Accounting Mid-term 16

Issuance Date

Account for convertible debt as you would straight debt. Debit cash and credit bond payable recognizing any discount or premium and amortizing it over the life of the bond.

Conversion Date

GAAP recommends using the "book value" approach in recording the conversion of the bond for stock. You record the extinguishment of the bond and unamortized balance of any related discount or premium, record the issuance of common stock at par value and any excess is put into Paid In Capital in Excess of Par. No gain or loss is recorded in this type of transaction as the conversion was part of the original agreement between the company and the investor.

the date on which total compensation expense is computed in a stock option plan is the date a. of grant b. of exercise c. that the market price coincides with the option price d. that the market price exceeds the option price

a

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 option 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 serve d recognized in the period of exercise

a

the major differnce 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 pain-in capital in excess of par can be a part of the transaction

b

compensation expense resulting from a compensatory stock option plan is generally a. recognized in the period of exercise b. recognized in the period of the grant c. allocated to the periods benefited by the employee's service life to retirement

c

which of the following is NOT a characteristic of non-compensatory stock option plan a. substantially all full-time employees may participate on an equitable basis b. the plan offers no substantive option feature c. unlimited time period permitted for exercise of an option as long as the holder is still employed by the company d.discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others

c

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

d

stock warrants outstanding should be classified as a. liabilities b. reductions of capital contributed in excess of par value c. assets d. none of these

d

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

d

the conversion of preferred stock onto common 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, but not as an extraordinary item b. reflected currently in income as an extraordinary item c. treated as a prior period adjustment d. treated as a direct reduction of retained earnings

d

when the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par vale of the bonds and the fair market value of the warrants, the excess should be credited to a. additional paid in capital form stock warrants b. retained earnings c. a liability account d. premium on bonds payable

d

which of the following is NOT a characteristic of a non-compensatory stock purchase plan a. it is open to almost all full-time employees b. the discount from market price is small c. the plan offers no substantive option feature d. all of these are characteristics

d

True or False: nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants

false

True or False: the intrinsic value of stock option is the defference between the market price of the stock and the exercise price of the options on the date of exercise

false

True or False: the market value method is used to account for the exercise of convertible preferred stock

false

True or False: under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise

false

Convertible bond

is a bond agreement that also includes a convertible feature that offers to exchange the bond for stock at the bond holder's option. Corporations issue this type of convertible debt obligation to raise capital without loosing more ownership control (as in equity issues) and to obtain debt at a lower cost of capital. The convertible feature discounts the normal market bond interest rate to below market.

True or False: The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues

true

True or False: a company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securitis based on their market values

true

True or False: if a stock dividend occurs after year-end, but before issuing the financial statement, a company must restate the weighted average number of shares outstanding for the year

true

True or False: the FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense

true

True or False: the service period in stock option plans is the time between the grant date and the vesting date

true