditors can claim the assets of the individual owners.

Accepted Answer

If a corporation becomes insolvent, creditors can only claim the assets of the corporation, not the individual owners. The owners' personal assets are protected by the concept of limited liability, which means they are not personally responsible for the debts of the corporation.

Question 20

Only the corporate form of business organization provides the owner with limited liability.

Accepted Answer

Other forms of business organization, such as Limited Liability Companies (LLCs) and Limited Partnerships (LPs), also provide owners with limited liability protection.

Quiz 15: Shareholders Equity: Capital Contributions and Distributions