Bakersfield College

ACG 2021

1)To evaluate the risk and quality of an individual bond issue, savvy investors rely heavily on:

1. 1. Bond ratings provided by financial investment services such as Moody's.
   2. Newspaper articles.
   3. Bond interest payments.
   4. The company's audit report.

2. Which of the following indicates the margin of safety provided to creditors?
   1. Rate of return on shareholders' equity.
   2. Times interest earned ratio.
   3. Gross margin.
   4. Debt to equity ratio.

3. Bonds payable should be reported as a long-term liability in the balance sheet of the issuing corporation at the:
   1. Face amount price less any unamortized discount or plus any unamortized premium.
   2. Current bond market price.
   3. Face amount less any unamortized premium or plus any unamortized discount.
   4. Face amount less accrued interest since the last interest payment date.

4. The unamortized balance of discount on bonds payable is reported in the balance sheet as:
   1. A prepaid expense.
   2. An expense account.
   3. A current liability.
   4. A contra-liability.

5. Eagle Company issued 10-year bonds at 96 during the current year. In the year-end financial statements, the discount should be:
   1. Deducted from bonds payable.
   2. Added to bonds payable.
   3. Included as an expense in the year of issue.
   4. Reported as a deferred charge.

6. Liberty Company issued 10-year bonds at 105 during the current year. In the year-end financial statements, the premium should be:
   1. Reported as an intangible asset.
   2. Included in revenue for the year of sale.
   3. Deducted from bonds payable.
   4. Added to bonds payable.

7. Red Corp. has a rate of return on assets of 10% and a debt to equity ratio of 2 to 1. Not including any indirect effects on earnings, the immediate impact of retiring debt on these ratios is a(n)

Return on Assets                     Debt to Equity

1. 1. increase                                   increase
   2. decrease                                 decrease
   3. increase                                   decrease
   4. decrease                                 increase

8. Yellow Corp. issues 10% bonds. Not including any indirect effects on earnings, the issuance will immediately decrease Yellow’s:

Return on Assets                    Debt to Equity Ratio

1. 1. yes                                               yes
   2. no                                                 no
   3. yes                                               no
   4. no                                                 yes

9. The times interest earned ratio indicates:
   1. The margin of safety provided to creditors.
   2. The extent of “trading on the equity” or financial leverage.
   3. Profitability without regard to how resources are financed.
   4. The effectiveness of employing resources provided by owners.

10. The debt to equity ratio indicates:
    1. The margin of safety provided to creditors.
    2. The extent of “trading on the equity” or financial leverage.
    3. Profitability without regard to how resources are financed.
    4. The effectiveness of employing resources provided by owners.

11. The rate of return on assets indicates:
    1. The margin of safety provided to creditors.
    2. The extent of “trading on the equity” or financial leverage.
    3. Profitability without regard to how resources are financed .
    4. The effectiveness of employing resources provided by owners.

12. The rate of return on shareholders’ equity indicates:
    1. The margin of safety provided to creditors.
    2. The extent of “trading on the equity” or financial leverage.
    3. Profitability without regard to how resources are financed .
    4. The effectiveness of employing resources provided by owners.

13. When bonds are retired prior to their maturity date:
    1. GAAP has been violated.
    2. The issuing company probably will report an ordinary gain or loss.
    3. The issuing company probably will report a gain.
    4. The issuing company will report a non-operating gain or loss.

14. On June 30, 2016, Blair Industries had outstanding $80 million of 8% convertible bonds that mature on June 30, 2017. Interest is payable each year on June 30 and December 31. The bonds are convertible into 6 million shares of $10 par common stock. At June 30, 2016, the unamortized balance in the discount on bonds payable account was $4 million. On June 30, 2016, half the bonds were converted when Blair's common stock had a market price of $30 per share. When recording the conversion, Blair should credit paid-in capital–excess of par:

1. 1. $6 million.
   2. $8 million.
   3. $10 million.
   4. $12 million.

16. On March 31, 2016, Ashley, Inc.'s bondholders exchanged their convertible bonds for common stock. The book value of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?
    1. Shareholders’ equity is increased.
    2. Additional paid-in capital is decreased.
    3. Retained earnings is increased.
    4. A loss is recognized.

17. On March 1, 2016, Doll Co. issued 10-year convertible bonds at 106. During 2019, the bonds were converted into common stock when the market price of Doll’s common stock was 500 percent above its par value. On March 1, 2016, cash proceeds from the issuance of the convertible bonds should be reported as:
    1. A liability for the entire proceeds.
    2. Paid-in capital for the entire proceeds.
    3. Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
    4. A liability for the face amount of the bonds and paid-in capital for the premium over the par value.

18. When outstanding bonds are converted into common stock, under either the book value method or the market value method, the same amount would be debited to:

Bonds Payable       Bond Premium

1. 1. Yes                               Yes
   2. No                               Yes
   3. No                                No
   4. Yes                                No

19. When bonds include detachable warrants, what is the appropriate accounting for the cash proceeds from the bond issue?
    1. The proceeds from the bond issue are allocated between the bonds and the warrants on the

basis of their relative market values.

1. 2. The proceeds from the bond issue are allocated between the bonds and the warrants on the basis of their relative face values.
   3. A nominal amount is allocated to the warrants.
   4. All of the proceeds are allocated to the bonds.

20. On April 1, 2016, Austere Corporation issued $300,000 of 10% bonds at 105. Each $1,000 bond was sold with 25 detachable stock warrants, each permitting the investor to purchase one share of common stock for $17. On that date, the market value of the common stock was $15 per share and the market value of each warrant was $2. Austere should record what amount of the proceeds from the bond issue as an increase in liabilities?

a.      $285,000.

b.      $300,000.

c.       $315,000.

d.      $0.

21. MSG Corporation issued $100,000 of 3-year, 6% bonds outstanding on December 31, 2015 for

$106,000. MSG uses straight-line amortization. On May 1, 2016, $10,000 of the bonds were retired at 112. As a result of the retirement, MSG will report:

1. 1. a $600 loss.
   2. a $667 loss.
   3. a $1,200 loss.
   4. a $1,200 gain.