A company issues a bond convertible into common stock. Under US GAAP, how are the proceeds allocated at issuance?

Answer options:

All to the Liability (Bond).

Allocated between Liability and Equity based on relative fair values.

All to Equity.

Allocated based on the intrinsic value of the conversion option.

How to approach this question

Unless there is a Beneficial Conversion Feature (BCF) or warrants (detachable), standard convertible debt proceeds are recorded 100% as Debt. (Note: ASU 2020-06 simplified this further, removing the separation models for Cash Conversion/BCF, treating most as just Debt).

Full Answer

A.All to the Liability (Bond).✓ Correct

Under current US GAAP (ASU 2020-06), for traditional convertible debt, no separation of the conversion feature is made. The entire proceeds are recorded as a liability.

Common mistakes

Applying IFRS rules (split accounting) or old GAAP BCF rules.

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