Intermediate II Accounting

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Test #2 Multiple choice. Chapters 16, 17, and 18.

Convertable Bonds:

A. have priority over other indebtedness.
B. are usually secured by a first or second mortgage.
C. pay interest only in the event earning are sufficient to cover the interst.
D. may be exchanged for equity securities.

D. may be exchanged for equity securities.

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:

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 financing at lower rates.
D. that convertible bonds will always sell at a premium.

C. that many corporations can obtain financing at lower rates.

When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be:

A. reflected currently in income, but not as an extradorinary item.
B. reflected currently in income as an extradorinary item.
C. treated as a prior period adjustment.
D. treated as an adjustment of addional paid-in capital.

A. reflected currently in income, but not as an extradorinary item.

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.

D. premium on bonds payable.

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 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.

D. based on the relative market values of the two securities involved.

The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee:

A. is granted the option.
B. has preformed all conditions precedent to exercising the option.
C. may first exercise the option.
D. exercise the option.

A. is granted the option.

Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally:

A. not recognized because no excess of market price over the otion price exists at the date of grant.
B. recognized in the period of the grant.
C. allocated to the periods benefited by the employee's required service.
D. recognized in the period of exercise.

C. allocated to the periods benefited by the employee's required service.

Jenks Co. has $2,500,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertable into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2010, the holders of the $800,000 bonds excised 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 $175,000. Jenks should record, as a result of this conversion, a:

A. credit of $136,000 to Paid-In capital in excess of par.
B. credit of $120,000 to Paid-In capital in excess of par.
C. credit of $56,000 to premium on bonds payable.
D. loss of $8,000.

A. credit of $136,000 to Paid-In capital in excess of par.

In 2009, Berger, Inc., issues for $103 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Berger's $25 par value common stock at the option of the preferred stockholder. In August 2010, all of the preferred stock was convered into common stock. The market value of the common stock at the date of conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock?

A. $1,020,000.
B. $780,000
C. $1,500,000
D. $1,680,000

D. $1,680,000

Sloan Corp. offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at time when the stock was selling for $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the Sloan bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants?

A. $20,000
B. $20,500
C. $24,000
D. $25,000

B. $20,500

Kiner, Inc. had 40,000 shares of treasury stock ($10 par value) at December 31, 2009, which it acquired at $11 per share. On June 4, 2010, Kiner issues 20,000 treasury shares to employees who exercied options under Kiner's employee stock option plan. The market value per share was $13 at December 13, 2009, $15 at June 4, 2010, and $18 at December 31, 2010. The stock options had been granted for $12 per share. The cost method is used. What is the balance of the treasury stock on Kiner's balance sheet at December 31, 2010?

A. $140,000
B. $180,000
C. $220,000
D. $240,000

C. $220,000

With respect to the computation of earnings per share, which of the following would most indicative of a simple capital structure?

A. common stock, preferred stock, and convertible securities outstanding in lots of even thousands.
B. earnings derived from one primary line of business.
C. ownership interest consisting solely of common stock
D. none of these

C. ownership interest consisting solely of common stock

Antidilutive securities:

A. should be included in the computation of diluted earnings per share but not basic earnings per share.
B. are those whose inclusion in earnings per share computation would cause basic earnings per share to exceed diluted earnings per share.
C. include stock options and warrants whose exercise price is less than the average market price of common stock.
D. should be ignroed in all earnings per share calcualtions

D. should be ignored in all earnings per share calculations.

In determining diluted earnings per share, dividends on non convertible cumulative preferred stock should be

A. disregarded.
B. added back to net income whether declared or not.
C. deducted from net income only if declared.
D. deducted from net income whether declared or not.

D. deducted from net income whether declared or not.

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n):

A. extradorinary item.
B. expense.
C. loss.
D. none of these.

B. expense.

The major difference between convertible debt and stock warrants is that upon exercise of the warrants:

A. the stock is held by the company for a defined period of time before they are issued to the warrant holder.
B. the holder has to pay a certain amount of cash to obtain the shares.
C. the stock involved is restricted and can only be sold by the recipient after a set period of time.
D. no paid-in capital in excess of par can be a part of the transaction.

B. the holder has to pay a certain amount of cash to obtain the shares.

Dilutive convertible securities must be used in the compuation of:

A. basic earnings per share only.
B. diluted earnings per share only.
C. diluted and basic earnings per share.
D. none of these.

B. diluted earnings per sare only.

Unrealized holding gains or losses which are recognized in income are from securities classified as:

A. held-to-maturity.
B. available-for-sale.
C. trading.
D. none of these.

C. trading.

Debt securities that are accounted for at amortized cost, NOT fair value, are:

A. held-to-maturity debt securities.
B. trading debt securities.
C. available-for-sale debt securities.
D. never-sell debt securities.

A. held-to-maturity debt securities.

In accounting for investments in debt securities that are classified as trading securities:

A. a discount as trading securities.
B. a premium is reported separately.
C. any discount or premium is not amortized.
D. none of these.

C. any discount or premium is not amortized.

APB Opinion No. 21 specifies that, regarding the amortization of a premium or discount on a debt security, the:

A. effective-interst method of allocation must be used.
B. straight-line method of allocation must be used.
C. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.
D. par value method must be used and therefore no allocation is necessary.

C. effective-interest method of allocation should be used but othe methods can be applied if there is no material difference in the result obtained.

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

A. the investor should always use the equity method to account for its investments.
B. the investor should use the equity method to account for its investments unless circumstances indicate that it is unable to exercise "significant influence" over the investee.
C. the investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee.
D. the investor should always use the fair value method to account for its investments.

B. the investor should use the equity method to account for its investments unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

On Novemeber 1, 2010, Little Company purchased 600 of the $1,000 face value, 9% bonds of Player, Incorp., for $632,000, which includes accrued interst of $9,000. The bonds, which mature on January 1, 2015, pay interest semiannually on March 1 and September 1. Assuming that Little uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Little's December 31, 2010 balance sheet at:

A. $600,000
B. $623,000
C. $622,080
D. $632,000

C. $622,080

Redman Company's trading securities portfolio which is appropriately included in current assets is as follows: PICTURE HERE
Ingnoring income taxes, what amount should be reported as a charge against income in Redman's 2007 income statement if 2007 is Redman's first year of operation?

A. $0
B. $20,000
C. $30,000
D. $50,000

C. $30,000

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