ACG 3113 - FINAL EXAM 2025
QUESTIONS AND ANSWERS
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 - ANS 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. - ANS 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?
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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 - ANS 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 - ANS 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.
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.
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C - Bonds Payable only.
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, D - Bonds Payable and Discount on Bonds Payable. - ANS 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. - ANS 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.
On January 4, 2020, Newell Water Company issued 10-year convertible bonds at 105. On
October 17, 2020, Newell encouraged bondholders to convert their bonds into common stock,
with each investor receiving common stock with an aggregate par value equal to the total face
amount of the bonds. Newell's common stock was selling at 50% above par value at the time of
the conversion. How should the cash proceeds from the issuance of the convertible bonds on
January 4, 2020, be reported?
A - As paid-in capital for the entire proceeds.
B - As paid-in capital for the portion of the proceeds attributable to the conversion feature and
as a liability for the balance.
C - As a liability for the face amount of the bonds and paid-in capital for the premium over the
face amount.
D - As a liability for the entire proceeds. - ANS D - IFRS requires that the issuer of convertible
debt record the liability and equity components separately. At the time of issuance, the method
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@COPYRIGHT @THEBRIGHT 2025/2026
QUESTIONS AND ANSWERS
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 - ANS 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. - ANS 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?
1
Select answer from the options below:
Page
@COPYRIGHT @THEBRIGHT 2025/2026
, 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 - ANS 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 - ANS 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.
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.
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C - Bonds Payable only.
@COPYRIGHT @THEBRIGHT 2025/2026
, D - Bonds Payable and Discount on Bonds Payable. - ANS 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. - ANS 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.
On January 4, 2020, Newell Water Company issued 10-year convertible bonds at 105. On
October 17, 2020, Newell encouraged bondholders to convert their bonds into common stock,
with each investor receiving common stock with an aggregate par value equal to the total face
amount of the bonds. Newell's common stock was selling at 50% above par value at the time of
the conversion. How should the cash proceeds from the issuance of the convertible bonds on
January 4, 2020, be reported?
A - As paid-in capital for the entire proceeds.
B - As paid-in capital for the portion of the proceeds attributable to the conversion feature and
as a liability for the balance.
C - As a liability for the face amount of the bonds and paid-in capital for the premium over the
face amount.
D - As a liability for the entire proceeds. - ANS D - IFRS requires that the issuer of convertible
debt record the liability and equity components separately. At the time of issuance, the method
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