Question

Alte Inc. issues $5 million face amount convertible bonds; the bonds issue at 101. Similar bonds issued without the conversion right would have been issued at 99. Alte applies U.S. GAAP.

At time of issuance, Alte should recognize the difference between the issue price and the face amount of the bonds as:

Multiple Choice

a gain.

a premium on bonds payable.

a discount on bonds payable.

paid-in capital.

Answer 1

Alte Inc. should recognize the difference between its bond's issue price and the face amount as a premium on bonds payable, which occurs when convertible bonds are issued above face value due to the attractiveness of the conversion feature to investors.

Step-by-step explanation:

Based on the information provided and the application of U.S. GAAP, Alte Inc. should recognize the difference between the issue price and the face amount of the bonds as a premium on bonds payable. When Alte Inc. issues convertible bonds at 101, which is above the face value, the excess amount over the face value is recorded as a premium on bonds payable. This premium is essentially additional paid-in capital that arises due to the bonds being convertible into another form of security, often shares of stock, causing investors to pay above the face value. A similar bond issued without the conversion right at 99 would have resulted in a discount; however, since the issued convertible bonds are at a premium, this is recognized as an augmentation to the bonds payable on the company's balance sheet.