Delilah Corp. has outstanding 1000 5% bonds, issued in year 1 at their face valu

Question

Delilah Corp. has outstanding 1000 5% bonds, issued in year 1 at their face value of $1,000 each which currently are selling at $1,150 each. In year 3 Delilah Corp. reaches an agreement with its bondholders to issue 100 shares of stock for each bond instead of paying off the bonds at the maturity date. The stock has a fair market value of $18 per share. As a result of the above, what recognized gain must Delilah's bondholders, now shareholders, report in year 3?

C. $650,000 dividend

D. $0

Explanation / Answer

Bond Purchase price 1000*1150 1150000 Less: Stock received will be 1000*100*18 1800000 Gain -650000 Delilah's shareholders gain would be $650000 dividend

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