On March 31, 2013, MDS, Inc.'s bondholders exchanged their convertible bonds for common stock. The carrying amount of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued. If Ashley used the book value method of accounting for the conversion, which of the following statements correctly states an effect of this conversion?

Question

Quizplus · Accepted Answer

Under the book value method, the bonds are converted at their carrying amount, which is less than the fair value but greater than the par value of the common stock issued. As a result, shareholders' equity is increased by the difference between the carrying amount of the bonds and the par value of the common stock issued. There is no effect on additional paid-in capital or retained earnings, and no extraordinary loss is recognized.