FINANCIAL ACCOUNTING 4 EXAMINATION
Time: 4 Hours
All calculations must be shown in an orderly manner to obtain part marks.
Round all calculations to the nearest dollar.
Narratives for journal entries are not required unless specifically asked for.
Assume a December 31 fiscal year-end unless specifically stated otherwise.
Assume all amounts are material unless directed otherwise.
Assume all companies are public companies unless otherwise noted.
Assume no companies use differential reporting unless otherwise noted.
for each of the following unrelated items. Answer
of these items
by giving the number of your choice. For example, if (1) is the best answer for
item (a), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item
will not be marked. Incorrect answers will be marked as zero. No account will be taken of any
explanations you offer.
2 marks each
Use the following information to answer parts (a) and (b).
In early 2003, KLN Company issued 20-year convertible bonds with a face value of $1,000,000 and a
stated interest rate of 8% paid annually. The bonds were issued for proceeds of $1,105,941 to provide an
effective interest rate of 7%. If the bonds did not have a conversion feature, in order to attract investors the
company would have had to issue the bonds for proceeds of $908,714, with an effective interest rate
Using the split accounting, incremental approach, at what amount should the conversion rights for
KLN’s 20-year convertible bonds be recorded?
1) $ 91,286
KLN Company uses the straight-line method to amortize the discount on its bonds. Ten years after the
bonds were issued, $500,000 (face value) of the bonds are converted using the carrying value
approach. The journal entry to record the issuance of common shares on conversion of the bonds
would include which of the following?
1) $26,485 debit to premium on bonds payable
2) $52,970 debit to premium on bonds payable
3) $22,821 credit to discount on bonds payable
4) $45,643 credit to discount on bonds payable