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

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

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 an adjustment of additional paid-in capital.


Answer: reflected currently in income, but not as an extraordinary item.

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.


Answer: the warrants issued with the debt securities are nondetachable

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n)

a. extraordinary item.
b. expense.
c. loss.
d. none of these.


Answer: expense

Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise

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

a. the ease with which convertible debt is sold even if the company has a poor credit rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.


Answer: that many corporations can obtain financing at lower rates.

Convertible bonds

a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.


Answer: may be exchanged for equity securities.

The conversion of bonds is most commonly recorded by the

a. incremental method.
b. proportional method.
c. market value method.
d. book value method.


Answer: book value method.