Problem 7-4 Multiple Choice (IAA)

1. Convertible bonds

a. Have priority over other indebtedness

b. Are usually secured by the mortgage
c. Pay interest only in the event earnings are sufficient
d. May be exchanged for equity shares

2. The conversion of bonds is usually recorded by

a. Incremental method
b. Proportional method
c. Fair value method
d. Carrying amount method

3. When convertible bond is not converted but paid at maturity

a. A gain or loss is recorded for the difference between the carrying amount of the
bond and the present value of the cash flows.
b. The amount allocated to equity is recorded as a gain
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face value is derecognized

4. Convertible bonds

a. Are separated into the liability component and the expense component
b. Allow an entity to issue debt financing at lower rate.
c. Are separated into their components based on relative fair value
d. All of the choices are correct

5. Bondholders exchanged their convertible bonds for ordinary shares. The carrying
amount of these bonds was lower than market value but greater than the par value
of the ordinary shares issued. If the book value or carrying amount method is used
which of the following correctly states an effect of the conversion?

a. Shareholders' equity is increased.

b. Share premium is decreased
c. Retained earnings account increased
d. A loss is recognized.