Financial Accounting: Liabilities & Equities (FA3) Exam Review

FA3 Exam Review notes Barbara Wyntjes, CGA, MBA, B.Sc.
f. On July 1, 2006, XZC Co. issued (sold) 2,000 of its no-par-value common shares and
4,000 of its no-par-value convertible preferred shares for a lump sum of $60,000. At the
date of issue, XZC’s common shares were trading at $17 per share and the convertible
preferred shares at $7 per share. What should the amount of the proceeds allocated to
XZC’s common share account be?
1) $32,000
2) $32,903
3) $34,000
4) $35,133
Multiple Choice solutions:
a. 2 [100,000 + 23,000 + 5,000 – (1,000 × 2) – 102,000] = $24,000
b. 2
c. 3
d. 4)
e. 4)
f. 2) (2,000 × $17) = 34,000, (4,000 x $7) = 28,000. Total $62,000
(34,000/62,000) x $60,000 = $32,903
Part 4: Module 4 – Complex Debt and Equity Instruments
Blueprint: 11-18%
a. XQL Inc. sells $1,000,000 of 6%, 5-year bonds with detachable share purchase
warrants for $1,040,000. Each $1,000 bond carries a warrant that entitles the investor to
purchase 1 common share for $200. Shortly after the issuance, the warrants trade for $50
each and the bonds are quoted at 103 ex-warrants. Assuming that XQL used the
proportional method to record this transaction, what was the net amount allocated to the
bonds?
1) $ 950,000
2) $ 990,000
3) $ 991,850
4) $1,000,000
b. Zil Co. has $4,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is
convertible into 30 no-par-value common shares. The bonds pay interest on January 31
and July 31. On July 31, 2006, the holders of $3,000,000 of the bonds exercised the
conversion privilege (converted their bonds into common shares). At the conversion date,
the market price of the bonds was $1,050 each, the market price of the common shares
was $36 each, and the balance in the contributed capital, common stock conversion rights
account was $120,000.
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