Question

On March 1, 2016, cash proceeds from the issuance of the convertible bonds should be reported as:

1) A liability for the face amount of the bonds and paid-in capital for the premium over the par value.
2) Paid-in capital for the entire proceeds.
3) Paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
4) A liability for the entire proceeds.

Answer 1

Cash proceeds from the issuance of convertible bonds should be recorded as a liability for the face amount and paid-in capital for any premium over par value. This reflects the debt and equity characteristics of convertible bonds.

Step-by-step explanation:

The correct reporting of cash proceeds from the issuance of convertible bonds on March 1, 2016, would be as a liability for the face amount of the bonds and paid-in capital for the premium over the par value. When a company issues convertible bonds, investors are given the right to convert their debt into equity shares at certain times during the bond's life, under certain conditions. The amount received over the bond's par or face value is considered to be a premium and is typically recorded in a separate account within the stockholders' equity section of the balance sheet. Therefore, option 1 is correct: A liability for the face amount of the bonds and paid-in capital for the premium over the par value.