posted by Cindy on .
On August 31,2010, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chickasaw's common stock. Chickasaw records interest expense at the effective rate. On August 31,2013, investors in Chickasaw's convertible bonds tendered 20% of the bonds for conversion into common stock that had a market value of $20 per share on the date of the conversion. On January 1,2012, Chickasaw Industries issued $40 million of it 20-year, 7% bonds dated January 1 at a price to yield 8%. On December 31,2013, the bonds were extinguished early through acquisition in the open market by Chickasaw for $40.5 million. Please don't show your work using a financial calculator, but show me how to do this step by step!!
Required: Using the book value method, would recording the conversion of 6% convertible bonds into common stock affect earnings? If so, by how much? Would earnings be affected if the market value method is used? If so, by how much.
Requirement: Were the 7% bonds issued at face value, at a discount, or at premium? Please explain and show your work, and not by showing the results using a financial calculator!!