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Becker Question –

My question is that in the Illustrative Journal Entry shown in the answer, why is DR Bonds Payable 150? Shouldn’t DR Bonds Payable equal the carrying value of the bond after 4 years (Prior year CV – amortized premium)?

On January 2, Year 1, Chard Co. issued 10-year convertible bonds at 105. Chard uses U.S. GAAP. During Year 4, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Chard’s common stock was 50 percent above its par value. Depending on whether the book value method or the market value method was used, Chard would recognize gains or losses on conversion when using the:

Book value method Market value method

a. Either gain or loss Loss

b. Neither gain nor loss Loss

c. Either gain or loss Gain

d. Neither gain nor loss Gain

Explanation

Choice “b” is correct. Book value method – neither gain nor loss. Market value method – loss.

Rules:

No gain or loss is recognized under the GAAP book value method at the time bonds are converted to common stock.

The use of the market value method recognizes gain or loss, but is not GAAP.

Illustrative JE: Debit (Dr) Credit (Cr)

Bond payable $ 105

Loss 45

Common stock & APIC $ 150

CPA 1 Day