ACG 3113 - Final Exam Latest Update
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:
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.
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.
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
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:
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.
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.
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
