atg 302 test 2
On November 1, 2021, Howell Company purchased 1,000 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $1,052,500, which includes accrued interest of $15,000. The bonds, which mature on January 1, 2026, pay interest semiannually on March 1 and September 1. Assuming that Howell 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 Howell's December 31, 2021, balance sheet at
$1,036,000.
At December 31, 2020 Rice Company had 300,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2020 or 2021. On January 30, 2022, prior to the issuance of its financial statements for the year ended December 31, 2021, Rice declared a 100% stock dividend on its common stock. Net income for 2021 was $1,140,000. In its 2021 financial statements, Rice's 2021 earnings per common share should be
$1.80.
Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2021, paying $1,410,375. The bonds mature January 1, 2031; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. On July 1, 2021, Patton Company should increase its Debt Investments account for the Scott Company bonds by For the year ended December 31, 2021, Patton Company should report interest revenue from the Scott Company bonds of:
$2,571. / $155283
Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $2,940,000 for the year ending December 31, 2021. Earnings per share of common stock for 2021 would be
$2.80.
At December 31, 2021, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2021. Net income for the year ended December 31, 2021, was $1,700,000. What should be Hancock's 2021 earnings per common share, rounded to the nearest penny?
$4.00
calculation for convertible bond discount on partially excersiced bonds
(FV exercised/FV of bonds) x total unamortized discount
On March 1, 2021, Ruiz Corporation issued $2,000,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2041. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2021, the fair value of Ruiz's common stock was $40 per share and the fair value of the warrants was $2.00. What amount should Ruiz record on March 1, 2021 as paid-in capital from stock warrants?
104,000
During 2021, Gordon Company issued at 104 five hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon's common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 96. The market value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon's stockholders' equity?
20,800
Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2020 at 96.1 plus accrued interest. The bonds were dated April 1, 2020 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2021, $1,200,000 of these bonds were converted into 500 shares of $20 par value common stock. Accrued interest was paid in cash at the time of conversion. What should be the amount of the unamortized bond discount on April 1, 2021 relating to the bonds converted?
43,200.
Instrument Corporation has the following investment which was held throughout 2021-2022: Fair Value Cost $900,000 12/31/21 $1,200,000 12/31/22 $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2022 related to its investment?
60,000 loss.
In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
Annual preferred dividend
On April 7, 2021, Kegin Corporation sold a $6,000,000, twenty-year, 8 percent bond issue for $6,360,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation's common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corporation's securities had the following market values: 8% bond without warrants $1,008 Warrants 21 Common stock 28 What accounts should Kegin credit to record the sale of the bonds?
Bonds Payable $6,000,000 Premium on Bonds Payable 105,600 Paid-in Capital—Stock Warrants 254,400
What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?
Decrease and increase
A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is
Dilutive: Yes Antidilutive: No
Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?
Fair Value Method / Equity Method No Effect/ Decrease
An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as
Fair Value Method: Income Equity Method:A reduction of the investments
Dublin Company holds a 30% stake in Club Company which was purchased in 2018 at a cost of $3,000,000. After applying the equity method, the Investment in Club Company account has a balance of $3,040,000. At December 31, 2018 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2018? I. $3,000,000 II. $3,040,000 III. $3,120,000
II or III only.
Which of the following is not a debt security?
Loans receivable
revenue from investment to be reported is calculate how?
NI x (percentage of ownership)
With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?
Ownership interest consisting solely of common stock
When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.
Which of the following is not a characteristic of an employee stock-purchase plan?
Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company.
On July 1, 2021, an interest payment date, $150,000 of Parks Co. bonds were converted into 3,000 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $6,000 unamortized discount on the bonds. Using the book value method, Parks would record
a $9,000 increase in paid-in capital in excess of par.
Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes
a debit to Debt Investments at $315,000.
On January 2, 2012, Farr Co. issued 10-year convertible bonds at 105. During 2012, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr's common stock was 50 percent above its par value. On January 2, 2012, cash proceeds from the issuance of the convertible bonds should be reported as
a liability for the entire proceeds
Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as
a reduction of the carrying value of the investment.
Use of the effective-interest method in amortizing bond premiums and discounts results in
a varying amount being recorded as interest income from period to period
Held-to-maturity securities are reported at
acquisition cost plus amortization of a discount.
Compensation expense resulting from a compensatory stock option plan is generally
allocated to the periods benefited by the employee's required service.
In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the
annual preferred dividend
In accounting for investments in debt securities,
any discount or premium is amortized
Transfers between categories
are accounted for at fair value for all transfers.
In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants
are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.
When computing diluted earnings per share, convertible bonds are
assumed converted only if they are dilutive.
Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are
available-for-sale debt securities.
On October 1, 2021, Renfro Company purchased to hold to maturity, 4,000, $1,000, 9% bonds for $3,960,000 which includes $60,000 accrued interest. The bonds, which mature on February 1, 2030, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2021 balance sheet at a carrying value of
b. $3,903,000.
A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably
based on the relative market values of the two securities involved.
In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would
be antidilutive.
The if-converted method of computing diluted earnings per share data assumes conversion of convertible securities as of the
beginning of the period (or at time of issuance, if later).
The conversion of bonds is most commonly recorded by the
book value method.
The conversion of preferred stock is recorded by the
book value method.
The distribution of stock rights to existing common stockholders will increase paid-in capital at the
capital at the Date of Issuance:No Date of Exercise of the Rights of the Rights:Yes
Investments in debt securities are generally recorded at
cost including brokerage and other fees.
Fogel Co. has $4,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2021, the holders of $1,280,000 bonds exercised 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 $280,000. Fogel should record, as a result of this conversion, a
credit of $217,600 to Paid-in Capital in Excess of Par.
An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a
debit to Debt Investments.
In determining diluted earnings per share, the current dividend on nonconvertible cumulative preferred stock should be
deducted from net income only if declared.
Dilutive convertible securities must be used in the computation of
diluted earnings per share only
On August 1, 2021, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2027, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2021 is
dr Debt Investments1,164,000 dr Interest Revenue27,000 cr. Cash 1,191,000
Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the
earnings are reported by the investee in its financial statements.
If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the
equity method.
Investments in debt securities should be recorded on the date of acquisition at
fair value plus brokerage fees and other costs incidental to the purchase.
A correct valuation for debt securities is
held-to-maturity at amortized cost.
Debt securities that are accounted for at amortized cost, not fair value, are
held-to-maturity debt securities
When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be
its fair value at the date of the transfer.
When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be
its fair value at the date of the transfer.
Convertible bonds
may be exchanged for equity securities
Securities which could be classified as held-to-maturity are
municipal bonds.
Stock warrants outstanding should be classified as
none of these. Paid-in capital-stock warrants
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 value of the warrants, the excess should be credited to
premium on bonds payable.
When computing diluted earnings per share, convertible securities are
recognized only if they are dilutive.
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
reflected currently in income.
The fair value option allows a company to
report most financial instruments at fair value at any point of time.
Antidilutive securities
should be ignored in all earnings per share calculations.
Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the
smaller earnings per share adjustment.
A reclassification adjustment is reported in the
statement of comprehensive income as other comprehensive income.
A company uses income from continuing operations to determine whether potential common stock is dilutive or antidilutive, and this is referred to as
the control number.
The major difference between convertible debt and stock warrants is that upon exercise of the warrants
the holder has to pay a certain amount of cash to obtain the shares.
Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when
the warrants issued with the debt securities are nondetachable.
Unrealized holding gains or losses which are recognized in income are from debt securities classified as
trading.
The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be
treated as a prior period adjustment. d. treated as a direct reduction of retained earnings.