When bonds are issued with a beneficial conversion option,the present value of the bond issue is revalued as the net value of the bonds and ________.

Question

Quizplus · Accepted Answer

When bonds are issued with a beneficial conversion option, the present value of the bond issue is revalued as the net value of the bonds and the effective rate of interest is recalculated and used for interest expense. This is because the conversion option allows the bondholder to convert the bond into common stock at a price lower than the current market price, which means the bond has additional value beyond the coupon payment. Therefore, the recalculated effective interest rate reflects this additional value and calculates the interest expense accordingly. As a result, option A, C, and D are incorrect.

When Bonds Are Issued with a Beneficial Conversion Option,the Present