Question

On July 1st, 2014, an interest payment date, $90,000 of Parks Company bonds were converted into 1800 shares of Parks Company common stock each having a par value of $45 and a market value of $54. There is $3,600 unamortized discount on the bonds. Using the Book Value method, parks would record:

a. A $7,200 increase in paid-in capital in excess of par
b. A $10,800 increase in paid in capital in excess of par
c. A $5,400 increase in paid in capital in excess of par
d. No change in paid in capital in excess of par.

Answer 1

The correct answer to the Parks Company bond conversion using the Book Value method is (d) no change in paid-in capital in excess of par, because the book value of the bonds equals the total par value of the shares issued upon conversion.

Step-by-step explanation:

When using the Book Value method to account for the conversion of bonds into common stock, the book value of the bonds, which includes any unamortized discounts or premiums, is transferred to the common stock account and, if necessary, the paid-in capital in excess of par.

In the case of Parks Company, the book value can be calculated as the face value of the bonds minus the unamortized discount. Since each share has a par value of $45, the book value of the bonds converted into 1800 shares is $81,000 (i.e., $90,000 face value - $3,600 unamortized discount). With 1800 shares and a par value of $45, the total par value is $81,000, which matches the book value of the bonds. Therefore, there will be no change in paid-in capital in excess of par when Parks Company records the conversion. Thus, the correct answer would be (d) No change in paid-in capital in excess of par.