CA Corporate Accounting 5 — Questions and Answers
Question 1: A company has net income of $600,000, 200,000 basic shares, and 20,000 dilutive stock options with an exercise price of $10 when the average market price is $25. What is the diluted share count using the treasury stock method?
- 212,000
- 220,000
- 208,000 (Correct answer)
- 216,000
Correct answer: 208,000
Treasury stock method: Options proceeds = 20,000 × $10 = $200,000; shares repurchased = $200,000 ÷ $25 = 8,000; net dilutive shares = 20,000 – 8,000 = 12,000; diluted = 200,000 + 12,000 = 212,000.
Question 2: Under the allowance method, when a specific customer account is written off as uncollectible, the journal entry is:
- Debit Bad Debt Expense; Credit Accounts Receivable
- Debit Allowance for Doubtful Accounts; Credit Accounts Receivable (Correct answer)
- Debit Accounts Receivable; Credit Allowance for Doubtful Accounts
- Debit Bad Debt Expense; Credit Allowance for Doubtful Accounts
Correct answer: Debit Allowance for Doubtful Accounts; Credit Accounts Receivable
Writing off a specific account debits the Allowance (reducing the contra-asset) and credits Accounts Receivable.
Question 3: Which of the following best describes the concept of 'legal capital' for a corporation?
- The total market capitalization of the company
- The minimum amount of contributed capital that cannot be distributed to shareholders (Correct answer)
- The amount available for dividend payments
- Total assets minus total liabilities
Correct answer: The minimum amount of contributed capital that cannot be distributed to shareholders
Legal capital, typically equal to par value of issued shares, is the minimum equity cushion that state law protects from distribution.
Question 4: A company records a prior period error correction that increases net income by $50,000 (after tax). Where is this adjustment reported in the financial statements?
- Current period income statement
- Other comprehensive income
- Opening retained earnings in the statement of changes in equity (Correct answer)
- Notes to financial statements only
Correct answer: Opening retained earnings in the statement of changes in equity
Under ASC 250, prior period error corrections are reported as an adjustment to opening retained earnings in the earliest period presented, not through current income.
Question 5: In a liquidating dividend, what is the accounting treatment that differs from an ordinary cash dividend?
- It is recorded entirely as a reduction of retained earnings
- The portion exceeding retained earnings is charged to Additional Paid-In Capital (Correct answer)
- It requires no journal entry because cash does not change
- It is classified as a liability at declaration date
Correct answer: The portion exceeding retained earnings is charged to Additional Paid-In Capital
When a dividend exceeds available retained earnings, the excess is treated as a return of capital and charged to APIC rather than retained earnings.
Question 6: Which ratio measures a company's ability to pay all current liabilities if they came due at once, using only the most liquid assets?
- Current ratio
- Quick (acid-test) ratio
- Cash ratio (Correct answer)
- Debt-to-equity ratio
Correct answer: Cash ratio
The cash ratio (cash + cash equivalents ÷ current liabilities) is the most conservative liquidity measure, excluding receivables and inventory.
Question 7: A corporation's charter authorizes 500,000 shares; 300,000 are issued; 50,000 are held as treasury stock. How many shares are outstanding?
- 500,000
- 300,000
- 250,000 (Correct answer)
- 450,000
Correct answer: 250,000
Outstanding shares = Issued shares – Treasury shares = 300,000 – 50,000 = 250,000.
CA Corporate Accounting 5
A company has net income of $600,000, 200,000 basic shares, and 20,000 dilutive stock options with an exercise price of $10 when the average market price is $25.
What is the diluted share count using the treasury stock method?