Convertible Bonds Accounting: How to Report Cash Proceeds

On January 2, 2018, cash proceeds from the issuance of convertible bonds should be reported as: c. a liability for the face amount of the bonds and paid-in capital for the premium over the face amount.

When convertible bonds are issued, the cash proceeds are typically allocated between the liability component and the equity component.

The liability component represents the face value of the bonds and is reported as a liability on the balance sheet. In this case, the face amount of the bonds should be reported as a liability.

The equity component represents the premium over the face value of the bonds and is reported as paid-in capital. In this case, since the market price of Farr's common stock was 50 percent above its par value at conversion, the premium over the face amount should be reported as paid-in capital.

Therefore, the correct answer is c. a liability for the face amount of the bonds and paid-in capital for the premium over the face amount.