Question 1

Under IFRS, debtors in technical default may continue to classify their debt as long-term if the creditor grants a waiver anytime before the financial statements are issued.

Accepted Answer

A) True 
 B)False

Question 2

When convertible bonds are converted, the fair value of the equity issued is not taken into consideration.

Accepted Answer

A) True 
 B)False

Question 3

IFRS does not permit the use of the fair value option.

Accepted Answer

A) True 
 B)False

Question 4

A bond conversion option is "in the money" if the exercise price exceeds the market price of the stock.

Accepted Answer

A) True 
 B)False

Question 5

Under IFRS, bond discounts are recorded in a separate contra-liability account.

Accepted Answer

A) True 
 B)False

Question 6

When is the straight-line method of amortization acceptable under U.S. GAAP?

Accepted Answer

A)  when the results are not significantly different from the effective interest method 
B)  when the straight-line method produces a higher level of net income 
C)  when the effective interest method produces a higher level of net income 
D)  when the company uses straight-line depreciation on long-term assets

Question 7

On July 1, 2019, Madrid Plastics issued bonds that included 20 detachable stock warrants for each bond. The warrants were appropriately valued at $4 each at the time the bonds were issued. Each warrant allows the warrant holder to purchase a share of $5 par common stock for $33 per share. A holder of 662 warrants decided to exercise all warrants and purchased 662 shares of stock when the market price of the shares was $42. What is the proper journal entry for Madrid to record this transaction?

Accepted Answer

A)  $$\begin{array} { | c | l | r | r | } 
\hline \text { Date } & { \text { Account } } &  { \text { Debit } } & \text { Credit } \
\hline \text { July 1,2019 } & \text { Cash } & 21,846 & \
& \text { Additional Paid-in Capital - Stock } \
& \text { Warrants } & 2,648 & \
\hline & \text { Common Stock } & & 3,310 \
\hline & \begin{array} { l } 
\text { Additional Paid-in Capital } \
\text { in Excess of Par-Common }
\end{array} & & 21,184 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | c | c | c | c | } 
\hline \text { Date } &{ \text { Account } } & \text { Debit } & \text { Credit } \
\hline \text { July 1,2019 } & \text { Cash } & 21,846 & \
\hline & \text { Common Stock } & & 3,310 \
\hline& \text { Paid-in-Capital-Common } \
&\text { Stock }& & 18,536\
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | l | r | r | } 
\hline \text { Date } &{ \text { Account } } & \text { Debit } &  { \text { Credit } } \
\hline \text { July 1,2019 } & \text { Cash } & 21,846 & \
\hline & \text { Paid-in Capital-Stock Warrants } & 2,648 & \
\hline & \text { Common Stock } & & 21,846 \
\hline & \begin{array} { l } 
\text { Paid-in-Capital-Common } \
\text { Stock }
\end{array} & & 2,648 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | c | l | r | r | } 
\hline \text { Date } & { \text { Account } } & \text { Debit } & \text { Credit } \
\hline \text { July 1,2019 } & \text { Cash } & 21,846 & \
\hline & \text { Paid-in Capital - Stock Warrants } & 2,648 & \
\hline & \text { Common Stock } & & 24,494 \
\hline
\end{array}$$

Question 8

When exercising detachable warrants issued with bonds, the firm removes the Additional Paid-in Capital-Stock Warrants account, debits Cash, credits Common Stock for the par value, and credits the remainder to Additional Paid-in Capital in Excess of Par.

Accepted Answer

A) True 
 B)False

Question 9

Jackson Mechanics issues $9,000,000 of bonds with nondetachable stock warrants. For the investors, this means that the bondholders ________.

Accepted Answer

A)  will own both the bonds and the stock 
B)  will own either the bonds or the stock 
C)  can sell the bonds and keep the stock warrants 
D)  can sell the stock warrants and keep the bonds

Question 10

Gordon Corporation issued $700,000 par value, 2%, 5-year bonds on January 1, 2019. The bonds mature on December 31, 2023 and pay semi-annual interest. The market rate on the date of issue is 4%. Gordon has elected to use the straight-line method for discount amortization. What is the bond issue price for the Gordon bonds?

Accepted Answer

A)  $700,000 
B)  $637,122 
C)  $766,299 
D)  $586,447

Question 11

Arco, Inc. issued $300,000 of 4%, 10-year convertible bonds at par on July 1, 2018. Each bond has a par value of $1,000. The bonds include the option for bondholders to convert each bond into 50 $1 par value shares of common stock beginning two years after the date of issue. The market price of the stock at the time of issue is $23 per share. What is the correct journal entry for the issue?

Accepted Answer

A)  $$\begin{array} { | c | l | r | r | } 
\hline \text { Date } &{ \text { Account } } & { \text { Debit } } & { \text { Credit } } \
\hline \text { July 1,2018 } & \text { Cash } & 300,000 & \
\hline & \text { Discount on Bonds Payable } & 45,000 & \
\hline & \text { Bonds Payable } & & 300,000 \
\hline & \begin{array} { l } 
\text { Add. Paid-in Capital-Bene. } \
\text { Conv. Option }
\end{array} & & 45,000 \
\hline
\end{array}$$ 
B)  $$\begin{array} { | c | l | r | r | } 
\hline \text { Date } &{ \text { Account } } & { \text { Debit } } &{ \text { Credit } } \
\hline \text { July 1,2018 } & \text { Cash } & 345,000 & \
\hline & \text { Premium on Bonds Payable } & & 45,000 \
\hline & \text { Bonds Payable } & & 300,000 \
\hline
\end{array}$$ 
C)  $$\begin{array} { | c | l | c | r | } 
\hline \text { Date } &{ \text { Account } } & \text { Debit } & { \text { Credit } } \
\hline \text {July 1,2018 } & \text { Cash } & 345,000 & \
\hline & \text { Bonds Payable } & & 300,000 \
\hline & \begin{array} { c } 
\text { Add. Paid-in Capital-Bene. } \
\text { Conv. Option }
\end{array} & & 45,000 \
\hline
\end{array}$$ 
D)  $$\begin{array} { | c | l | r | r | } 
\hline \text { Date } & { \text { Account } } &{ \text { Debit } } & { \text { Credit } } \
\hline \text { July 1,2018 } & \text { Cash } & 300,000 & \
\hline & \text { Discount on Bonds Payable } & 45,000 & \
\hline & \text { Bonds Payable } & & 345,000 \
\hline
\end{array}$$

Question 12

Companies use a fair value adjustment account to adjust the related liability account when remeasuring the liability to its fair value.

Accepted Answer

A) True 
 B)False

Question 13

A bond's issue price is normally the sum of the present value of the future interest payments plus the present value of the face value of the bonds.

Accepted Answer

A) True 
 B)False

Question 14

IFRS does not separate the debt and equity components for bonds issued with detachable warrants.

Accepted Answer

A) True 
 B)False

Question 15

For U.S. GAAP reporters, a company can reclassify short-term debt as long-term debt if it intends to refinance or replace the debt with long-term debt or equity securities, and can demonstrate the ability to consummate the refinancing.

Accepted Answer

A) True 
 B)False

Question 16

On January 2, 2018, Winston, Inc. issued 10,000 $1,000 par bonds at $1,055 each. Each bond contains 25 stock warrants, each of which gives the owner the right to purchase one share of Winston's $2 par value common stock at $35. The current selling price of common stock is $25 per share. Winston bonds without stock warrants are currently selling for $1,035.
Required:
1. Prepare the journal entry to record the sale of the bonds if the warrants are nondetachable.
2. Prepare the journal entry to record the sale of the bonds if the warrants are detachable using the incremental method.
3. Prepare the journal entry to record the exercise of all detachable warrants on May 16, 2021, when the market price of the stock was $52, using the incremental method.
4. What is the market value of the new stock?

Accepted Answer

The answer of On January 2, 2018, Winston, Inc. issued...

Question 17

Under IFRS, a bond's carrying value is the same as reported under U.S. GAAP.

Accepted Answer

A) True 
 B)False

Question 18

Given the following information from an amortization table for December 31, prepare the journal entry to record the payment of interest. $$\begin{array} { | c | c | c | c | } 
\hline \begin{array} { c } 
6 \% \text { Cash } \
\text { Interest }
\end{array} & \begin{array} { c } 
7 \% \text { Effective } \
\text { Interest }
\end{array} & \begin{array} { c } 
\text { Premium } \
\text { Amortization }
\end{array} & \begin{array} { c } 
\text { Carrying } \
\text { Value }
\end{array} \
\hline \$ 42,000 & \$ 35,651 & \$ 6,349 & \$ 507,567 \
\hline
\end{array}$$

Accepted Answer

A)  Journal Entry $$\begin{array} { | l | l | r | r | } 
\hline & { \text { Account } } &  { \text { Debit } } & { \text { Credit } } \
\hline \text { December 31 } & \text { Interest Expense } & 35,651 & \
\hline & \text { Discount on Bonds Payable } & 6,349 & \
\hline & \text { Cash } & & 42,000 \
\hline
\end{array}$$ 
B)  Journal Entry $$\begin{array} { | l | l | r | r | } 
\hline &{ \text { Account } } &{ \text { Debit } } & { \text { Credit } } \
\hline \text { December 31 } & \text { Interest Expense } & 35,651 & \
\hline & \text { Discount on Bonds Payable } & 6,349 & \
\hline & \text { Bonds Payable } & & 42,000 \
\hline
\end{array}$$ 
C)  Journal Entry $$\begin{array} { | l | l | r | r | } 
\hline &  { \text { Account } } &{ \text { Debit } } &{ \text { Credit } } \
\hline \text { December 31 } & \text { Interest Expense } & 35,651 & \
\hline & \text { Premium on Bonds Payable } & 6,349 & \
\hline & \text { Cash } & & 42,000 \
\hline
\end{array}$$ 
D)  Journal Entry $$\begin{array} { | l | c | r | r | } 
\hline & \text { Account } &{ \text { Debit } } &{ \text { Credit } } \
\hline \text { December 31 } & \text { Interest Payable } & 42,000 & \
\hline & \text { Premium on Bonds Payable } & & 6,349 \
\hline & \text { Interest Expense } & & 35,651 \
\hline
\end{array}$$

Question 19

On January 1, the Hudson Company borrowed $160,000 to purchase machinery and agreed to pay 4% interest for six years on an installment note. Each note payment is $30,522 and is due on the last day of the year. How much interest will Hudson report for the first year of the loan? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

Accepted Answer

A)  $30,522 
B)  $6,400 
C)  $24,122 
D)  $1,221

Question 20

How do U.S. GAAP and IFRS differ in the treatment of short-term debt that is expected to be refinanced?

Accepted Answer

The answer of How do U.S. GAAP and IFRS differ...

Exam 14: Financing Liabilities

Under IFRS, debtors in technical default may continue to classify their debt as long-term if the creditor grants a waiver anytime before the financial statements are issued.

When convertible bonds are converted, the fair value of the equity issued is not taken into consideration.

IFRS does not permit the use of the fair value option.

A bond conversion option is "in the money" if the exercise price exceeds the market price of the stock.

Under IFRS, bond discounts are recorded in a separate contra-liability account.

When is the straight-line method of amortization acceptable under U.S. GAAP?

When exercising detachable warrants issued with bonds, the firm removes the Additional Paid-in Capital-Stock Warrants account, debits Cash, credits Common Stock for the par value, and credits the remainder to Additional Paid-in Capital in Excess of Par.

Jackson Mechanics issues $9,000,000 of bonds with nondetachable stock warrants. For the investors, this means that the bondholders ________.

Companies use a fair value adjustment account to adjust the related liability account when remeasuring the liability to its fair value.

A bond's issue price is normally the sum of the present value of the future interest payments plus the present value of the face value of the bonds.

IFRS does not separate the debt and equity components for bonds issued with detachable warrants.

For U.S. GAAP reporters, a company can reclassify short-term debt as long-term debt if it intends to refinance or replace the debt with long-term debt or equity securities, and can demonstrate the ability to consummate the refinancing.

Under IFRS, a bond's carrying value is the same as reported under U.S. GAAP.

How do U.S. GAAP and IFRS differ in the treatment of short-term debt that is expected to be refinanced?