Final answer:
Convertible bonds subsequent to issuance are accounted for like ordinary bonds, recording them as a liability and recognizing interest expenses. Convertible bonds provide capital-raising advantages with potential reduced cash outflows for interest, but can also dilute future equity upon conversion.
Step-by-step explanation:
The proper accounting for convertible bonds subsequent to issuance is the same as accounting for ordinary bonds. When a company issues convertible bonds, they are essentially issuing a type of debt instrument that can be converted into a predetermined number of shares of the company's common stock. Until the option to convert is exercised, the convertible bonds are treated as a liability, similar to ordinary bonds, including the recognition of interest expense and liability for the bond principal.
Issuing convertible bonds gives a company the ability to raise capital while potentially reducing cash interest payments, as these bonds often carry lower interest rates compared to ordinary bonds due to the added value of the conversion feature. However, it also means that the company could be selling off future ownership, akin to issuing stock. Should the conversion feature be exercised, the accounting treatment will change, as the liability will be extinguished and the equity will increase.