302 Ch 16 LO1

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, 2018, 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 a. credit of $217,600 to Paid-in Capital in Excess of Par. b. credit of $192,000 to Paid-in Capital in Excess of Par. c. credit of $89,600 to Premium on Bonds Payable. d. loss of $12,800.

A

Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2018, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,000,000. In applying the book value method, what amount should Morgan credit to the account "paid-in capital in excess of par," as a result of this conversion? a. $ 330,000. b. $ 160,000. c. $1,440,000. d. $ 720,000.

A

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

A

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $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, 2018 relating to the bonds converted? a. $46,800. b. $43,200. c. $23,400. d. $44,400.

B

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $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 was the effective interest rate on the bonds when they were issued? a. 9% b. Above 9% c. Below 9% d. Cannot determine from the information given.

B

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

B

Litke Corporation issued at a premium of $10,000 a $200,000 bond issue convertible into 4,000 shares of common stock (par value $20). At the time of the conversion, the unamortized premium is $4,000, the market value of the bonds is $220,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds? a. $130,000 b. $124,000 c. $144,000 d. $120,000

B

On July 1, 2018, 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. no change in paid-in capital in excess of par. b. a $9,000 increase in paid-in capital in excess of par. c. a $18,000 increase in paid-in capital in excess of par. d. a $12,000 increase in paid-in capital in excess of par.

B

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

B

Chang Corporation issued $6,000,000 of 9%, ten-year convertible bonds on July 1, 2017 at 96.1 plus accrued interest. The bonds were dated April 1, 2017 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2018, $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. If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2017? a. $129,000. b. $135,000. c. $141,000. d. $270,000.

C

Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is a. the ease with which convertible debt is sold even if the company has a poor credit rating. b. the fact that equity capital has issue costs that convertible debt does not. c. that many corporations can obtain debt financing at lower rates. d. that convertible bonds will always sell at a premium.

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

In 2017, Eklund, Inc., issued for $103 per share, 90,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Eklund's $25 par value common stock at the option of the preferred stockholder. In August 2018, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? a. $1,530,000. b. $1,170,000. c. $2,250,000. d. $2,520,000.

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

D

Companies recognize a gain or loss when stockholders exercise convertible preferred stock.

F

Companies recognize the gain or loss on retiring convertible debt as comprehensive income.

F

The market value method is used to account for the exercise of convertible preferred stock.

F

1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues.

T

The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense.

T