When bonds have a conversion feature, GAAP requires the difference between proceeds with and without the conversion feature should be allocated to additional paid-in-capital at the time of issuance.

Question

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Under GAAP, the proceeds from issuing convertible bonds are recorded as debt in its entirety; there is no allocation to additional paid-in capital for the conversion feature at the time of issuance. The conversion feature is accounted for separately if it meets the criteria for bifurcation as a derivative, but typically it's embedded in the debt instrument.

When Bonds Have a Conversion Feature, GAAP Requires the Difference