Test 1 Intermediate Accounting II

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Use the following to answer
questions 1-2:

Cox Co. issued $100,000 of
ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.

1.

One step in calculating
the issue price of the bonds is to multiply the principal by the table value
for

A)

10 periods and 10% from
the present value of 1 table.

B)

20 periods and 5% from
the present value of 1 table.

C)

10 periods and 8% from
the present value of 1 table.

D)

20 periods and 4% from
the present value of 1 table.

2.

Another step in
calculating the issue price of the bonds is to

A)

multiply $10,000 by the
table value for 10 periods and 10% from the present value of an annuity
table.

B)

multiply $10,000 by the
table value for 20 periods and 5% from the present value of an annuity table.

C)

multiply $10,000 by the
table value for 20 periods and 4% from the present value of an annuity table.

D)

none of these.

3.

Stone, Inc. issued
bonds with a maturity amount of $200,000 and a maturity ten years from date
of issue. If the bonds were issued at
a premium, this indicates that

A)

the effective yield or
market rate of interest exceeded the stated (nominal) rate.

B)

the nominal rate of
interest exceeded the market rate.

C)

the market and nominal
rates coincided.

D)

no necessary
relationship exists between the two rates.

Use the following to answer
questions 4-6:

On January 1, 2007, Bleeker Co.
issued eight-year bonds with a face value of $1,000,000 and a stated interest
rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

Present value of 1 for
8 periods at 6%

.627

Present value of 1 for
8 periods at 8%

.540

Present value of 1 for
16 periods at 3%

.623

Present value of 1 for
16 periods at 4%

.534

Present value of
annuity for 8 periods at 6%

6.210

Present value of
annuity for 8 periods at 8%

5.747

Present value of
annuity for 16 periods at 3%

12.561

Present value of
annuity for 16 periods at 4%

11.652

4.

The present value of
the principal is

A)

$534,000.

B)

$540,000.

C)

$623,000.

D)

$627,000.

5.

The present value of
the interest is

A)

$344,820.

B)

$349,560.

C)

$372,600.

D)

$376,830.

6.

The issue price of the
bonds is

A)

$883,560.

B)

$884,820.

C)

$889,560.

D)

$999,600.

7.

Amstop Company issues
$20,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus accrued
interest. The bonds are dated January 1, 2007, and pay interest on June 30
and December 31. What is the total cash received on the issue date?

A)

$19,400,000

B)

$20,450,000

C)

$19,700,000

D)

$19,100,000

8.

A company issues
$20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007. Interest is paid on June 30 and December
31. The proceeds from the bonds are $19,604,145. Using effective-interest
amortization, how much interest expense will be recognized in 2007?

A)

$780,000

B)

$1,560,000

C)

$1,568,498

D)

$1,568,332

9.

The December 31, 2006,
balance sheet of Eddy Corporation includes the following items:

9% bonds payable due December 31, 2015

$1,000,000

Unamortized premium
on bonds payable

27,000

The bonds were issued
on December 31, 2005, at 103, with interest payable on July 1 and December 31
of each year. Eddy uses straight-line
amortization. On March 1, 2007, Eddy retired $400,000 of these bonds at 98
plus accrued interest. What should Eddy record as a gain on retirement of
these bonds? Ignore taxes.

A)

$18,800.

B)

$10,800.

C)

$18,600.

D)

$20,000.

10.

On January 1, 2001,
Gonzalez Corporation issued $4,500,000 of 10% ten-year bonds at 103. The bonds are callable at the option of
Gonzalez at 105. Gonzalez has recorded amortization of the bond premium on
the straight-line method (which was not materially different from the
effective-interest method).

On December 31, 2007,
when the fair market value of the bonds was 96, Gonzalez repurchased
$1,000,000 of the bonds in the open market at 96. Gonzalez has recorded
interest and amortization for 2007. Ignoring income taxes and assuming that
the gain is material, Gonzalez should report this reacquisition as

A)

a loss of $49,000.

B)

a gain of $49,000.

C)

a loss of $61,000.

D)

a gain of $61,000.

Use the following to answer
questions 11-12:

Presented below is information
related to Edis Corporation:

Common Stock, $1 par

$4,300,000

Paid-in Capital in
Excess of Par—Common Stock

550,000

Preferred 8 1/2% Stock,
$50 par

2,000,000

Paid-in Capital in
Excess of Par—Preferred Stock

400,000

Retained Earnings

1,500,000

Treasury Common Stock
(at cost)

150,000

11.

The total stockholders’
equity of Edis Corporation is

A)

$8,600,000.

B)

$8,750,000.

C)

$7,100,000.

D)

$7,250,000.

12.

The total paid-in
capital (cash collected) related to the common stock is

A)

$4,300,000.

B)

$4,850,000.

C)

$5,250,000.

D)

$4,700,000.

13.

Bleeker Company issued
10,000 shares of its $5 par value common stock having a market value of $25
per share and 15,000 shares of its $15 par value preferred stock having a
market value of $20 per share for a lump sum of $480,000. How much of the proceeds would be allocated
to the common stock?

A)

$50,000

B)

$218,182

C)

$250,000

D)

$255,000

14.

Renfro Corporation
started business in 1999 by issuing 200,000 shares of $20 par common stock
for $36 each. In 2004, 20,000 of these shares were purchased for $52 per
share by Renfro Corporation and held as treasury stock. On June 15, 2008,
these 20,000 shares were exchanged for a piece of property that had an
assessed value of $810,000. Renfro’s
stock is actively traded and had a market price of $60 on June 15, 2008. The
cost method is used to account for treasury stock. The amount of paid-in
capital from treasury stock transactions resulting from the above events
would be

A)

$800,000.

B)

$480,000.

C)

$390,000.

D)

$160,000.

15.

King Co. issued 100,000
shares of $10 par common stock for $1,200,000. King acquired 8,000 shares of
its own common stock at $15 per share. Three months later King sold 4,000 of
these shares at $19 per share. If the cost method is used to record treasury
stock transactions, to record the sale of the 4,000 treasury shares, King
should credit

A)

Treasury Stock for
$76,000.

B)

Treasury Stock for
$40,000 and Paid-in Capital from Treasury Stock for $36,000.

C)

Treasury Stock for
$60,000 and Paid-in Capital from Treasury Stock for $16,000.

D)

Treasury Stock for
$60,000 and Paid-in Capital in Excess of Par for $16,000.

16.

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.

17.

Proceeds from an issue
of debt securities having stock warrants should NOT be allocated between debt
and equity features when

A)

the market value of the
warrants is not readily available.

B)

exercise of the
warrants within the next few fiscal periods seems remote.

C)

the allocation would
result in a discount on the debt security.

D)

the warrants issued
with the debt securities are nondetachable.

18.

Stock warrants
outstanding should be classified as

A)

liabilities.

B)

reductions of capital
contributed in excess of par value.

C)

assets.

D)

none of these.

19.

Vittly Corporation
owned 900,000 shares of Nixon Corporation stock. On December 31, 2007, when
Vittly’s account “Investment in Common Stock of Nixon Corporation”
had a carrying value of $5 per share, Vittly distributed these shares to its
stockholders as a dividend. Vittly originally paid $8 for each share. Nixon
has 3,000,000 shares issued and outstanding, which are traded on a national
stock exchange. The quoted market price for a Nixon share was $7 on the
declaration date and $9 on the distribution date.

What would be the
reduction in Vittly’s stockholders’ equity as a result of the above
transactions?

A)

$3,600,000.

B)

$4,500,000.

C)

$7,200,000.

D)

$8,100,000.

20.

The stockholders’
equity section of Lawton Corporation as of December 31, 2006, was as follows:

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On March 1, 2007, the
board of directors declared a 15% stock dividend, and accordingly 1,500
additional shares were issued. On
March 1, 2007, the fair market value of the stock was $6 per share. For the two months ended February 28, 2007,
Lawton
sustained a net loss of $10,000.

What amount should Lawton report as
retained earnings as of March 1, 2007?

A)

$56,000.

B)

$62,000.

C)

$66,000.

D)

$72,000.

21.

On January 1, 2007,
Golden Corporation had 110,000 shares of its $5 par value common stock
outstanding. On June 1, the corporation acquired 10,000 shares of stock to be
held in the treasury. On December 1, when the market price of the stock was
$8, the corporation declared a 10% stock dividend to be issued to
stockholders of record on December 16, 2007. What was the impact of the 10%
stock dividend on the balance of the retained earnings account?

A)

$50,000 decrease

B)

$80,000 decrease

C)

$88,000 decrease

D)

No effect

Use the following to answer
questions 12-13:

Tomlin, Inc. has outstanding
300,000 shares of $2 par common stock and 60,000 shares of no-par 8% preferred
stock with a stated value of $5. The preferred stock is cumulative and
nonparticipating. Dividends have been paid in every year except the past two
years and the current year.

22.

Assuming that $150,000
will be distributed as a dividend in the current year, how much will the
common stockholders receive?

A)

Zero.

B)

$78,000.

C)

$102,000.

D)

$126,000.

23.

Assuming that $183,000
will be distributed, and the preferred stock is also participating,
how much will the common stockholders receive?

A)

$111,000.

B)

$90,000.

C)

$93,000.

D)

$48,000.

24.

The major difference
between convertible debt and stock warrants is that upon exercise of the
warrants

A)

the stock is held by
the company for a defined period of time before they are issued to the
warrant holder.

B)

the holder has to pay a
certain amount of cash to obtain the shares.

C)

the stock involved is
restricted and can only be sold by the recipient after a set period of time.

D)

no paid-in capital in
excess of par can be a part of the transaction.

Use the following to answer
questions 25-27:

Gomez Corporation issued
$3,000,000 of 9%, ten-year convertible bonds on July 1, 2007 at 96.1 plus
accrued interest. The bonds were dated April 1, 2007 with interest payable
April 1 and October 1. Bond discount is amortized semiannually on a
straight-line basis. On April 1, 2008, $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.

25.

If “interest
payable” were credited when the bonds were issued, what should be the
amount of the debit to “interest expense” on October 1, 2007?

A)

$64,500.

B)

$67,500.

C)

$70,500.

D)

$135,000.

26.

What should be the
amount of the unamortized bond discount on April 1, 2008 relating to the
bonds converted?

A)

$23,400.

B)

$21,600.

C)

$11,700.

D)

$22,200.

27.

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.

28.

Darby 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?

A)

$25,000

B)

$22,000

C)

$32,000

D)

$40,000

29.

On July 4, 2007, Diaz
Company issued for $4,200,000 a total of 40,000 shares of $100 par value, 7%
noncumulative preferred stock along with one detachable warrant for each
share issued. Each warrant contains a
right to purchase one share of Diaz $10 par value common stock for $15 per
share. The stock without the warrants would normally sell for $4,100,000. The
market price of the rights on July 1, 2007, was $2.50 per right. On October
31, 2007, when the market price of the common stock was $19 per share and the
market value of the rights was $3.00 per right, 16,000 rights were exercised.
As a result of the exercise of the 16,000 rights and the issuance of the
related common stock, what journal entry would Diaz make?

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A)

a

B)

b

C)

c

D)

d

30.

Sloane Corporation
offered detachable 5-year warrants to buy one share of common stock (par
value $5) at $20 (at a time when the stock was selling for $32). The price
paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The
market price of the Sloane bonds without the warrants was $180,000, and the
market price of the warrants without the bonds was $20,000. What amount
should be allocated to the warrants?

A)

$20,000

B)

$20,500

C)

$24,000

D)

$25,000

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