Firm A issues convertible bonds to raise capital in the amount of a million dollars. An identical Firm B issues debt with warrants attached to raise the same amount. Which of the following statements is/are true in this situation?
Answer(s): A
While both convertible bonds and bonds with attached warrants derive significant value from the possibility of conversion to common stock, the accounting treatments for the two are quite different. With convertible bonds, the conversion feature is completely ignored and the bond is recorded as an ordinary bond. On the other hand, the proceeds from a bond-with-warrant issue are divided into two groups: those related to the bond and those related to the warrant. The former is recorded as a liability while the latter is directly added to equity, without any income statement effects. This leads to a bigger amortization of a discount (or a smaller amortization of premium) with a warrant-debt than with a convertible bond. This effect offsets the fact that a higher liability is recognized with a convertible bond. Hence, the interest expense is higher in general when debt-with-warrant is issued.
Birch Ltd. had net income for the year of $101,504 and a simple capital structure consisting of the following common shares outstanding:Months Outstanding Number of SharesJanuary - February 24,000March - June 29,400July - November 36,000December 35,040Birch's earnings per share (rounded to the nearest cent) were ________.
Answer(s): D
EPS equals net income divided by the weighted average number of shares outstanding and is $3.20 ($101,504 / 31,720). Following is the calculation for the weighted average number of shares outstanding:24,000 X (2 / 12) = 4,00029,400 X (4 / 12) = 9,80036,000 X (5 / 12) = 15,00035,040 X (1 /12) = 2,920weighted average 31,720
Stock splits have the following effects on the financial statements:
Answer(s): B
All of the responses represent the effect of stock splits on the financial statements.
The statement of cash flows provides us with important clues on all of the following except:
The statement of cash flows is very informative and can tell you a lot about a company. However, it does not tell you the direction the company is heading as far as its near term liquidity. It can not be inferred that because a company has a lot of cash flow that its payable balances will decrease in the followingyear. There could be many reasons for holding excess cash including business seasonality and potential acquisitions.
Which of the following expenses can be capitalized?
US GAAP requires that all R&D costs be expensed immediately (unless they generate tangible or intangible assets which have alternative future uses which are measurable). R&D costs include salaries for research personnel.
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