Lollipopss

Front 1

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.

Back 1

d. may be exchanged for equity securities.

Front 2

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

Back 2

d. book value method.

Front 3

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 financing at lower rates.
d. that convertible bonds will always sell at a premium.

Back 3

c. that many corporations can obtain financing at lower rates.

Front 4

The conversion of preferred stock into 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.

Back 4

d. treated as a direct reduction of retained earnings.

Front 5

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

Back 5

d

Front 6

On January 2, 2007, Ramos Co. issued at par $10,000 of 6% bonds convertible in total into 1,000 shares of Ramos's common stock. No bonds were converted during 2007. Throughout 2007, Ramos had 1,000 shares of common stock outstanding. Ramos's 2007 net income was $3,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2007. Ramos's diluted earnings per share for 2007 would be (rounded to the nearest penny)
a. $1.50. b. $1.71. c. $1.80. d. $3.42.

Back 6

b

Front 7

At December 31, 2006, Pratt Company had 500,000 shares of common stock outstanding. On October 1, 2007, an additional 100,000 shares of common stock were issued. In addition, Pratt had $10,000,000 of 6% convertible bonds outstanding at December 31, 2006, which are convertible into 225,000 shares of common stock. No bonds were converted into common stock in 2007. The net income for the year ended December 31, 2007, was $3,000,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2007, should be (rounded to the nearest penny) a. $6.52.
b. $4.80. c. $4.56. d. $4.00.

Back 7

c

Front 8

On January 2, 2007, Dino Co. issued at par $300,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2007. Dino had 50,000 shares of common stock outstanding during 2007. Dino's 2007 net income was $160,000 and the income tax rate was 30%. Dino's diluted earnings per share for 2007 would be (rounded to the nearest penny)
a. $2.71. b. $3.03. c. $3.20. d. $3.58.

Back 8

b

Front 9

At December 31, 2006, Kegan Co. had 1,200,000 shares of common stock outstanding. In addition, Kegan had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2007, Kegan paid $600,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for 2007 was $3,400,000 and the income tax rate was 40%. The diluted earnings per share for 2007 is (rounded to the nearest penny)
a. $1.24. b. $1.74. c. $2.51. d. $2.84.

Back 9

b