QUESTIONS ON BONDS AND WARRANTS In this section, you are given FOUR Multiple Choice Questions on Bonds and Warrants. USE THE INFORMATION GIVEN BELOW TO ANSWER QUESTIONS You may find it useful and easier to answer this question by first preparing a Bond Amortization Table. On January 1, 2011, the Moon Travels, Inc., [MTI], issued $1,000,000, 8% , five-year convertible bonds for a cash price of $1,250,000. Interest is payable semi-annually on June 30 and December 31. Each $1,000 bond includes 20 warrants. Each warrant can be exchanged for one common share on MTI at an exercise price of $10 per share and the value of the conversion rights was estimated to be $94,700. The market rate of interest is 6% for similar bonds and similar warrants were being traded at $3.50 each. Each bond could be converted into 90 shares. You are required to select the alphabet of the one best answer to each of the questions listed below and input it in the computer. How would the bonds be reported on the balance sheet, December 31, 2011? a. [Long term Liability] Bonds Payable $40,000. O b. Current Liability] Interest Payable $32,336; [Long term Liability] Bonds Payable $40,000 O c. [Long term Liability] Bonds Payable $1,085,300. O d. (Current Liability] Bonds Payable 40,000. Oe. [Current Liability] Bonds Payable $16,025; [Long term Liability] Bonds Payable $1,054,170. Assume 30% of the warrants were exercised on July 1, 2013 when the shares of MTI were being traded at $11.50. The appropriate journal entry which the company should make on July 1 to record this transaction would be a. Cash DR...$60,000; Contributed Surplus - Warrants DR...$21,000; Bonds Payable CR...$81,000. O b. Cash DR...$69,000; Contributed Surplus - Warrants DR...$21,000; Gain on Warrants CR....$11,000; Bonds Payable CR....$69.000. O c. DR....$60,000; Contributed Surplus - Warrants DR....$21,000; Loss on Warrants DR....$9,000; Bonds Payable CR... $90,000. O d. Cash DR...$69,000; Contributed Surplus - Warrants DR....$21,000; Common Shares CR....$90,000. Cash Cash DR... $60,000; Contributed Surplus - Warrants DR....$21,000; Common Shares CR....$81,000. Assume 40% of the bonds were converted on January 1, 2012 when the shares of MTI were being traded at $12.00. The appropriate journal entry which the company should make on January 1 to record this transaction would be $5,880 CR...$432,000; Gain on Conversion CR CR....$432,000. O a. Bonds Payable DR...$400,000; Contributed Surplus - Conversion DR...$37,880; Common Shares O b. Bonds Payable DR....$400,000; Contributed Surplus - Conversion DR....$32,000; Common Shares O c. Bonds Payable DR...$428,078; Contributed Surplus - Conversion DR...$37,880; Common Shares Od. Bonds Payable DR...$428,078; Contributed Surplus - Conversion DR...$37,880; Common Shares CR...$432,000; Cash CR...$5,880. CR...$465,958. O e. None of the above. Assume 40% of the bonds were converted on January 1, 2012 when the shares of MTI were being traded at $12.00. The appropriate journal entry which the company should make on January 1 to record this transaction would be CR...$432,000; Gain on Conversion CR ....$5,880. a. Bonds Payable DR....$400,000; Contributed Surplus - Conversion DR...$37,880; Common Shares O b. Bonds Payable DR...$400,000; Contributed Surplus - Conversion DR...$32,000; Common Shares CR.... $432,000. C. Bonds Payable DR...$428,078; Contributed Surplus - Conversion DR....$37,880; Common Shares CR....$432,000; Cash CR ....$5,880. O d. Bonds Payable DR....$428,078; Contributed Surplus - Conversion DR...$37,880; Common Shares CR.... $465,958. e. None of the above
