CPA · Question 32 · Area II: Balance Sheet Accounts
Horizon Corp. issued convertible bonds with a face value of $1,000,000. The bonds were issued at par and are convertible into 40,000 shares of common stock. At the time of issuance, similar bonds without the conversion feature would have yielded 8%, while the convertible bonds yield 6%.<br/><br/>Under ASC 470-20, how should Horizon account for the issuance of these convertible bonds?
Answer options:
Record the entire $1,000,000 as debt; no separate accounting for the conversion feature
Allocate proceeds between debt and equity based on relative fair values
Record debt at the present value using the 8% rate and the remainder as equity
Record the conversion option as a derivative liability at fair value
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