Question

In discussing book value of common stock, which statement below is not correct?

Multiple Choice

• The terms "issued" and "outstanding" are synonymous when discussing the number of common shares.

• Book value is also referred to as total equity of the firm.

• If any preferred stock were outstanding, its carrying amount would be deducted from the total equity to obtain the common equity.

• Book value per share is computed by dividing common equity by the number of common shares outstanding.

Convertible bonds are usually:

Multiple Choice

• mortgage bonds.

• callable.

• senior bonds.

• participating.

Which of the following statements does not accurately describe the current accounting standards for goodwill?

Multiple Choice

• Goodwill should be tested for impairment on at least an annual basis and in certain conditions between annual dates.

• If the fair value of the reporting unit is greater than its book value there is not a goodwill impairment.

• If the fair value of the reporting unit is less than its book value there will always be a goodwill impairment.

• Goodwill should not be amortized.

Answer 1

1. Common Stock: Answer option (d)

Option a is a correct a statement because if an entity issues 10,000 common stock, the outstanding number of common stocks are also 10,000. The terms 'issued' and 'outstanding' are used interchangeable in respect of common stock.

Option b is a correct statement because book value refers to the networth of the firm which is equal to total of assets minus total of liabilities. The net worth is also termed as total equity of the firm.

Option c is a correct statement because preferred stock is another kind of equity and thus presented in total equity. When we have to compute the total equity attributable to common stock, we shall deduct the portion attributable to preferred stock holders.

Option d is an incorrect statement because book value per share is calculated as:

Book Value per share = Net Worth or Total Book Value/Number of Common stocks outstanding

And book value per share is not computed by dividing the common stock by the number of common stock outstanding.

2. Convertible bonds: Answer option a

A convertible bond is a bond which can be converted into the common stock of the issuer, generally at the discretion of the investor.

Option a is correct because:

Mortgage bonds means that the bonds are secured with a charge on the assets of the issuer. This feature ensures that on case the issuer defaults on the interest and principal payments on the bond, the charged asset can be sold off to pay the bond holders. Convertible bonds are usually issued with a mortgage feature to ensure that interest payments are made until the bonds are converted into common stock.

Option b is incorrect because:

A callable bond is a bond which can be called i.e. redeemed by the issuer at a date earlier than the maturity of the bond. Such call option is generally available with the issuer.

Option c is incorrect because:

Seniority of a bond depends on the terms of the issue. If a straight bond is issued as a senior secured bond with a first charge on the assets of the issuer, it may become the senior most bond. Thus, Convertible bonds may or may not be senior bonds.

Option d is incorrect because:

Participating bonds are bonds that earn a specified rate of interest as well as may earn dividends when declared for the common stock holders of the iasuer.

Such bonds are rarely issued by an entity and generally convertible bonds do not carry a participating feature. However, once the convertible bonds are converted into common stock, the holders are entitled to dividends and distributions.

3. Goodwill: Answer option c

Option a is a correct statement because Ind AS 38/ IAS 38 on Intangible Assets alongwwith Ind AS 36/IAS 36 on Impairment of Assets, mention that goodwill being an indefinite use intangible asset should not be amortized and should be tested for impairment atleast annually and if conditions exists even more frequently.

Option b is a correct statement because:

Ind AS 36/ IAS 36 on Impairment of Assets states that, an asset is impaired if its carrying amount is greater than its recoverable amount.

Recoverable amount has been defined as higher of the Value in Use (VIU) or Fair Value less cost of Disposal(FVLCOD)

Ind AS 36/ IAS 36 further states that if any of the two, VIU or FVLCOD is greater than the carrying value of the asset, there will be no Impairment.

Thus when the fair value of a reporting unit is greater than its book value, there will be no goodwill impairment.

Option c is an incorrect statement because:

Ind AS 36/ IAS 36 on Impairment of Assets states that, an asset is impaired if its carrying amount is greater than its recoverable amount.

Recoverable amount has been defined as higher of the Value in Use (VIU) or Fair Value less cost of Disposal(FVLCOD)

From the above it is clear that even if the fair value is lower than the carrying value, we need to calculate the value in use before concluding that there is a requirement to impair the asset

Thus when the fair value of a reporting unit is lesser than its book value, there may or may not be an impairment of goodwill and it depends on the value in use.

Option d is a correct statement because:

Ind AS 38/ IAS 38 on Intangible Assets alongwwith Ind AS 36/IAS 36 on Impairment of Assets, mention that goodwill being an indefinite use intangible asset should not be amortized and should be tested for impairment atleast annually and if conditions exists even more frequently.