Management Accounting Assignment: Multiple Choice and Analysis

This document presents a comprehensive solution to a management accounting assignment. The solution begins with multiple-choice questions covering topics such as dividend declaration, preferred stock types, and treasury stock. It then proceeds to a calculation question, demonstrating the dete...Read More

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Multiple choice questions..........................................................................................................2
Calculation question...................................................................................................................3
Short answer questions...............................................................................................................3
Answer 1................................................................................................................................3
Answer 2................................................................................................................................4
Pfizer financial statement questions...........................................................................................5
Reference....................................................................................................................................6

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Multiple choice questions
Answer 1 – A. Date of declaration
Answer 2 – A. Callable preferred stock
Answer 3 – B. Convertible preferred stock
Answer 4 – C. $ 50,000
Answer 5 – B. The number of shares outstanding will be 600,000 after the dividend is paid
Answer 6 – E. Treasury stock
Answer 7 – D. Fixed cost
Answer 8 – C. Extraordinary loss
Answer 9 – A. Cumulative feature
Answer 10 – C. Par value decreases

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Calculation question
Particular Amount
Sales $ 100,000.00
Less: Variable costs
Manufacturing $ 40,000.00
Marketing and administrative $ 20,000.00
Total variable cost $ 60,000.00
Contribution margin $ 40,000.00
Less: Fixed cost
Manufacturing cost $ 20,000.00
Marketing and administrative $ 10,000.00
Total fixed cost $ 30,000.00
Operating profit $ 10,000.00
Hence, current operating profit of Benezra Enterprises is $ 10,000.
Short answer questions
Answer 1
Stock compensation is the method used by the corporations for rewarding its
employees. The reason this method is used by the corporations is that the tax consequence is
based on the FMV (fair market value) of stock. Hence, if stock is subject to the tax
withholding, tax shall be paid in cash irrespective of the fact that the employees are paid
through equity compensation (Izhakian and Yermack 2017). Under fair value approach
accounting for the stock – based compensation at the grant date shall be charged to
compensation expenses over the service period of the employee. It shall be estimated at the
fair values of ESOPs (employee stock option plan) and the stock issue SARs (Stock
appreciation rights). However, the estimated expenses for compensation are not charged
against actual benefit that is received by employees from option exercise (Aldatmaz, Ouimet

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and Van Wesep 2018). Further, the fair value estimation of granted contract shall be
computed through using the model of option valuation.
Vesting period is crucial under accounting for stock option compensation as it
determines time period over which compensating cost of option holder is considered as
expense under the income statements. During vesting period business is required to expense
total compensation cost of stock option of employees those are providing service (Call, Kedia
and Rajgopal 2016). Total cost is the fair value of option granted in exchange for service.
After vesting if the options, employees have right to exercise the options and thereby
purchase the shares in business at exercise price. On exercising the options cash account is
debited and the common stock is credited (Kim and Ouimet 2014).
Answer 2
Stock splits are the events where outstanding number of shares increases and stated
value or par value of the shares reduced. For instance, 2 for 1 stock split will double the
outstanding share numbers and will halve par value of the share. Hence, the existing
shareholders will experience that their share number will become double however, no change
will be there regarding the proportional ownership. As the total outstanding share value is not
affected through stock split no journal entry is required in accounting for the stock split
(Copeland 2014).
Conversely, stock dividends involve issuance of the additional stock shares to the
existing shareholders on proportionate basis. Stock dividends are similar to the stock splits.
For instance, shareholder holding 100 shares will hold 125 shares after getting 25% of stock
dividend. Eventually all the shareholders will hold 25% shares more and therefore, holding
proportion will not be changed. Though little difference is there between stock split and stock
dividend unlike the stock split stock dividends require journal entries. It is recorded through

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moving the amounts from the retained earnings to the paid-in-capital (Tsai et al. 2018).
Amounts required to be moved depends on the distribution size. Small stock dividend that is
lower than 20-25% of outstanding shares will be accounted at the market price on the
declaration date. However, large stock dividend is accounted at the par value.
Pfizer financial statement questions
1. Par value of a share of the common stock for Pfizer for the year ended 2017 is $ 0.05
2. No par value for the preferred stock of Pfizer for the year ended 2017 was there and it
has stated value (Pfizer.com 2018)
3. Total cost of treasury stock that is owned by Pfizer as at 31st December 2017
amounted to $ (89,425).
4. Diluted earnings per share of Pfizer for the year 2017 was $ 2.65
5. Dividend rate on the ‘Series A convertible perpetual preferred stock’ for Pfizer was
6.25%.
6. Employee stock option expense or share based payments net of tax recognized by
Pfizer during the year 2017 was amounted to $ 677 million.
7. Shares of the stock exercisable under the plan of stock option as at 31st December
2017 were 108,747 thousands (Pfizer.com 2018).

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Reference
Aldatmaz, S., Ouimet, P. and Van Wesep, E.D., 2018. The option to quit: The effect of
employee stock options on turnover. Journal of Financial Economics, 127(1), pp.136-151.
Call, A.C., Kedia, S. and Rajgopal, S., 2016. Rank and file employees and the discovery of
misreporting: The role of stock options. Journal of Accounting and Economics, 62(2-3),
pp.277-300.
Copeland, T., 2014. Stock split in the American market, liquidity changes following stock
splits. Journal of Finance, 3, pp.11-15.
Izhakian, Y. and Yermack, D., 2017. Risk, ambiguity, and the exercise of employee stock
options. Journal of Financial Economics, 124(1), pp.65-85.
Kim, E.H. and Ouimet, P., 2014. Broad‐based employee stock ownership: Motives and
outcomes. The Journal of Finance, 69(3), pp.1273-1319.
Pfizer.com. 2018. Pfizer: One of the world's premier biopharmaceutical companies. [online]
Available at: https://www.pfizer.com/ [Accessed 23 Nov. 2018].
Tsai, Y.S., Tzang, S.W., Hung, C.H. and Chang, C.P., 2018, July. The Relationship Between
Dividend, Business Cycle, Institutional Investor and Stock Risk. In International Conference
on Innovative Mobile and Internet Services in Ubiquitous Computing (pp. 793-800).
Springer, Cham.