ExpertHard1 markMultiple Choice
CPA · Question 34 · Area 3: Technical Accounting and Reporting
A company issues $1,000,000 of convertible bonds at par. The bonds pay 4% interest. Similar non-convertible bonds yield 6%. Under US GAAP, how is the issuance proceeds allocated?
A company issues $1,000,000 of convertible bonds at par. The bonds pay 4% interest. Similar non-convertible bonds yield 6%. Under US GAAP, how is the issuance proceeds allocated?
Answer options:
A.
All proceeds are recorded as Liability (Debt).
B.
Proceeds are allocated between Liability and Equity based on relative fair values.
C.
Proceeds are allocated to Liability based on the PV of cash flows at 6%, remainder to Equity.
D.
All proceeds are recorded as Equity.
How to approach this question
US GAAP vs IFRS difference. IFRS splits convertible debt (Debt + Equity). US GAAP generally keeps it all as Debt (unless specific complex exceptions apply).
Full Answer
A.All proceeds are recorded as Liability (Debt).✓ Correct
A
Recent updates (ASU 2020-06) simplified convertible debt accounting, removing the beneficial conversion feature and cash conversion models. Now, most convertible debt is treated as a single liability unit, unlike IFRS which requires bifurcation.
Common mistakes
Applying IFRS split accounting rules.
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