Question

XYZ Co. has outstanding $200,000 par value Convertible Bonds. The bonds were originally issued at a $10,000 Premium. All the bonds were converted into 6,000 shares of $20 par value Common Stock. At the time of conversion, the unamortized Premium is $4,500. The market value of the bonds is $190,000, and the stock is quoted on the market at $50 per share. Prepare a journal entry to record the conversion assuming XYZ Co. uses the Book Value method.

Answer 1

When recording the conversion using the Book Value method, the carrying amount of the bonds is debited to Convertible Bonds and credited to Convertible Bonds Premium. The common stock received is credited at the par value, and any difference is debited or credited to Paid-in Capital in Excess of Par.

Step-by-step explanation:

When recording the conversion using the Book Value method, we need to consider the carrying amount of the bonds before the conversion. The carrying amount is the par value of the bonds plus the unamortized premium, which is $200,000 + $4,500 = $204,500. This amount will be debited to the Convertible Bonds and credited to the Convertible Bonds Premium. The common stock received will be credited at the par value, which is $20 x 6,000 = $120,000. The difference between the carrying amount of the bonds and the common stock credited will be debited or credited to the Paid-in Capital in Excess of Par account, depending on whether it is a gain or loss. In this case, since the market value of the bonds is lower than the carrying amount, there is a loss of $14,500 ($204,500 - $190,000) which will be debited to the Paid-in Capital in Excess of Par account.