EXAn Fat the bej and a $5 mm urke ing rate I. Select the best answer (60 points) The conversion of bonds is most commonly recorded by the 1 gslain the mit entries eries: C fair v a. incremental method b. proportional method. c. market value method. d. book value method If a company offers additional considerations to convertible bondholders In order to encourage 2. conversion, it is called a(an): of end mont nsid mobi a. forced conversion. b. sweetener additional conversion. C. d end conversion. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is anef un s 8 3. a the ease with which convertible debt is sold even if the company has a poor credit rating b. the fact that equity capital has issue costs that convertible debt does not c. that many corporations can obtain debt financing at lower rates d. that convertible bonds will always sell at a premium. When convertible debt is retired by the issuer, any material difference between the cash acquisition 4. price and the carrying amount of the debt should be a reflected currently in income, but not as an extraordinary item. b. reflected currently in income as an extraordinary item. C treated as a prior period adjustment. d. treated as an adjustment of additional paid-in capital The conversion of preferred stock is recorded by the 5 a incremental method. b book value method. c market value method. d. par value method. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par 6 alue 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 7 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 the allocation would result in a discount on the debt security. d the warrants issued with the debt securities are nondetachable Stock warrants outstanding should be classified as a liabilities D. reductions of capital contributed in excess of par value C assets d None of these answers are correct. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably a zero. b calculated by the excess of the proceeds over the face amount of the bonds c equal to the market value of the warrants d based on the relative market values of the two securities involved Fogel Co, has $3,000,000 of 8 % convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2014, the holders of $960,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $210,000. Fogel should record, as a result of this conversion, a 10. a credit of $163,200 to Paid-in Capital in Excess of Par b credit of $144,000 to Paid-in Capital in Excess of Par c credit of $67 200 to Premium on Bonds Payable. d loss of $9,600. On July 1, 2014, an interest payment date, $90,000 of Parks Co. bonds were converted into 1,800 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $3,600 unamortized discount on the bonds. Using the book value method, Parks would record 11 a. no change in paid-in capital in excess of par b. a $5,400 increase in paid-in capital in excess of par C a $10,800 increase in paid-in capital in excess of par d a $7.200 increase in paid-in capital in excess of par 12 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 receve forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2014, the halders 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 Morean credit to the account "paid-in capital in excess of par," as a result of tnie conversion? a $ 247.500 b S 120,000 c $1,080,000 d S 540,000 Chang Corporation issued $4,000,000 of 9%, ten-year convertible bonds on July 1, 2014 at 96.1 plus accrued Interest. The bonds were dated April 1, 2014 with interest payable April 1 and October 1 Bond discours in amortized semiannually on a straight-line basis. On April 1, 2015, $800,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of convercinn if"interest payable" were credited when the bonds were issued, what should be the amount of the debit 13. to "interest expense" on October 1, 2014? a $ 86,000. b. $ 90,000 C. $ 94,000. d. $180,000. What should be the amount of the unamortized bond discount on April 1, 2015 relating to the bonds 14. converted? a. $31,200. b. $28,800. C. $15,600. d $29,600 What was the effective interest rate on the bonds when they were issued? 15. a. 9% b. Above 9% Below 9 % d. Cannot determine from the information given. C. 16. When preparing a reconciliation of net income to cash from operations, an increase in the ending inventory over the beginning inventory will result in an adjustment to reported net income because cash is increased because inventory is a current asset a. inventory is an expense deducted in computing net earnings, but is not a use of cash the net increase in inventory is part of the difference between cost of goods sold and cash paid to supplicrs. d. all changes in noncash accounts must be disclosed. b. C. 17 In the preparation of a statement of cash flows, adiustments to net income to reconcile net income to cash from operating activities include a Amortization of organization cost b. the difference between the purchase price and the resale price of treasury stock (assuming the cost method of accounting for treasury stock). dividends received demption premium on preferred stock redeemed during the period 18, Jacquin Corporation reports its income from investments under the equity method and recognized income of $15,000 from its investment in Trapper Company during the current year. Trapper declared no dividends during the current year. On Jacquin's statement of cash flows the $15,000 would be shown as cash from investing activities. b be showm as an addition to net income in the reconciliation of net income to cash from operations c be shown as a deduction from net income in the reconciliation of net income to cash from operations d not be shown. 19. Which of the following items involving current trade accounts receivable is most likely to appear in a statement of cash flows? The balance in the allowance for doubtful accounts The change in net sales Sales returns and allowances Collection of an account previously written off b. c. d. 20 Which of the following independent transactions would cause net income to be more than cash from operating activities? A decrease in the accounts receivable account An increase in the merchandise inventory account An increase in the accounts payable account An increase in the accrued wages payable account a. b. C. d. Which of the following transactions would not be reported on the statement of cash flows? 21. a. Purchase of treasury stock b. Declaration of a cash dividend which has not yet been paid c. Patent amortization d. Purchase of an operational asset by issuing common stock 22 Which of the following would be reported in the operating, investing, or financing sections of the statement of cash flows prepared under the indirect method? Declaration of an unpaid cash dividend Acquisition of a factory warehouse by issuing long-term debt Gain on the sale of cash equivalents Write-off of an uncollectible account receivable 1 C. 23. Choose the combination that best reflects the appropriate classification of cash received from operating. investing and financing activities. Financing Issuance of bonds payable Issuance of bonds payable Cash paid by customers Dividends received Operating Cash paid by customers Sale of operational assets Dividends received Sale of operational assets Dividends received Issuance of bonds payable Sale of operational assets Investing Cash paid by customers Choose the combination that best reflects the appropriate classification of cash paid for opersting 24 investing and financing activities Investing Interest paid Cash paid to suppliers Purchase of stock of another entity Income taxes paid Financing Dividends paid Income taxes paid Dividends paid Cash paid to suppliers Operating a Cash paid to suppliers b. Interest paid Income taxes paid d. Dividends paid Whish of the following is NOT required by generally accepted accounting principles? 25 Statement of cash flows Earmings per share b. Cash per share c. Disclosure in notes to financial statements of the projected benefit obligation ofa d. defined-benefit pension plan Proceeds from the sale of investments in common stock accounted for by the equity method would be 26 classified into which of the following sections of the statement of cash flows? Operating Investing b. Financing Non-cash item c. d. A gain on the sale of a plant assets should be included in which of the following sections of a statement 27 of cash flows prepared using the indirect method? Investing activities b. a. Operating activities Financing activities Non-cash investing and financing activities C. d. Which of the following is a non-cash transaction that should be disclosed in a schedule accompanying 28. the statement of cash flows? Sale of an investment for cash Purchase of a machine for cash Issuance of common stock in exchange for land d. a. b. c. Declaration and payment of a cash dividend on common stock 29. Which of the following causes a change in the amount of cash held by a company? Write-off of a bad debt a. Declaration of a cash dividend b. Payment of a cash dividend declared in a previous period Declaration and issuance of a stock dividend c. d. 30. On a reconciliation of net income to cash from operations, depreciation is added back to net income as depreciation is a direct outflow of cash. reduces net income but does not involve an outflow of cash. reduces net income and involves an outflow of cash. is an outflow of cash to a fund established for the replacement of assets. a b. e. EXAn Fat the bej and a $5 mm urke ing rate I. Select the best answer (60 points) The conversion of bonds is most commonly recorded by the 1 gslain the mit entries eries: C fair v a. incremental method b. proportional method. c. market value method. d. book value method If a company offers additional considerations to convertible bondholders In order to encourage 2. conversion, it is called a(an): of end mont nsid mobi a. forced conversion. b. sweetener additional conversion. C. d end conversion. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is anef un s 8 3. a the ease with which convertible debt is sold even if the company has a poor credit rating b. the fact that equity capital has issue costs that convertible debt does not c. that many corporations can obtain debt financing at lower rates d. that convertible bonds will always sell at a premium. When convertible debt is retired by the issuer, any material difference between the cash acquisition 4. price and the carrying amount of the debt should be a reflected currently in income, but not as an extraordinary item. b. reflected currently in income as an extraordinary item. C treated as a prior period adjustment. d. treated as an adjustment of additional paid-in capital The conversion of preferred stock is recorded by the 5 a incremental method. b book value method. c market value method. d. par value method. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par 6 alue 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 7 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 the allocation would result in a discount on the debt security. d the warrants issued with the debt securities are nondetachable Stock warrants outstanding should be classified as a liabilities D. reductions of capital contributed in excess of par value C assets d None of these answers are correct. A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably a zero. b calculated by the excess of the proceeds over the face amount of the bonds c equal to the market value of the warrants d based on the relative market values of the two securities involved Fogel Co, has $3,000,000 of 8 % convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2014, the holders of $960,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $210,000. Fogel should record, as a result of this conversion, a 10. a credit of $163,200 to Paid-in Capital in Excess of Par b credit of $144,000 to Paid-in Capital in Excess of Par c credit of $67 200 to Premium on Bonds Payable. d loss of $9,600. On July 1, 2014, an interest payment date, $90,000 of Parks Co. bonds were converted into 1,800 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $3,600 unamortized discount on the bonds. Using the book value method, Parks would record 11 a. no change in paid-in capital in excess of par b. a $5,400 increase in paid-in capital in excess of par C a $10,800 increase in paid-in capital in excess of par d a $7.200 increase in paid-in capital in excess of par 12 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 receve forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2014, the halders 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 Morean credit to the account "paid-in capital in excess of par," as a result of tnie conversion? a $ 247.500 b S 120,000 c $1,080,000 d S 540,000 Chang Corporation issued $4,000,000 of 9%, ten-year convertible bonds on July 1, 2014 at 96.1 plus accrued Interest. The bonds were dated April 1, 2014 with interest payable April 1 and October 1 Bond discours in amortized semiannually on a straight-line basis. On April 1, 2015, $800,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of convercinn if"interest payable" were credited when the bonds were issued, what should be the amount of the debit 13. to "interest expense" on October 1, 2014? a $ 86,000. b. $ 90,000 C. $ 94,000. d. $180,000. What should be the amount of the unamortized bond discount on April 1, 2015 relating to the bonds 14. converted? a. $31,200. b. $28,800. C. $15,600. d $29,600 What was the effective interest rate on the bonds when they were issued? 15. a. 9% b. Above 9% Below 9 % d. Cannot determine from the information given. C. 16. When preparing a reconciliation of net income to cash from operations, an increase in the ending inventory over the beginning inventory will result in an adjustment to reported net income because cash is increased because inventory is a current asset a. inventory is an expense deducted in computing net earnings, but is not a use of cash the net increase in inventory is part of the difference between cost of goods sold and cash paid to supplicrs. d. all changes in noncash accounts must be disclosed. b. C. 17 In the preparation of a statement of cash flows, adiustments to net income to reconcile net income to cash from operating activities include a Amortization of organization cost b. the difference between the purchase price and the resale price of treasury stock (assuming the cost method of accounting for treasury stock). dividends received demption premium on preferred stock redeemed during the period 18, Jacquin Corporation reports its income from investments under the equity method and recognized income of $15,000 from its investment in Trapper Company during the current year. Trapper declared no dividends during the current year. On Jacquin's statement of cash flows the $15,000 would be shown as cash from investing activities. b be showm as an addition to net income in the reconciliation of net income to cash from operations c be shown as a deduction from net income in the reconciliation of net income to cash from operations d not be shown. 19. Which of the following items involving current trade accounts receivable is most likely to appear in a statement of cash flows? The balance in the allowance for doubtful accounts The change in net sales Sales returns and allowances Collection of an account previously written off b. c. d. 20 Which of the following independent transactions would cause net income to be more than cash from operating activities? A decrease in the accounts receivable account An increase in the merchandise inventory account An increase in the accounts payable account An increase in the accrued wages payable account a. b. C. d. Which of the following transactions would not be reported on the statement of cash flows? 21. a. Purchase of treasury stock b. Declaration of a cash dividend which has not yet been paid c. Patent amortization d. Purchase of an operational asset by issuing common stock 22 Which of the following would be reported in the operating, investing, or financing sections of the statement of cash flows prepared under the indirect method? Declaration of an unpaid cash dividend Acquisition of a factory warehouse by issuing long-term debt Gain on the sale of cash equivalents Write-off of an uncollectible account receivable 1 C. 23. Choose the combination that best reflects the appropriate classification of cash received from operating. investing and financing activities. Financing Issuance of bonds payable Issuance of bonds payable Cash paid by customers Dividends received Operating Cash paid by customers Sale of operational assets Dividends received Sale of operational assets Dividends received Issuance of bonds payable Sale of operational assets Investing Cash paid by customers Choose the combination that best reflects the appropriate classification of cash paid for opersting 24 investing and financing activities Investing Interest paid Cash paid to suppliers Purchase of stock of another entity Income taxes paid Financing Dividends paid Income taxes paid Dividends paid Cash paid to suppliers Operating a Cash paid to suppliers b. Interest paid Income taxes paid d. Dividends paid Whish of the following is NOT required by generally accepted accounting principles? 25 Statement of cash flows Earmings per share b. Cash per share c. Disclosure in notes to financial statements of the projected benefit obligation ofa d. defined-benefit pension plan Proceeds from the sale of investments in common stock accounted for by the equity method would be 26 classified into which of the following sections of the statement of cash flows? Operating Investing b. Financing Non-cash item c. d. A gain on the sale of a plant assets should be included in which of the following sections of a statement 27 of cash flows prepared using the indirect method? Investing activities b. a. Operating activities Financing activities Non-cash investing and financing activities C. d. Which of the following is a non-cash transaction that should be disclosed in a schedule accompanying 28. the statement of cash flows? Sale of an investment for cash Purchase of a machine for cash Issuance of common stock in exchange for land d. a. b. c. Declaration and payment of a cash dividend on common stock 29. Which of the following causes a change in the amount of cash held by a company? Write-off of a bad debt a. Declaration of a cash dividend b. Payment of a cash dividend declared in a previous period Declaration and issuance of a stock dividend c. d. 30. On a reconciliation of net income to cash from operations, depreciation is added back to net income as depreciation is a direct outflow of cash. reduces net income but does not involve an outflow of cash. reduces net income and involves an outflow of cash. is an outflow of cash to a fund established for the replacement of assets. a b. e