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ACG 3113 - Final Exam , QUESTIONS WITH ACCURATE
ANSWERS | MULTIPLE CHOICES |!!
Allen Industries sells 20,000 bonds with a par value of $500. Each bond comes
with a detachable warrant. Allen knows the market price of the warrants is $20
and that similar bonds without warrants sell for $99. Based on this information,
Allen should allocate proceeds of the sale using the ________ method -
(ANSWER)proportional - We are given two values of the bonds and the
detachable warrant. We will opt to use the proportional method to allocate the
proceeds using the proportion of the two amounts, based on fair values. With the
incremental method, the value of the lump-sum purchase is first allocated to
securities with known market values. The remaining value of the transaction is
then allocated to the security with an unknown market value.
Which of the following is one reason corporations issue convertible debt?
A. They can obtain debt financing at lower rates.
B. They can easily sell convertible debt even if the company has a poor credit
rating.
C. They can avoid issue costs associated with equity capital.
D. They can always sell convertible bonds at a premium. - (ANSWER)A -
Corporations issue convertible securities for two main reasons. One is to raise
equity capital without giving up more ownership control than necessary. A second
reason to issue convertibles is to obtain debt financing at cheaper rates.
When will the distribution of stock rights to existing common stockholders
increase paid-in capital?
Select answer from the options below:
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A - at the date of issuance of the rights
B - at the date of issuance of the rights and at the date of ececise of the rights.
C - It will never increase paid-in-capital
D - at the date of exercise of the rights - (ANSWER)D - To have an increase in
paid-in capital, the stockholder would need to exercise their right, and then they
would receive cash in excess of par value, which credits Paid-in Capital in Excess
of Par.
Winter Sports Apparel issued convertible debt securities. Which of the following
statements is true regarding their journal entries as a result of this issuance?
A - They will have a single journal entry at issuance for all securities and another
single entry at retirement for all securities in the issue.
B - They will have two separate journal entries at issuance, one for the bonds to
be converted and one for bonds that will not be converted. Then they will have a
single entry at conversion for all bonds to be converted and another single entry
at retirement for all securities that were not converted.
C - They will have a single journal entry at issuance for all securities and another
single entry at conversion for all securities in the issue.
D - They will have a single journal entry at issuance for all securities, separate
entries each time bonds are converted to common stock, and a single entry at the
end of the - (ANSWER)D - Under GAAP, proceeds from the issuance of convertible
debt are recorded entirely as debt. The entry to record would be a credit to cash
and debit to bonds payable. When recording the conversion of bonds to common
stock, there will always be a debit to Bonds Payable and a credit to Common
Stock. Companies need to recognize a gain or loss on retiring convertible debt in
the same way that they recognize a gain or loss on retiring nonconvertible debt.
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Justice Enterprises issued $1,000 par value convertible bonds at 98. At the time of
issuance, they should record credits to
A - Common Stock and Premium on Bonds Payable.
B - Bonds Payable and Common Stock.
C - Bonds Payable only.
D - Bonds Payable and Discount on Bonds Payable. - (ANSWER)C - At the time of
issuance, the method for recording convertible bonds at the date of issue follows
the method used to record straight debt issues. Convertible bonds are classified
as a liability, in this case, Bonds Payable only.
How should the difference between the cash acquisition price of retired
convertible debt and the carrying amount of the debt be recorded by the issuer?
A - It should be recorded currently in income.
B - It should be recorded as an adjustment of additional paid-in capital.
C - It should be recorded as a prior period adjustment.
D - It should be recorded currently in other comprehensive income, but not
included in the calculation of EPS. - (ANSWER)A - Companies need to recognize a
gain or loss on retiring convertible debt in the same way that they recognize a
gain or loss on retiring nonconvertible debt. Gains and losses are recorded as
income for that year. The company should record a debit to Retained Earnings for
the difference when the par value of the common stock issued exceeds the book
value of the preferred stock.
ACG 3113 - Final Exam , QUESTIONS WITH ACCURATE
ANSWERS | MULTIPLE CHOICES |!!
Allen Industries sells 20,000 bonds with a par value of $500. Each bond comes
with a detachable warrant. Allen knows the market price of the warrants is $20
and that similar bonds without warrants sell for $99. Based on this information,
Allen should allocate proceeds of the sale using the ________ method -
(ANSWER)proportional - We are given two values of the bonds and the
detachable warrant. We will opt to use the proportional method to allocate the
proceeds using the proportion of the two amounts, based on fair values. With the
incremental method, the value of the lump-sum purchase is first allocated to
securities with known market values. The remaining value of the transaction is
then allocated to the security with an unknown market value.
Which of the following is one reason corporations issue convertible debt?
A. They can obtain debt financing at lower rates.
B. They can easily sell convertible debt even if the company has a poor credit
rating.
C. They can avoid issue costs associated with equity capital.
D. They can always sell convertible bonds at a premium. - (ANSWER)A -
Corporations issue convertible securities for two main reasons. One is to raise
equity capital without giving up more ownership control than necessary. A second
reason to issue convertibles is to obtain debt financing at cheaper rates.
When will the distribution of stock rights to existing common stockholders
increase paid-in capital?
Select answer from the options below:
,2|Page
A - at the date of issuance of the rights
B - at the date of issuance of the rights and at the date of ececise of the rights.
C - It will never increase paid-in-capital
D - at the date of exercise of the rights - (ANSWER)D - To have an increase in
paid-in capital, the stockholder would need to exercise their right, and then they
would receive cash in excess of par value, which credits Paid-in Capital in Excess
of Par.
Winter Sports Apparel issued convertible debt securities. Which of the following
statements is true regarding their journal entries as a result of this issuance?
A - They will have a single journal entry at issuance for all securities and another
single entry at retirement for all securities in the issue.
B - They will have two separate journal entries at issuance, one for the bonds to
be converted and one for bonds that will not be converted. Then they will have a
single entry at conversion for all bonds to be converted and another single entry
at retirement for all securities that were not converted.
C - They will have a single journal entry at issuance for all securities and another
single entry at conversion for all securities in the issue.
D - They will have a single journal entry at issuance for all securities, separate
entries each time bonds are converted to common stock, and a single entry at the
end of the - (ANSWER)D - Under GAAP, proceeds from the issuance of convertible
debt are recorded entirely as debt. The entry to record would be a credit to cash
and debit to bonds payable. When recording the conversion of bonds to common
stock, there will always be a debit to Bonds Payable and a credit to Common
Stock. Companies need to recognize a gain or loss on retiring convertible debt in
the same way that they recognize a gain or loss on retiring nonconvertible debt.
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Justice Enterprises issued $1,000 par value convertible bonds at 98. At the time of
issuance, they should record credits to
A - Common Stock and Premium on Bonds Payable.
B - Bonds Payable and Common Stock.
C - Bonds Payable only.
D - Bonds Payable and Discount on Bonds Payable. - (ANSWER)C - At the time of
issuance, the method for recording convertible bonds at the date of issue follows
the method used to record straight debt issues. Convertible bonds are classified
as a liability, in this case, Bonds Payable only.
How should the difference between the cash acquisition price of retired
convertible debt and the carrying amount of the debt be recorded by the issuer?
A - It should be recorded currently in income.
B - It should be recorded as an adjustment of additional paid-in capital.
C - It should be recorded as a prior period adjustment.
D - It should be recorded currently in other comprehensive income, but not
included in the calculation of EPS. - (ANSWER)A - Companies need to recognize a
gain or loss on retiring convertible debt in the same way that they recognize a
gain or loss on retiring nonconvertible debt. Gains and losses are recorded as
income for that year. The company should record a debit to Retained Earnings for
the difference when the par value of the common stock issued exceeds the book
value of the preferred stock.
