Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 ordinary shares immediately after an interest payment date. At that time, the market price of the debentures is 104, and the ordinary shares are selling at $14 per share (par value $10). At date of issue, the company recorded Share Premium—Conversion Equity of $50,000. The company records the conversion as follows. Bonds Payable 960,000 Share Premium—Conversion Equity 50,000 00Share Capital—Ordinary 800,000 00Share Premium—Ordinary 210,000 Discuss the propriety of this accounting treatment.
Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 ordinary shares immediately after an interest payment date. At that time, the market price of the debentures is 104, and the ordinary shares are selling at $14 per share (par value $10). At date of issue, the company recorded Share Premium—Conversion Equity of $50,000. The company records the conversion as follows. Bonds Payable 960,000 Share Premium—Conversion Equity 50,000 00Share Capital—Ordinary 800,000 00Share Premium—Ordinary 210,000 Discuss the propriety of this accounting treatment.
Chapter20: Financing With Derivatives
Section: Chapter Questions
Problem 17P
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Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 ordinary shares immediately after an interest payment date. At that time, the market price of the debentures is 104, and the ordinary shares are selling at $14 per share (par value $10). At date of issue, the company recorded Share Premium—Conversion Equity of $50,000. The company records the conversion as follows.
Bonds Payable |
960,000
|
|
Share Premium—Conversion Equity |
50,000
|
|
00Share Capital—Ordinary |
800,000
|
|
00Share Premium—Ordinary |
210,000
|
Discuss the propriety of this accounting treatment.
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