Problem 7-2 Multiple Choice (ACP)

1. When an entity issued bonds payable that can be converted into ordinary shares,
what will be the effect on liabilities and equity, respectively?

a. Increase and No effect

b. Increase and Increase
c. No effect and Increase
d. Decrease and Increase

2. An entity issued bonds payable with nondetachable share warrants. In computing

interest expense for the first year, the effective interest rate is multiplied by the

a. Proceeds received from sale of the bonds

b. Face value of the bonds
c. Fair value of the bonds only
d. Share warrants outstanding

3. When an entity issued bonds payable with detachable share warrants, how will
share premium be computed if the warrants are exercised by the bondholders?

a. It is the difference between the proceeds received based on the exercised price
and the total par or stated value of the shares issued.
b. It is the difference between the proceeds received based on the exercised price
plus the share warrants outstanding and the total par or stated value of the share
issued.
c. It is the sum of the share warrants outstanding and total par or stated value of
the shares issued.
d. It is the balance of the share warrants outstanding.

4. When an entity issued convertible bonds, how will share premium be computed if
the bonds were converted into ordinary shares?

a. It is the difference between the carrying amount of the bonds and the total par or
stated value of the shares issued.
b. It is the difference between the face value of the bonds and the total par or stated
value of the shares issued.
c. It is the difference between the carrying amount of the bonds plus share premium
from conversion privilege and the total par or stated value of the shares issued.
 d. It is the difference between the face value of the bonds plus the share premium
from conversion privilege and the total par or stated value of the shares issued.

5. The proceeds from a bond issued with share warrants shall be accounted for as

a. Entirely bonds payable

b. Entirely shareholders' equity
c. Partly bonds payable and partly unearned revenue
d. Partly bonds payable and partly shareholders' equity

1. B
2. C
3. B
4. C
5. D