Convertible bonds into common stock affect earnings? Custom Essay

On August 31, 2010, Chicksaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, prices to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chicksaw’s common stock. Chicksaw records interest expense at the effective rate. On August 31, 2013, investors in Chicksaw’s convertible bonds tendered 20% of the bonds for conversion into common stock that had a market value of $20 per share on the date of conversion.On January 1, 2012, Chicksaw Industries issued $40 million of its 20-year, 7% bonds dated January 1 at a price of yield 8%. On December 31, 2013, the bonds were extinguished early through acquisition in the open market by Chicksaw for $40.5 million.
Required:
1. Using the book value method, would recording the conversion of the 6% convertible bonds into common stock affect earnings? If so, by how much? Would earnings be affected if the market value method is used? If so, by how much?
2. Were the 7% bonds issued at face value, at a discount, or at a premium? Explain
3. Would the amount of interest expense for the 7% bonds be higher in the first year or the second year of the term to maturity? Explain
4. How should gain or loss on early extinguishment of debt be determined? Does the extinguishment of the 7% bonds result in a gain or loss? Explain