Intermediate 442 Homework#4 – Chapter 16 Circle the letter to indicate the best answer. If it is a computational problem, show the computations beside the problem. You will receive NO credit for an answer that is unsupported by computations. Print the assignment on unlined paper and print on both sides. This assignment is due February 22.

1.
The recording of nonconvertible bonds at the date of issue is the same as the recording of straight debt issues.
A)
True
B)
False

2.
A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their par values.
A)
True
B)
False

3.
The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options at the exercise date.
A)
True
B)
False

4.
If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share.
A)
True
B)
False

5.
When stock dividends or stock splits occur, companies must restate the shares outstanding after the stock dividend or split, in order to compute the weighted-average number of shares.
A)
True
B)
False

6.
The conversion of bonds is most commonly recorded by the
A)
incremental method.
B)
proportional method.
C)
market value method.
D)
book value method.

7.
The distribution of stock rights to existing common stockholders will increase paid-in capital at the

Date of Issuance
Date of Exercise of the Rights of the Rights

A)

Yes
Yes

B)

Yes
No

C)

No
Yes

D)

No
No

8.
Which of the following is not a characteristic of a noncompensatory stock option plan?
A)
Substantially all full-time employees may participate on an equitable basis.
B)
The plan offers no substantive option feature.
C)
Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.
D)
All of these are characteristics.

Use the following to answer questions 9-11:

Dowdy Corporation issued $3,000,000 of 9%, ten-year convertible bonds on July 1, 2014 at 96.1 plus accrued interest. The bonds were dated April 1, 2014 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2015, $600,000 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.

9.
If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2014?
A)
$64,500.
B)
$67,500.
C)
$70,500.
D)
$135,000. ($3,000,000 – $2,883,000) ÷ 117 = $1,000/month ($3,000,000 × .09 × 3/12) + ($1,000 × 3) = $70,500

10.
What should be the amount of the unamortized bond discount on April 1, 2015 relating to the bonds converted?
A)
$23,400.
B)
$21,600.
C)
$11,700.
D)
$22,200. $117,000 ÷ 117 = $1,000/month $600,000 $117,000 – [($1,000 × 3) + ($1,000 × 6] × ————— = $21,600 $3,000,000

11.
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.

Bonds issued at a discount, market rate > coupon rate

12.
Richmond Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 shares of common stock (par value $40). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, 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 (assume book value method)?
A)
$25,000
B)
$22,000
C)
$32,000
D)
$40,000

$100,000 + $2,000 – (2,000 × $40) = $22,000

13.