23853690-Self-Study-Quiz-16-With-Answers - Chapter 16...

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Chapter 16 Self-Study Quiz with Answers ANALYSIS OF MULTIPLE-CHOICE TYPE QUESTIONS 1. (L.O. 1) For the purpose of inducing conversion, a corporation with convertible bonds increases the number of common shares into which this debt may be converted. Upon conversion, the fair value of the additional shares given should be reported as: a. an expense of the current period. b. an extraordinary item. c. a direct reduction of owners’ equity. d. a deferred expense. Explanation: When an issuer offers some form of additional consideration (cash, other assets, or common stock), called “sweetener,” to induce conversion of convertible debt, SFAS No. 84 requires that the sweetener be recognized as an expense equal to the fair value of the additional securities or other consideration given. (Solution = a.) 2. (L.a. 1) The Goodings Corporation issued 1,000 8% convertible bonds with a face value of $1,000 each at a price of 102. An underwriter advised the corporation that without the conversion feature, the bonds could not have been issued at a price above 99. At the date of issuance, the amount to be recorded as paid-in capital attributable to the conversion feature is: a. $0. b. $10,000. c. $20,000. d. $30,000. Approach and Explanation: State the rule related to accounting for the issuance of convertible bonds. All proceeds received from the issuance of convertible debt are to be recorded in liability accounts; none of the proceeds is to be allocated to the conversion feature under current generally accepted accounting principles. The journal entry to record the issuance of these bonds is no different than the recording of bonds without the conversion feature. That entry would be as follows for the bonds in question: Cash 1,020,000 Bonds Payable 1,000,000 Premium on Bonds Payable 20,000 (Solution = a.) 3. (L.O. 1) A corporation issued convertible bonds with a face value of $800,000 at a discount. At a date when the unamortized discount was $50,000, the bonds were converted to stock having a par value of $200,000 and a market value of $870,000. Using the book value method, the amount of gain/loss to record on the conversion is: a. $0. b. $70,000. c. $120,000. d. $670,000. Approach and Explanation: Reconstruct the journal entry to record the conversion. The book value of bonds is removed from the accounts and that book value amount is recorded in appropriate stockholders’ equity accounts. There is never a gain or loss recognized when the book value method is used to record the conversion of bonds to stock. The journal entry is as follows:
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Bonds Payable 800,000 Discount on Bonds Payable 50,000 Common Stock 200,000 Paid-in Capital in Excess of Par 550,000 Support for the book value method is based on the argument that an agreement was established at the date of the issuance either to pay a stated amount of cash at maturity or to issue a stated number of shares of equity securities. Therefore, when the debt is converted to equity in accordance with the preexisting contract terms, no gain or loss
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This note was uploaded on 03/26/2012 for the course ECON 101 taught by Professor Mr.delacruz during the Spring '11 term at Assoc. of Chartered Certified Accountants.

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23853690-Self-Study-Quiz-16-With-Answers - Chapter 16...

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