6. On January 1, 2008, Waddle Company adopted a compensatory stock option plan a

Question

6. On January 1, 2008, Waddle Company adopted a compensatory stock option plan
and granted its managers 10,000 options to buy shares of common stock; each
option can be used to acquire a share of common stock at a price of $25 a share.
The fair value of each option was $7.50 on January 1, 2008. The options can be
converted into common stock after July 1, 2011. The required service period is three
years. How much compensation expense will be recorded for the year ending
December 31, 2010 assuming that the fair value approach is used?
a) $75,000
b) $175,000
c) $50,000
d) $25,000

7. Cash dividends paid by a corporation:
a) are an expense of the corporation that declared the dividend.
b) reduces the net income of the corporation that declared the dividend.
c) reduces the retained earnings of the corporation that declared the dividend.
d) reduces the retained earnings of the corporation that declared the dividend
because net income is reduced by the amount of the dividend.

8. When an investor owns less than 20 percent of the investee company, the investor
may still be able to exert influence over the investee company if the other stock is:
a) closely held by a few investors.
b) widely distributed across a few investors.
c) widely distributed across a large number of individual investors.
d) controlled a small group of investors.

9. Cash flows arising from the purchase or sale of marketable securities are cash flows from ________________ activities.
a) investing
b) operating
c) financing
d) research

Explanation / Answer

6)Option "b' is the correct answer . common stock value = 10000 *25 = $250000 option value = 10000*7.5 = 75000 convertion ratio = 1:1 Compansation expense = 250000-75000 = $175000 7)Option "c" is the corerct answer. Always Dividend would be paid from Retained Earning account only .So it would not be imapct on Net income. 8) option " d" is t he corerct answer. He may not influence on all of the investors widely 9) Option " a" is the correct answer . Purchasing and selling of securites is regarding to investment activity.

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