Analysis Case

$14-7$

Bonds;

conversion;

extinguishment

LO$14-5$

On August $31,2021,$ Chickasaw Industries issued $$25$ million of its $30-$year, $5\%$ convertible

bonds dated August $31,$ priced to yield $6\%.$ The bonds are convertible at the option of the

investors into $1,500,000$ shares of Chickasaw's common stock. Chickasaw records interest

expense at the effective rate. On August $31,2024,$ investors in Chickasaw'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 the conversion. On January $1,2023,$ Chickasaw Industries issued $$40$

million of its $20-$year, $7\%$ bonds dated January $1$ at a price to yield $8\%.$ On December $31,2024,$

the bonds were extinguished early through acquisition in the open market by Chickasaw for

$$40\mathrm{.}5$ million.

Required:

Using the book value method, does the conversion of the $5\%$ convertible bonds into

common stock result in a gain, a loss, or no gain or loss?

Using the market value method, by how much does the conversion of the $5\%$ convertible

bonds into common stock result in a gain, a loss, or no gain or loss?

Were the $7\%$ bonds issued at face value, at a discount, or at a premium?

In the second year of the term to maturity, will the amount of interest expense for the $7\%$

bonds be higher than, lower than, or the same as in the first year?

Does the early extinguishment of the $7\%$ bonds result in a gain, a loss, or no gain or loss?