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7 present 924061 927 fair value of conversion option

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Unformatted text preview: nal Method Given: • Same as previous example, except: -- Using an option pricing model, the fair value -of the conversion option can be determined as $72,341 $72,341 Proportional Method Present value (fair value) of the bonds $924,061 92.7% Present $924,061 92.7% Fair value of conversion option Using an option pricing model* $ 72,341 7.3% 72,341 7.3% Aggregate fair market value $996,402 100% $996,402 100% Value allocated to the bond=1,000,000* 92.7% =927,000 Value 92.7% Value allocated to the option = 1,000,000* 7.3% =73,000 Value 7.3% Cash 1,000,000 Bonds Payable Contributed Surplus-stock option 927,000 73,000 73,000 Reporting at Time of Conversion (by the holder) • Main issue is determining the amount at which Main the securities are being exchanged the • Two approaches available – Book value approach • Gain or loss on conversion does not occur Gain does • Most common approach – Market value approach • Gain or loss on conversion can occur Gain can – Either method acceptable under GAAP Book value approach Assume bond holders want to convert bonds into common shares before the bonds mature, and the unamortized discount is $14,058. The journal entry will be: Bonds Payable 985,942* Bonds Contributed Surplus—Stock Option 73,000 Contributed 73,000 Common Shar...
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