Accounting

Homework Help Latest DiscussionsDiscussion

On August 31,2010, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chickasaw's common stock. Chickasaw records interest expense at the effective rate. On August 31,2013, investors in Chickasaw's convertible bonds tendered 20% of the bonds for conversion into common stock that had a market value of $20 per share on the date of the conversion. On January 1,2012, Chickasaw Industries issued $40 million of it 20-year, 7% bonds dated January 1 at a price to yield 8%. On December 31,2013, the bonds were extinguished early through acquisition in the open market by Chickasaw for $40.5 million. Please don't show your work using a financial calculator, but show me how to do this step by step!! Required: Using the book value method, would recording the conversion of 6% convertible bonds into common stock affect earnings? If so, by how much? Would earnings be affected if the market value method is used? If so, by how much. Requirement: Were the 7% bonds issued at face value, at a discount, or at premium? Please explain and show your work, and not by showing the results using a financial calculator!!

Started by Michael Lowe ( Mohawk Valley Community College )

Answers

Book Value Method

The conversion of 6% convertible bonds into common stock would affect earnings if the book value method is used. The book value of the bonds upon conversion would be the face value less any unamortized bond discounts. This means that Chickasaw Industries would need to reduce their carrying amount of the bonds to the market value of the new common stock, and any difference between the two would be recognized as a gain.

For example, if the face value of the 6% convertible bonds is $25 million and the market value of the new common stock is $20 million, Chickasaw Industries would need to record a gain of $5 million.

Market Value Method

The conversion of 6% convertible bonds into common stock would also affect earnings if the market value method is used. In this method, the bonds are recorded at their market value upon conversion, which would be the market value of the new common stock. If the market value is less than the face value of the bonds, Chickasaw Industries would need to recognize a loss on the transaction.

For example, if the face value of the 6% convertible bonds is $25 million and the market value of the new common stock is $20 million, Chickasaw Industries would need to recognize a loss of $5 million.

7% Bonds

The 7% bonds were issued at face value, since the face value and market value of the bonds were

Answered by gcampbell

Answers

We have mentors from