Hardest Banking Exam Quiz: MCQ!

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  • 1/111 Questions

    Bonds for which the owners' names are not registered with the issuing corporation are called

    • Bearer bonds
    • Term bonds
    • Debenture bonds
    • Callable bonds
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About This Quiz

Tackle the Hardest Banking Exam Quiz with multiple-choice questions focused on finance and accounting principles. Dive into bond terminologies, bond types, and liability distinctions to enhance your financial acumen and prepare for professional certifications.

Hardest Banking Exam Quiz: MCQ! - Quiz

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  • 2. 

    When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will

    • Increase only if the bonds were issued at a discount.

    • Decrease only if the bonds were issued at a premium.

    • Increase only if the bonds were issued at a premium.

    • Increase if the bonds were issued at either a discount or a premium.

    Correct Answer
    A. Increase if the bonds were issued at either a discount or a premium.
    Explanation
    The effective-interest method is used to allocate bond premium or discount over the life of the bond. When bonds are issued at a discount, the periodic amortization will increase because the discount is being allocated over a longer period. Similarly, when bonds are issued at a premium, the periodic amortization will also increase because the premium is being allocated over a longer period. Therefore, the periodic amortization will increase if the bonds were issued at either a discount or a premium.

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  • 3. 

    If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting

    • Bonds Payable.

    • Gain on Restructuring of Debt.

    • Unrealized Holding Gain/Loss-Income

    • None of these answers are correct

    Correct Answer
    A. Unrealized Holding Gain/Loss-Income
    Explanation
    When a company chooses the fair value option, any decrease in the fair value of the liability is recorded by crediting Unrealized Holding Gain/Loss-Income. This is because the fair value option allows companies to report certain financial instruments at their fair value, with changes in fair value being recognized in the income statement. Therefore, when the fair value of a liability decreases, it is recorded as an unrealized holding loss in the income statement.

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  • 4. 

    A primary source of stockholders' equity is

    • Income retained by the corporation

    • Appropriated retained earnings

    • Contributions by stockholders

    • Both income retained by the corporation and contributions by stockholders

    Correct Answer
    A. Both income retained by the corporation and contributions by stockholders
    Explanation
    Both income retained by the corporation and contributions by stockholders are primary sources of stockholders' equity. Income retained by the corporation refers to the profits that the company has earned but not distributed to the shareholders as dividends. These retained earnings increase the stockholders' equity. On the other hand, contributions by stockholders refer to the additional capital invested by shareholders into the company, such as purchasing additional shares or making direct investments. These contributions also increase the stockholders' equity. Therefore, both retained earnings and contributions by stockholders contribute to the overall stockholders' equity of a corporation.

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  • 5. 

    Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?

    • Authorized shares

    • Issued shares

    • Unissued shares

    • Outstanding shares

    Correct Answer
    A. Authorized shares
    Explanation
    Authorized shares refer to the maximum number of shares that a corporation is legally allowed to issue according to its charter. This number is specified in the company's articles of incorporation and represents the total pool of shares that can be issued to shareholders. Issued shares are the shares that have already been issued to shareholders, while unissued shares are the authorized shares that have not yet been issued. Outstanding shares are the total number of shares that are currently held by shareholders, including both issued and unissued shares.

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  • 6. 

    The conversion of bonds is most commonly recorded by the

    • Incremental method

    • Proportional method.

    • Market value method.

    • Book value method

    Correct Answer
    A. Book value method
    Explanation
    The conversion of bonds is most commonly recorded by the book value method. This method involves recording the conversion of bonds based on their original book value, which is the value at which the bonds were initially issued. This method ensures that the conversion does not affect the overall financial position of the company, as it does not consider any changes in the market value of the bonds. Instead, it focuses on the original cost of the bonds and adjusts the corresponding accounts accordingly.

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  • 7. 

    If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

    • Greater than if the straight-line method were used.

    • Greater than the amount of the interest payments

    • The same as if the straight-line method were used.

    • Less than if the straight-line method were used.

    Correct Answer
    A. Greater than if the straight-line method were used.
    Explanation
    If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be greater than if the straight-line method were used. This is because the effective-interest method allocates the total bond premium over the life of the bond based on the effective interest rate, which is higher in the earlier years. As a result, a larger portion of the premium is amortized in the earlier years, leading to higher interest expense compared to the straight-line method, where the same amount of premium is amortized each year.

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  • 8. 

    The interest rate written in the terms of the bond indenture is known as the

    • Coupon rate

    • Nominal rate

    • Stated rate

    • Coupon rate, nominal rate, or stated rate.

    Correct Answer
    A. Coupon rate, nominal rate, or stated rate.
    Explanation
    The interest rate written in the terms of the bond indenture is referred to as the coupon rate, nominal rate, or stated rate. These terms are used interchangeably to describe the fixed interest rate that the bond issuer promises to pay to bondholders over the life of the bond. The coupon rate is typically expressed as a percentage of the bond's face value and is used to calculate the periodic interest payments that bondholders will receive.

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  • 9. 

    Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.One step in calculating the issue price of the bonds is to multiply the principal by the table value for

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

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

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

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

    Correct Answer
    A. 20 periods and 4% from the present value of 1 table.
    Explanation
    To calculate the issue price of the bonds, the present value of the future cash flows needs to be determined. Since the bonds pay interest semiannually, there will be 20 periods (10 years * 2 periods per year). The yield is 8%, so the interest rate to be used in the present value calculation is 4% (8% / 2). Therefore, the correct answer is 20 periods and 4% from the present value of 1 table.

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  • 10. 

    Early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition

    • Any costs of issuing the bonds must be amortized up to the purchase date.

    • The premium must be amortized up to the purchase date.

    • Interest must be accrued from the last interest date to the purchase date.

    • All of these answers are correct.

    Correct Answer
    A. All of these answers are correct.
    Explanation
    The given answer is correct because when a company extinguishes bonds payable before their maturity date, any costs of issuing the bonds must be amortized up to the purchase date. Additionally, the premium, which was originally paid to purchase the bonds at a higher price than their face value, must also be amortized up to the purchase date. Lastly, interest must be accrued from the last interest date to the purchase date. Therefore, all of the given answers are correct.

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  • 11. 

    The debt to assets ratio is computed by dividing

    • Current liabilities by total assets.

    • Long-term liabilities by total assets

    • Total liabilities by total assets.

    • Total assets by total liabilities

    Correct Answer
    A. Total liabilities by total assets.
    Explanation
    The debt to assets ratio is a financial metric that measures the proportion of a company's total liabilities to its total assets. It indicates the percentage of a company's assets that are funded by debt. By dividing total liabilities by total assets, we can determine the extent to which a company relies on borrowed funds to finance its operations and investments. A higher debt to assets ratio suggests a higher level of financial risk, as it indicates a larger proportion of debt relative to assets. Conversely, a lower ratio indicates a stronger financial position with a higher proportion of assets funded by equity.

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  • 12. 

    Dilutive convertible securities must be used in the computation of

    • Basic earnings per share only

    • Diluted earnings per share only

    • Diluted and basic earnings per share

    • None of these.

    Correct Answer
    A. Diluted earnings per share only
    Explanation
    Dilutive convertible securities are financial instruments that have the potential to increase the number of shares outstanding if they are converted into common stock. These securities can dilute the ownership of existing shareholders and impact the earnings per share (EPS) calculation. Therefore, they should be considered only in the computation of diluted earnings per share. Basic earnings per share does not take into account the potential dilution from convertible securities.

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  • 13. 

    Which of the following is not a characteristic of a noncompensatory stock purchase plan?

    • It is open to almost all full-time employees.

    • The discount from market price is small

    • The plan offers no substantive option feature.

    • All of these are characteristics.

    Correct Answer
    A. All of these are characteristics.
    Explanation
    The correct answer is "All of these are characteristics." This means that all the options mentioned in the question are characteristics of a noncompensatory stock purchase plan. The plan is open to almost all full-time employees, it offers a small discount from market price, and it does not have any substantive option feature.

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  • 14. 

    An example of an item which is not a liability is

    • Dividends payable in stock.

    • Advances from customers on contracts.

    • Accrued estimated warranty costs.

    • The portion of long-term debt due within one year.

    Correct Answer
    A. Dividends payable in stock.
    Explanation
    Dividends payable in stock are not considered a liability because they represent a distribution of profits to shareholders rather than an obligation to pay a debt or fulfill a contractual obligation. Dividends payable in stock are typically recorded as a reduction in retained earnings and an increase in common stock or additional paid-in capital accounts. This means that they do not create a future financial obligation for the company and therefore are not classified as a liability.

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  • 15. 

    Theoretically, the costs of issuing bonds could be

    • Expensed when incurred.

    • Reported as a reduction of the bond liability.

    • Debited to a deferred charge account and amortized over the life of the bonds.

    • Any of these answers are correct.

    Correct Answer
    A. Any of these answers are correct.
    Explanation
    The costs of issuing bonds can be expensed when incurred, reported as a reduction of the bond liability, or debited to a deferred charge account and amortized over the life of the bonds. All of these options are valid methods for accounting for the costs of issuing bonds, depending on the company's accounting policies and preferences.

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  • 16. 

    Treasury shares are shares

    • Held as an investment by the treasurer of the corporation

    • Held as an investment of the corporation

    • Issued and outstanding

    • Issued but not outstanding.

    Correct Answer
    A. Issued but not outstanding.
    Explanation
    Treasury shares refer to shares that have been issued by a corporation but are not currently held by any shareholders. These shares are typically repurchased by the corporation and held as an investment. Therefore, the correct answer is "issued but not outstanding."

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  • 17. 

    Common stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders

    • Are entitled to a dividend every year in which the business earns a profit.

    • Have the rights to specific assets of the business.

    • Bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.

    • Can negotiate individual contracts on behalf of the enterprise.

    Correct Answer
    A. Bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
    Explanation
    Common stockholders of a business enterprise are considered the residual owners because they bear the ultimate risks and uncertainties associated with the business. This means that they are the ones who are responsible for any losses or liabilities the business may incur. However, they also have the potential to receive the benefits of enterprise ownership, such as dividends and capital appreciation, if the business performs well. This makes them the true owners of the enterprise, with the ability to reap the rewards or suffer the consequences of its operations.

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  • 18. 

    How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

    • As ordinary earnings shown on the income statement.

    • As paid-in capital from treasury stock transactions.

    • As an increase in the amount shown for common stock.

    • As an extraordinary item shown on the income statement.

    Correct Answer
    A. As paid-in capital from treasury stock transactions.
    Explanation
    When using the cost method of recording treasury stock transactions, a "gain" from the sale of treasury stock should be reflected as paid-in capital from treasury stock transactions. This is because the cost method records treasury stock at its cost, and any gain from the sale of treasury stock represents an increase in the amount of paid-in capital. Therefore, it is appropriate to reflect the gain in the paid-in capital account rather than as ordinary earnings or an increase in the amount shown for common stock.

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  • 19. 

    Which of the following features of preferred stock makes it more like a debt than an equity instrument?

    • Participating

    • Voting

    • Redeemable

    • Noncumulative

    Correct Answer
    A. Redeemable
    Explanation
    Redeemable refers to the feature of preferred stock that allows the issuer to repurchase the stock from the shareholder at a predetermined price. This feature makes preferred stock more like a debt instrument because it provides the shareholder with a fixed return of capital, similar to the repayment of a loan. In contrast, equity instruments typically do not have a fixed repayment feature and do not guarantee the return of the initial investment. Therefore, the redeemable feature aligns preferred stock more closely with debt instruments rather than equity instruments.

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  • 20. 

    At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the

    • Declaration of a stock split.

    • Declaration of a stock dividend

    • Purchase of treasury stock

    • Payment in full of subscribed stock.

    Correct Answer
    A. Purchase of treasury stock
    Explanation
    When a company purchases its own shares of stock on the open market, those shares are considered treasury stock. This reduces the number of outstanding shares because the purchased shares are no longer held by shareholders. As a result, the number of issued shares (including both outstanding and treasury stock) will be greater than the number of outstanding shares. Therefore, the correct answer is the purchase of treasury stock.

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  • 21. 

    Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?

    • Dividend preferences

    • Liquidation preferences

    • Call prices

    • Conversion or exercise prices

    Correct Answer
    A. Liquidation preferences
    Explanation
    Liquidation preferences should be made in the equity section of the balance sheet because they represent the priority of claims that equity shareholders have in the event of liquidation. This information is important for users of the financial statements to understand the rights and preferences of different classes of equity shareholders. By including this disclosure in the equity section, it provides a clear and concise overview of the liquidation preferences without the need to refer to the notes to the financial statements.

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  • 22. 

    When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be

    • Reflected currently in income, but not as an extraordinary item

    • Reflected currently in income as an extraordinary item

    • Treated as a prior period adjustment.

    • Treated as an adjustment of additional paid-in capital.

    Correct Answer
    A. Reflected currently in income, but not as an extraordinary item
    Explanation
    When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be reflected currently in income, but not as an extraordinary item. This means that the difference should be recognized as a regular item in the income statement, rather than being classified as an extraordinary event. Extraordinary items are reserved for rare and unusual events that are not expected to recur in the normal course of business. Therefore, the correct answer states that the difference should be reflected in income, but not as an extraordinary item.

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  • 23. 

    The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be

    • Reflected currently in income, but not as an extraordinary item.

    • Reflected currently in income as an extraordinary item

    • Treated as a prior period adjustment

    • Treated as a direct reduction of retained earnings

    Correct Answer
    A. Treated as a direct reduction of retained earnings
    Explanation
    When preferred stock is converted into common stock, any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be treated as a direct reduction of retained earnings. This means that the amount should be deducted directly from the company's retained earnings account on the balance sheet. It should not be reflected as income or as an extraordinary item, and it should not be treated as a prior period adjustment.

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  • 24. 

    In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market prIn applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share. ice, the computation would

    • Fairly present diluted earnings per share on a prospective basis

    • Fairly present the maximum potential dilution of diluted earnings per share on a prospective basis

    • Reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.

    • Be antidilutive

    Correct Answer
    A. Be antidilutive
    Explanation
    The treasury stock method is used to calculate the dilutive effect of stock options and warrants on diluted earnings per share. If the exercise price of the options or warrants exceeds the average market price, it means that the options or warrants are out of the money and would not be exercised by the holders. In this case, including these options or warrants in the computation would not result in any dilution of earnings per share. Therefore, the correct answer is that the computation would be antidilutive.

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  • 25. 

    The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

    • Bond indenture

    • Bond debenture

    • Registered bond

    • Bond coupon

    Correct Answer
    A. Bond indenture
    Explanation
    A bond indenture is a legal document that outlines the terms and conditions of a bond agreement between the issuer of the bonds and the lender. It includes details such as the interest rate, maturity date, repayment terms, and any covenants or restrictions placed on the issuer. This document serves as a binding contract between the two parties and provides clarity and protection for both the issuer and the lender.

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  • 26. 

    The term used for bonds that are unsecured as to principal is

    • Mortgage bonds

    • Debenture bonds

    • Indebenture bonds

    • Registered bond

    Correct Answer
    A. Debenture bonds
    Explanation
    Debenture bonds are a type of bond that is unsecured as to principal. This means that there is no specific asset or property pledged as collateral for the bond. Instead, debenture bonds rely on the general creditworthiness and reputation of the issuer to repay the principal amount. Unlike mortgage bonds, which are secured by specific properties, debenture bonds do not have any specific assets backing them. Indebenture bonds and registered bonds are not commonly used terms in finance and do not accurately describe the concept of unsecured bonds.

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  • 27. 

    Reich, 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

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

    • The nominal rate of interest exceeded the market rate.

    • The market and nominal rates coincided.

    • No necessary relationship exists between the two rates.

    Correct Answer
    A. The nominal rate of interest exceeded the market rate.
    Explanation
    If the bonds were issued at a premium, it indicates that the nominal rate of interest exceeded the market rate. This means that the bonds were sold at a price higher than their face value, indicating that investors were willing to pay more for the bonds due to the higher interest rate offered. The premium reflects the difference between the higher nominal rate and the lower market rate, showing that the nominal rate of interest exceeded the market rate.

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  • 28. 

    When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

    • Decreased by accrued interest from June 1 to November 1.

    • Decreased by accrued interest from May 1 to June 1.

    • Increased by accrued interest from June 1 to November 1.

    • Increased by accrued interest from May 1 to June 1.

    Correct Answer
    A. Increased by accrued interest from May 1 to June 1.
    Explanation
    When a bond issue is sold on June 1 with interest payment dates of May 1 and November 1, the issuer will receive cash that includes the accrued interest from the last interest payment date (May 1) to the date of sale (June 1). Therefore, the amount of cash received by the issuer will be increased by accrued interest from May 1 to June 1.

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  • 29. 

    "In-substance defeasance" is a term used to refer to an arrangement whereby

    • A company gets another company to cover its payments due on long-term debt.

    • A governmental unit issues debt instruments to corporations.

    • A company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.

    • A company legally extinguishes debt before its due date.

    Correct Answer
    A. A company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.
    Explanation
    "In-substance defeasance" refers to a situation where a company ensures the future repayment of its long-term debt by placing purchased securities in an irrevocable trust. This arrangement allows the company to set aside funds to fulfill its debt obligations, providing a sense of security to the lender. By placing the securities in a trust, the company legally commits to using those assets for debt repayment, effectively removing the debt from its balance sheet. This method allows the company to extinguish the debt before its due date and reduces the risk associated with defaulting on the debt.

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  • 30. 

    A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place

    • The present value of the debt instrument must be approximated using an imputed interest rate.

    • It should not be recorded on the books of either party until the fair value of the property becomes evident

    • The board of directors of the entity receiving the property should estimate a value for the property that will serve as a basis for the transaction

    • The directors of both entities involved in the transaction should negotiate a value to be assigned to the property

    Correct Answer
    A. The present value of the debt instrument must be approximated using an imputed interest rate.
    Explanation
    When a debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable, the present value of the debt instrument must be approximated using an imputed interest rate. This is because the fair value of the property is not known, so the value of the debt instrument needs to be estimated based on an assumed interest rate. This approximation allows for the recording of the transaction on the books of the parties involved, even though the fair value of the property is not yet evident.

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  • 31. 

    Note disclosures for long-term debt generally include all of the following except

    • Assets pledged as security.

    • Call provisions and conversion privileges

    • Restrictions imposed by the creditor.

    • Names of specific creditors.

    Correct Answer
    A. Names of specific creditors.
    Explanation
    The correct answer is "names of specific creditors." In the note disclosures for long-term debt, information about assets pledged as security, call provisions and conversion privileges, and restrictions imposed by the creditor are typically provided. However, the names of specific creditors are usually not disclosed in these note disclosures.

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  • 32. 

    Total stockholders' equity represents

    • A claim to specific assets contributed by the owners

    • The maximum amount that can be borrowed by a company

    • A claim against a portion of the total assets of a company

    • Only the amount of earnings that have been retained in the business.

    Correct Answer
    A. A claim against a portion of the total assets of a company
    Explanation
    Total stockholders' equity represents a claim against a portion of the total assets of a company. This means that the owners or stockholders have a right to a portion of the company's assets after all liabilities have been settled. It is the residual interest in the assets of the company after deducting liabilities. Stockholders' equity includes contributions made by the owners as well as retained earnings. It does not represent the maximum amount that can be borrowed by a company or only the amount of earnings retained in the business.

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  • 33. 

    Stock that has a fixed per-share amount printed on each stock certificate is called

    • Stated value stock.

    • Fixed value stock

    • Uniform value stock.

    • Par value stock.

    Correct Answer
    A. Par value stock.
    Explanation
    Par value stock is a type of stock that has a fixed per-share amount printed on each stock certificate. This value is determined by the company and represents the minimum price at which the stock can be issued. It is used for accounting and legal purposes, but it does not necessarily reflect the actual market value of the stock. Par value stock allows investors to know the minimum value of their shares and provides a basis for calculating dividends and voting rights.

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  • 34. 

    An entry is not made on the

    • Date of declaration

    • Date of record

    • Date of payment

    • An entry is made on all of these dates.

    Correct Answer
    A. Date of record
    Explanation
    On the date of record, an entry is made to record the shareholders who are eligible to receive the declared dividend. This date is set by the company and shareholders who are listed on this date will receive the dividend payment. The date of record is important for determining the ownership of shares and ensuring that only eligible shareholders receive the dividend.

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  • 35. 

    Quirk Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?

    • There should be no capitalization of retained earnings

    • Par value

    • Fair value on the declaration date

    • Fair value on the payment date

    Correct Answer
    A. Par value
    Explanation
    When a company issues a stock dividend, it means that additional shares of stock are being distributed to the shareholders. In this case, Quirk Corporation issued a 100% stock dividend, which means that the shareholders received additional shares equal to the number of shares they already owned. The par value of the stock is the nominal value assigned to each share, which in this case is $10. Since the question asks about the amount at which retained earnings should be capitalized for the additional shares issued, the correct answer is the par value. This means that the retained earnings should be increased by the par value of the additional shares issued.

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  • 36. 

    The rate of return on common stock equity is calculated by dividing

    • Net income less preferred dividends by average common stockholders' equity

    • Net income by average common stockholders' equity.

    • Net income less preferred dividends by ending common stockholders' equity.

    • Net income by ending common stockholders' equity

    Correct Answer
    A. Net income less preferred dividends by average common stockholders' equity
    Explanation
    The rate of return on common stock equity is calculated by dividing net income less preferred dividends by average common stockholders' equity. This calculation takes into account the net income earned by the company after deducting any preferred dividends paid out to shareholders, and compares it to the average common stockholders' equity over a specific period of time. This ratio helps to measure the profitability and efficiency of the company in generating returns for its common shareholders.

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  • 37. 

    Convertible bonds

    • Have priority over other indebtedness

    • Are usually secured by a first or second mortgage

    • Pay interest only in the event earnings are sufficient to cover the interest

    • May be exchanged for equity securities.

    Correct Answer
    A. May be exchanged for equity securities.
    Explanation
    Convertible bonds are a type of bond that allows the bondholder to convert the bond into a specified number of equity securities, such as common stock, at a predetermined price. This feature provides the bondholder with the potential to benefit from any appreciation in the value of the underlying equity securities. Unlike other types of bonds, convertible bonds give the bondholder the option to convert their investment into equity, providing them with the opportunity for potential capital gains.

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  • 38. 

    If a company offers additional considerations to convertible bondholders in order to encourage conversion, it is called a(an

    • Forced conversion

    • Sweetener

    • Additional conversion

    • End conversion

    Correct Answer
    A. Sweetener
    Explanation
    When a company offers additional considerations to convertible bondholders in order to encourage conversion, it is referred to as a "sweetener." This term is commonly used in finance to describe incentives or benefits provided to bondholders to entice them to convert their bonds into equity shares. The sweetener can come in various forms, such as a higher conversion ratio, a lower conversion price, or additional financial incentives. By providing these sweeteners, the company aims to incentivize bondholders to convert their bonds, which can be beneficial for the company in terms of reducing debt and increasing equity.

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  • 39. 

    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

    • The ease with which convertible debt is sold even if the company has a poor credit rating

    • The fact that equity capital has issue costs that convertible debt does not.

    • That many corporations can obtain debt financing at lower rates

    • That convertible bonds will always sell at a premium

    Correct Answer
    A. That many corporations can obtain debt financing at lower rates
    Explanation
    Many corporations can obtain debt financing at lower rates. This is a reason why corporations issue convertible debt. By issuing convertible debt, corporations can take advantage of the lower interest rates on debt financing compared to equity financing. This allows them to save on interest expenses and potentially reduce their overall cost of capital. Additionally, issuing convertible debt provides flexibility as it can be converted into equity if desired, providing the opportunity to raise equity capital in the future.

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  • 40. 

    The residual interest in a corporation belongs to the

    • Management

    • Creditors

    • Common stockholders

    • Preferred stockholders

    Correct Answer
    A. Common stockholders
    Explanation
    The residual interest in a corporation refers to the remaining assets after all debts and obligations have been paid off. Common stockholders are the owners of a corporation and have a claim on these residual assets. Therefore, the correct answer is common stockholders.

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  • 41. 

    The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is

    • The pro forma method.

    • The proportional method.

    • The incremental method.

    • Either the proportional method or the incremental method.

    Correct Answer
    A. Either the proportional method or the incremental method.
    Explanation
    In a lump sum issuance, the accounting problem arises when determining how to allocate the proceeds between the different classes of securities. The pro forma method, which involves estimating the fair value of each class of securities, is one acceptable approach. The proportional method, on the other hand, allocates the proceeds based on the relative fair values of each class of securities. The incremental method, another acceptable approach, allocates the proceeds based on the incremental fair value of each class of securities compared to the total fair value of all classes combined. Therefore, either the proportional method or the incremental method can be used to address the allocation issue in a lump sum issuance.

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  • 42. 

    Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as

    • An increase in current liabilities

    • An increase in stockholders' equity.

    • A footnote.

    • An increase in current liabilities for the current portion and long-term liabilities for the long-term portion

    Correct Answer
    A. A footnote.
    Explanation
    Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as a footnote. This is because cumulative preferred dividends in arrears represent a liability to the corporation, but they do not directly impact the current liabilities or stockholders' equity. Instead, they are disclosed in a footnote to provide transparency and inform the users of the financial statements about the existence and amount of these unpaid dividends.

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  • 43. 

    What effect does the issuance of a 2-for-1 stock split have on each of the following?                  Par Value per Share              Retained Earnings

    • A. No effect No effect

    • B. Increase No effect

    • C. Decrease No effect

    • D. Decrease Decrease

    Correct Answer
    A. C. Decrease No effect
    Explanation
    A 2-for-1 stock split does not have any effect on the par value per share. The par value per share is a nominal value assigned to each share of stock and is determined by the company at the time of issuance. The stock split does not change the par value per share.

    However, a 2-for-1 stock split does not have any effect on retained earnings either. Retained earnings are the accumulated profits of a company that have not been distributed to shareholders as dividends. A stock split does not impact the company's earnings or its ability to retain earnings, so the retained earnings remain unaffected.

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  • 44. 

    In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are

    • Weighted by the number of days outstanding.

    • Weighted by the number of months outstanding

    • Considered outstanding at the beginning of the year

    • Considered outstanding at the beginning of the earliest year reported

    Correct Answer
    A. Considered outstanding at the beginning of the earliest year reported
    Explanation
    When computing the weighted average of shares outstanding, the additional shares resulting from a stock dividend or stock split are considered outstanding at the beginning of the earliest year reported. This means that the additional shares are included in the calculation from the start of the earliest year for which data is being analyzed. This ensures that the impact of the stock dividend or split is properly accounted for in the weighted average calculation.

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  • 45. 

    Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

    • The present value of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

    • The present value of scheduled interest payments on long-term debt during each of the next five years.

    • The amount of scheduled interest payments on long-term debt during each of the next five years.

    • The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

    Correct Answer
    A. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.
    Explanation
    The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years must be disclosed because it provides information about the cash outflows that the company will need to make in the future to satisfy its debt obligations. This information is important for investors and creditors to assess the company's ability to meet its financial obligations and manage its debt. The present value of future payments and scheduled interest payments are also relevant, but they do not encompass the full extent of the company's debt obligations like the amount of future payments does.

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  • 46. 

    The cumulative feature of preferred stock

    • Limits the amount of cumulative dividends to the par value of the preferred stock.

    • Requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.

    • Means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock.

    • Enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.

    Correct Answer
    A. Requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.
    Explanation
    The correct answer states that the cumulative feature of preferred stock requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. This means that if a company is unable to pay dividends to preferred stockholders in a particular year, it is obligated to make up for those unpaid dividends in the future before distributing dividends to common shareholders. This feature ensures that preferred stockholders receive their entitled dividends, even if there are temporary financial difficulties.

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  • 47. 

    A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is         Dilutive               Antidilutive

    • A. Yes Yes

    • B. Yes No

    • C. No Yes

    • D. No No

    Correct Answer
    A. B. Yes No
    Explanation
    If a convertible bond issue is included in the diluted earnings per share computation, it means that the assumption is being made that the bonds have been converted into common stock. If the inclusion of the convertible bond issue has a dilutive effect on earnings per share, it means that the conversion of the bonds would result in a decrease in earnings per share. Therefore, the answer "Yes No" suggests that the convertible bond issue should be included in the computation, but its inclusion would have an antidilutive effect on earnings per share.

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  • 48. 

    Bonds that pay no interest unless the issuing company is profitable are called

    • Collateral trust bonds

    • Debenture bonds

    • Revenue bonds

    • Income bonds

    Correct Answer
    A. Income bonds
    Explanation
    Income bonds are a type of bond that pay no interest unless the issuing company is profitable. This means that if the company is not making a profit, the bondholders will not receive any interest payments. However, if the company is profitable, the bondholders will receive interest payments based on the company's earnings. This type of bond is often used by companies that have a higher risk of not being profitable, as it provides some protection to bondholders in case of financial difficulties.

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  • 49. 

    If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will

    • Exceed what it would have been had the effective-interest method of amortization been used.

    • Be less than what it would have been had the effective-interest method of amortization been used.

    • Be the same as what it would have been had the effective-interest method of amortiza-tion been used.

    • Be less than the stated (nominal) rate of interest.

    Correct Answer
    A. Exceed what it would have been had the effective-interest method of amortization been used.
    Explanation
    If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will exceed what it would have been had the effective-interest method of amortization been used. This is because the straight-line method of amortization allocates the same amount of bond discount to each period, resulting in higher interest expense in the earlier years. On the other hand, the effective-interest method of amortization allocates a higher amount of bond discount to the earlier periods, resulting in lower interest expense in those years. Therefore, interest expense will be higher with the straight-line method compared to the effective-interest method in the earlier years.

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  • Current Version
  • Mar 20, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Nov 17, 2014
    Quiz Created by
    Learning2swerve

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