CPA Financial Accounting and Reporting (FAR) : Equity Transactions
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Example Questions
Example Question #1 : Equity Transactions
The Mohawk Company borrows $5 million and is required to sign a debt covenant as a condition of taking out the loan. Which of the following is least likely to be required by the debt covenant?
The debt covenant may restrict Mohawk from doing whatever it wants with the loan proceeds
The debt covenant may require Mohawk to uphold certain minimum or maximum ratios
The debt covenant may require Mohawk to maintain a certain amount of working capital
The debt covenant may restrict Mohawk from operating certain business segments if they don't meet minimum profitability requirements
The debt covenant may restrict Mohawk from operating certain business segments if they don't meet minimum profitability requirements
Debt covenants typically place restrictions and requirements on working capital, not company operations.
Example Question #2 : Equity Transactions
The Barry Company borrows on a note payable and is subject to a debt covenant that requires it to maintain a certain level of working capital. In July of Year 1, Barry's working capital requirements fall below the level acceptable by its lender. Which of the following actions could the lender most likely take in response to this?
Immediately call the entire loan balance due
Immediately sue Barry for violation of the terms of the loan
Hold company officers personally liable for the outstanding balance
Seize the remainder of of Barry's working capital in settlement of the balance
Immediately call the entire loan balance due
If debt covenants are met, lenders have many options, but the most likely action they would take is to immediately call the entire balance due.
Example Question #3 : Equity Transactions
First Lender Bank requires all corporate borrowers to maintain a current ratio of .9, or they will be considered out of compliance with the terms of their loan and the full outstanding balance could be called immediately. One of its borrowers, the Stone Company, has current assets of $150,000 and current liabilities of $200,000. Another borrower, the Concrete Company, has current assets of $75,000 and current liabilities of $90,000. Which of these companies is in compliance with First Lender's debt covenant?
Concrete Company only
Neither Stone Company nor Concrete Company
Both Stone Company and Concrete Company
Stone Company only
Neither Stone Company nor Concrete Company
The current ratio is calculated as current assets divided by current liabilities. For Stone Company, the current ratio is $150K/$200K = .75. For Concrete Company, the current ratio is $75K/$90K = .833. Neither company is in compliance because both have ratios below .9.
Example Question #4 : Equity Transactions
A property dividend should be recorded in retained earnings at the property's:
Market value at date of issuance
Book value at date of declaration
Market value at date of declaration
Book value at date of issuance
Market value at date of declaration
A property dividend should be recorded in retained earnings at the property's market value at date of declaration.
Example Question #5 : Equity Transactions
How would a stock dividend affect assets, equity, and retained earnings?
Decrease retained earnings
Decrease retained earnings, assets, and equity
Decrease assets
Decrease equity
Decrease retained earnings
There is no net effect to equity as all transfers take place within equity. There is no effect to assets and only a decrease to retained earnings.
Example Question #1 : Debt And Equity Financing
Additional paid in capital would be utilized in recording gains from _______ transactions.
Neither
Both
Treasury stock
Investments in another company
Treasury stock
APIC is an account used to track the gains and decrease in gains from purchasing and reselling treasury stock.
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