On August 31, 2013, Chickasaw Industries issued $25 million of its 30-year, 6% convertible bonds dated August 31, priced to yield 5%. The bonds are convertible at the option of the investors into 1,500,000 shares of Chickasaw's common stock. Chickasaw records interest expense at the effective rate. On Aug 31, 2016, investors in Chickasaw's convertible bonds tendered 20% of the bonds for conversion into common stock that had a market value of $20 per share on the date of conversion. On Jan 1, 2015, Chickasaw Ind. issued $40 million of its 20-year, 7% bonds dated Jan 1 at a price to yield 8%. On Dec 31, 2016, the bonds were extinguished early through acquisition in the open market by Chickasaw for $40.5 million.

Required:

1. Using the book value methoud, would recording the conversion of the 6% convertible bonds into common stock affect earnings? If so, by how much? Would earnings be affected if the market value method isused? if so, by how much?

2. Were the 7% bonds issued at face value, at a discount, or at a premium? Explain.

3. Would the amount of interst expense for the 7% bonds be higher in the first year or second year of the term to maturity? Explain.

4. How should gain or loss on early extinguishment of debt be determined? Dose the early extinguishment of the 7% bonds result in a gain or loss? Explain.