Question

5. On January 1, 2016, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2021, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

Book value method. Market value method.

1. no gain or loss   no gain or loss

2. no gain or loss loss

3. no gain or loss gain

4. loss loss

5. gain gain

I upload it again... plz show me the full calculation.... no hand writing plz and no just some sentence..plz!!

tks

Answer 1

As the bonds where issued for 10 million which were converted intu stock with the market value of 11 million hence market value method Bell should recognise gain of 1 Million.

However there will be no change in the books of bell as the bonds are only converted into common stock and not yet sold so upon conversion there will be no gain or loss recognised to Bell.

Therefore answer should be no gain or loss as per book value method and gain as per market value method.