Liam Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value ordinary shares that had a market price of $40 per share.

(a) How should Liam Co. account for the conversion of the bonds into ordinary shares under the book value method?

(b) Discuss the rationale for this method.