005 Convertible Bonds

Question 1

What is the accounting treatment for convertible bonds with a beneficial conversion feature?

Answer 1

The excess of fair value of the stock to be issued upon conversion (measured at the date of issuance) over the face value of the bonds, is allocated to owners’ equity.

Question 2

What amount is allocated to owners’ equity on issuance of convertible bonds that can be settled in cash?

Answer 2

Issuance price less the present value of the bonds using the prevailing rate on similar bonds.

Question 3

What is the accounting treatment by the issuer for additional consideration paid to induce conversion of convertible bonds?

Answer 3

Recognize expense for the fair value of the additional consideration.

Question 4

What is the market value method of recorded converted debt?

Answer 4

The more reliable of market value of the stock or bonds is allocated to the capital stock account and contributed capital in excess of par account. A gain or loss is recorded equal to the difference between the total market value recorded and the remaining book value of the bonds.

Question 5

What is the book value method of recording converted debt?

Answer 5

Remaining book value of the bonds is transferred to the capital stock account and contributed capital in excess of par account. No gain or loss is recorded.

Question 6

What method of recording converted debt does not recognize a gain or loss?

Answer 6

Book value method.

Question 7

When a convertible bond is issued, how are the proceeds treated?

Answer 7

The same as a nonconvertible bond. Nothing allocated to the conversion feature.

Question 8

Bonds are unaffected by conversion feature until what point in time?

Answer 8

Until conversion takes place.