Account For Derivative Instruments Practice Test

A for-profit company issues a $10,000,000 convertible bond that allows the holder to convert the bond into a fixed number of the issuer’s common shares. The conversion feature is not clearly and closely related to the debt host and, if freestanding, would meet the definition of a derivative; however, the conversion option is indexed to the issuer’s own stock and qualifies for equity classification under applicable guidance. Under FASB ASC 815, how should the embedded derivative be accounted for in the financial statements?

A for-profit company issues a debt instrument whose interest payments are based on a leveraged commodity index (for example, 2× changes in a copper price index), and the debt host is not measured at fair value with changes in fair value recognized in earnings. The embedded feature meets the definition of a derivative and is not clearly and closely related to the debt host. Which is the appropriate accounting treatment under FASB ASC 815?