On January 1, 2010, Leffler, Inc.sold $200, 000 of its convertible bonds at par.Conversion terms allow each $1, 000 bond to be converted into 40 common shares.On April 1, 2012, the company increases the conversion terms to 55 shares per bond if conversion takes place within 180 days.The conversion of all of the bonds took place on May 1, 2012.Fair market values of the common stock were as follows: January 1, $20; April 1, $30; and May 1, $25.The bond conversion expense would be recorded at

Question

Quizplus · Accepted Answer

The bond conversion expense is calculated as the difference between the cash value of the bonds ($200,000) and the fair value of the common shares issued upon conversion.

As per the conversion terms, each bond can be converted into 40 shares of common stock. Therefore, total shares to be issued upon conversion = 40 x 200 = 8,000 shares.

On April 1, the fair value of the common shares is $30, and the conversion terms are revised to 55 shares per bond if conversion takes place within 180 days. Therefore, if the conversion takes place on or before September 27, 2012 (180 days from April 1), each bond can be converted into 55 shares instead of 40 shares.

On May 1, all the bonds are converted into shares. The fair value of the common shares on that date is $25. Therefore, the fair value of the shares issued upon conversion = 8,000 shares x $25 = $200,000.

The cash value of the bonds is $200,000, which is equal to the fair value of the shares issued upon conversion. Therefore, there is no gain or loss on the conversion itself. However, there is an expense to be recorded for the increase in the conversion ratio from 40 shares to 55 shares per bond.

The expense is calculated as follows:
(55-40) x 8,000 shares x $30 fair value per share on April 1 = $75,000

Therefore, the bond conversion expense to be recorded is $75,000, which is Option B.