CASE 1 0-6 IS THERE A LOSS ON CONVERSION?

Holton Co. recently issued $1,000,000 face value, 8%, 30-year debentures at 97, The debentures are callable at 103 upon 30 days' notice by the issuer at anytime besinnins 5 years after the date of issue. The debentures are convertible into $1 par value common stock of the company at the conversion price of $12.50 per share for each $500 or multiple thereof of the principal amount of the debentures ($500/$12.50 = 40 shares for each $500 of face value).

Assume that no value is assisned to the conversion feature at the date of issue of the debentures. Assume further that 5 years after issue, debentures with a face value of $100,000 and book value of $97,500 are tendered for conversion on an interest payment date when the market price of the debentures is 104 and the common stock is sellins at $14 per share.

J. K. Bisss, the company accountant, records the conversion as follows:

Bonds Payable 100,000 Discount on Bonds Payable 2,500 Common Stock 8,000 Paid-in Capital in Excess of Par 89,500 Julie Robinson, staff auditor for the company's CPA firm, reviews the transaction and feels the conversion entr/ should reflect the market value of the stock. Accordins to Robinson's analysis, a loss on the bond conversion of $14,500 should be recosnized. Bisss objects to recosnizins a loss, so Robinson discusses the problem with the audit manaser, K.

Ashworth. Ashworth has a different view and recommends usins the market value of the debentures as a basis for recordins the conversion and recosnizins a loss of only $6,500.

Evaluate the various positions. Include in your evaluation the substitute entries that would be made under both Robinson's and Ashworth 's proposals.