Question

7 Which type of warrants require an allocation of the issuance proceeds between the bonds and the warrants under US GAAP A) Non detachable B) Detachable C) Both of the above D) Neither of the above 8. The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options A) True B) False 9. The conversion of bonds is recorded by using the A) incremental method. B) proportional method C) market value method D) book value method 10. Compensation expense resulting from a stock option plan is generally A) recognized in the period of exercise B) recognized in the period of the grant C) allocated to the periods benefited by the employee's required service (le service period D) None of the above Il The FASB states that when an issuer makes an additional payment (a 'sweetenerto encourage bond conversion, the payment should be reported as A) An expense B) As part of the bond C) As part of the bond discount or premium D) None of the above 12 Unrealized holding gains and losses are recognized in net income for which type of debt securities? A) Available for sale B) Trading C) Held to maturity D) All of the above 13 Equity security holdings between 20 and 50 percent indicate that the investor has which type of interest over the investee (choose the best answer)? A) Control B) Significant influence No interest Pape

Answer 1

Solution.7. The correct answer is option B)Detachable

Explanation: Option B holds true as in case of detachable warrants allocation of the issuance proceeds between the bonds and the warrants under US GAAP on the issuance date. Option A non detachable warrant comes with the right of keeping securities and selling such warrants and vice versa, so does not hold true. Option C and D are invalid.

8. The given statement is True.

Explanation: The given statement is true.

9.The correct answer is option D)book value method.

Explanation: The conversion of bonds is recorded under book value method and recorded under equity section of balance sheet. Option A and B is employed in case of allocation of lump sum sale to securities classes. Option C is employed while recording bond at market value. So, option A,B,C does not hold true.

10.The correct answer is option C)allocated to the periods benefited by the employee's required service.

Explanation: Compensation expense resulting from a stock option plan is generally is allocated to service period. So, option A,B,D does not hold true.

11.The correct answer is option A)An expense.

Explanation: Under FASB rules, when an issuer makes an additional payment (a "sweetner") to encourage bond conversion the payment is recorded as an expense. So option B,C,D does not hold true.

12.The correct answer is option A)Available for sale.

Explanation: Option A holds true as available for sale securities are meant to be sold before maturity and are included in net income under the equity section of the balance sheet at fair value. Option B, C, D does not hold true as they are not included under unrealized holding gains and losses.

13.The correct answer is option C)No interest.

Explanation: The investor has no interest over the investee for equity security holdings between 20 and 50 percent as given in option c. Other options does not hold true.