D104 Intermediate Accounting II - Set 3 - Part 3

Correct Answer: In the footnotes

Dividends in arrears on cumulative preferred stock are disclosed in the footnotes to the financial statements, but they are not recorded as a liability until declared.

Correct Answer: Retained earnings decrease

Declaring a property dividend decreases retained earnings, as the dividend represents a distribution of the companys assets to shareholders.

Correct Answer: A note payable due in 6 months

Notes payable due within one year or the operating cycle (whichever is longer) are classified as current liabilities.

Correct Answer: Has no effect on stockholders' equity

Converting preferred stock to common stock has no overall effect on stockholders' equity because it only shifts the equity from preferred to common stock.

Correct Answer: As a contra liability

Bond discounts are reported as a contra liability, reducing the carrying amount of the bonds payable on the balance sheet.

Correct Answer: Dividends declared / net income - preferred dividends

The payout ratio measures the percentage of net income distributed to shareholders as dividends, after accounting for preferred dividends.

Correct Answer: When issued at par

Bonds are reported at face value when they are issued at par, meaning the market and coupon rates are equal.

Correct Answer: Stock options

Stock options are considered dilutive securities because they can potentially increase the number of common shares outstanding, diluting earnings per share.

Correct Answer: To measure a companys ability to pay interest on its debt

The times interest earned ratio helps analysts evaluate a companys ability to meet its interest obligations from operating income.

Correct Answer: Debit cash, credit paid-in capital and common stock

When stock options are exercised, cash is debited, and both paid-in capital and common stock are credited for the par value and any excess.