On January 1, 2009, Gless Textiles issued $12 million of 9%, 10-year convertible

Question

On January 1, 2009, Gless Textiles issued $12 million of 9%, 10-year convertible bonds at 101. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of Gless’s $1 par common stock. Century Services purchased 10% of the issue as an investment. On July 1, 2014, when Gless’s common stock had a market price of $33 per share, Century converted the bonds it held. How much is the gain or loss that Gless should recognize on this conversion under the book value method?

A. $0

B. $5,400

C. $54,000

D. None of the above answers is correct.

Explanation / Answer

Under book value method, bond liability is converted into equity with no gain or loss recorded.

Hence Option A.0 is correct.

The proportionate book value on July 1, 2014 for bonds will move to common stock(face value amount) and additional paid in captital(balancing figure).

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