Question

The conversion of preferred stock may be recorded by the:

a) book value method.
b) market value method.
c) incremental method.
d) par value method

Answer 1

The conversion of preferred stock can be recorded using different methods, including the book value method, market value method, incremental method, and par value method.

Step-by-step explanation:

The conversion of preferred stock can be recorded using different methods, including the book value method, market value method, incremental method, and par value method. However, there is no specific method required by generally accepted accounting principles (GAAP). The choice of method depends on the circumstances and purpose of the conversion.

The book value method records the conversion based on the book value of preferred stock, which is calculated by dividing the total equity of the company by the number of outstanding shares. The market value method records the conversion based on the market price of the preferred stock at the time of conversion. The incremental method records the conversion by allocating the difference between the market value of the common stock issued upon conversion and the book value of the preferred stock to additional paid-in capital. The par value method records the conversion based on the par value of the preferred stock.