Question :
On 31st August, 2010 Chickasaw Industries issued $25million of its 30-year, 6 percent convertible bonds dated 31st Auguest, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of chickasaw's general stock. Chickasaw records interest expense at the effectual rate. On 31st August, 2010 investors in Chickasaw's convertible bonds tendered 20 percent of the bonds for conversation into general stock that had a market value of $20 per share on the date of the conversion. On 1st January, 2012 Chickasaw Industries issued $40 million of its 20-year, 7 percent bonds dated January 1 at a price to yeild 8. On 31st December, 2013, the bonds were extinguished early during acquisition in the open market by Chickasaw for 40.5 million.
Required:
1. Using the book value technique, would recording the conversation of the 6 percent convertible bonds into general stock affect earnings?
2. Were the 7 percent bonds issued at face value, at a discount, or at a premium? Describe.
3. Would the amount of interest expense for the 7 percent bonds be higher in the first year or second year of the term to maturity? Describe.
4. How should profit or loss on early extinguishment of debt be evaluated? Does the early extinguishment of the 7 percent bonds result in a gain or loss? Describe.