Asked by Adeyemi Adeyolanu on Jun 25, 2024

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Which of the following correctly describes U.S.GAAP accounting for convertible bonds and the implication of that requirement?

A) separation of debt and equity components;interest expense is overstated.
B) no separation of debt and equity components;interest expense is understated.
C) no separation of debt and equity components;interest expense is overstated.
D) separation of debt and equity components;interest expense is understateD.

Convertible Bonds

Bonds that can be converted into a predetermined number of the issuing company's shares.

U.S. GAAP

Generally Accepted Accounting Principles in the United States, which are a set of rules and standards for financial reporting.

Interest Expense

The cost incurred by an entity for borrowed funds, representing the interest payments due on any type of debt, including loans, bonds, and lines of credit.

  • Learn about the distinctive features and accounting outcomes associated with convertible debt and convertible bonds.
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MG
Melissa GoldenJun 27, 2024
Final Answer :
B
Explanation :
Under U.S. GAAP, convertible bonds are not separated into debt and equity components. This accounting treatment means that the interest expense reported on the income statement does not reflect the value of the equity conversion option, which can lead to an understatement of the interest expense compared to if the debt and equity components were accounted for separately.