On January 1, 2013, Bell Co. issued $10 million of 10-year convertible bonds at 105. On January 1, 2018, the bonds were converted into common stock with a market value of $11 million. Upon conversion, Bell would recognize:

Question

Quizplus · Accepted Answer

Upon conversion of the bonds, Bell Co. would no longer have any bond liability and would instead issue common stock. The market value of the common stock is given as $11 million, which is $1 million higher than the face value of the bonds ($10 million). As a result, Bell Co. would recognize a gain equal to the difference between the market value of the common stock issued and the face value of the bonds converted, which is $1 million. Choice B is the option that shows a gain of $1 million upon conversion.