ACCT 302 Dilutive Securities

A corporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably a. based on the relative market values of the two securities involved. b. zero. c. calculated by the excess of the proceeds over the face amount of the bonds. d. equal to the market value of the warrants.

a

Accounting for stock option plans must be based on: a. the fair value method. b. either the fair value method or the intrinsic value method. c. the intrinsic value method. d. the option-pricing method.

a

Convertible bonds are usually converted into: a. common stock. b. other bonds at a lower interest rate. c. stock warrants. d. preferred stock.

a

Under the fair value method, compensation expense is recorded: a. evenly over the service period. b. evenly over the period from the grant date to the measurement date. c. on the date of grant. d. on the date of exercise.

a

Which of the following is an advantage of a restricted-stock plan? a. It never becomes completely worthless. b. It creates new job opportunities in a company. c. It increases the market price of the stock. d. It increases the profit of a company.

a

Which of the following is generally associated with the terms of convertible debt securities? a. An interest rate that is lower than nonconvertible debt. b. An initial conversion price that is less than the market value of the common stock at time of issuance. c. A feature to subordinate the security to nonconvertible debt. d. A noncallable feature.

a

Convertible bonds a. pay interest only in the event earnings are sufficient to cover the interest. b. may be exchanged for equity securities. c. have priority over other indebtedness. d. are usually secured by a first or second mortgage.

b

Detachable stock warrants outstanding should be classified as a. reductions of capital contributed in excess of par value. b. paid-in capital. c. prepaid expenses. d. contingent liabilities.

b

For which of the following securities is an allocation of the sales proceeds necessary? a. Bonds issued with either detachable or nondetachable warrants. b. Bonds issued with detachable warrants. c. Bonds issued with nondetachable warrants. d. Convertible bonds.

b

On January 2, 2018, Farr Co. issued 10-year convertible bonds at 105. During 2018, 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, 2018, cash proceeds from the issuance of the convertible bonds should be reported as a. paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. b. a liability for the entire proceeds. c. paid-in capital for the entire proceeds. d. a liability for the face amount of the bonds and paid-in capital for the premium over the face amount.

b

Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when a. exercise of the warrants within the next few fiscal periods seems remote. b. the warrants issued with the debt securities are nondetachable. c. the market value of the warrants is not readily available. d. the allocation would result in a discount on the debt security.

b

Stock warrants outstanding should be classified as a. assets. b. paid-in capital-stock warrants. c. liabilities. d. reductions of capital contributed in excess of par value.

b

The conversion of bonds is most commonly recorded by the a. proportional method. b. book value method. c. market value method. d. incremental method.

b

Under the fair-value method of recording stock options, companies will report a. the same compensation expense relative to the intrinsic-value method. b. a higher compensation cost relative to the intrinsic-value method. c. a lower compensation cost relative to the intrinsic- value method. d. no increase in compensation expense.

b

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n) a. extraordinary item. b. expense. c. loss. d. none of these answer choices is correct.

b

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. treated as a prior period adjustment. b. reflected currently in income. c. treated as an adjustment of additional paid-in capital. d. reflected currently in income as a discontinued operations item.

b

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. premium on bonds payable. c. retained earnings. d. a liability account.

b

Compensation expense resulting from a compensatory stock option plan is generally a. allocated over the periods of the employee's service life to retirement. 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

The conversion of preferred stock is recorded by the a. market value method. b. par value method. c. book value method. d. incremental method.

c

If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an): a. additional conversion. b. forced conversion. c. end conversion. d. sweetener.

d

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 a. reflected currently in income. b. treated as a prior period adjustment. c. reflected currently in income as a discontinued operations item. d. treated as a direct reduction of retained earnings.

d

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. may first exercise the option. b. has performed all conditions precedent to exercising the option. c. exercises the option. d. is granted the option.

d

The distribution of stock rights to existing common stockholders will increase paid-in capital at the Date of Exercise of the Rights / Date of Issuance of the Rights a. Yes No b. Yes Yes c. No No d. No Yes

d

The proceeds from a bond issued with detachable stock purchase warrants should be accounted for a. Partially as unearned revenue, and partially as bonds payable. b. Entirely as stockholders' equity. c. Entirely as bonds payable. d. Partially as stockholders' equity, and partially as bonds payable.

d