Choose the correction answer

1. In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price.

T F

2. Convertible bonds

a. have priority over other indebtedness.

b. are usually secured by a first or second mortgage.

c. pay interest only in the event earnings are sufficient to cover the interest.

d. may be exchanged for equity securities.

3. If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an):

a. forced conversion.

b. sweetener.

c. additional conversion.

d. end conversion.

4. Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $12,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2014, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $750,000. In applying the book value method, what amount should Morgan credit to the account "paid-in capital in excess of par," as a result of this conversion?

a. $ 247,500.

b. $ 120,000.

c. $1,080,000.

d. $ 540,000.

5. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to

a. additional paid-in capital from stock warrants.

b. retained earnings.

c. a liability account.

d. premium on bonds payable.

6. Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when

a. the market value of the warrants is not readily available.

b. exercise of the warrants within the next few fiscal periods seems remote.

c. the allocation would result in a discount on the debt security.

d. the warrants issued with the debt securities are nondetachable