Question

On July 1, 2010, an interest payment date, $60,000 of Parks Co. bonds were converted into 1,200 shares of Parks Co. common stock each having a par value of $45 and a market value of $54. There is $2,400 unamortized discount on the bonds. Using the book value method, Parks would record

a. no change in paid-in capital in excess of par.
b. a $3,600 increase in paid-in capital in excess of par.
c. a $7,200 increase in paid-in capital in excess of par.
d. a $4,800 increase in paid-in capital in excess of par.

Answer 1

Using the book value method, Parks would record a $4,800 increase in paid-in capital in excess of par.

Step-by-step explanation:

Using the book value method, Parks would record a $4,800 increase in paid-in capital in excess of par.

When the bonds are converted into common stock, Parks needs to record the increase in paid-in capital from the conversion. The par value of the common stock is $45, and the market value is $54, resulting in a difference of $9 per share. With 1,200 shares being issued, the total increase in paid-in capital will be $10,800 (1,200 shares x $9). However, since there is an unamortized discount of $2,400 on the bonds, the recorded increase in paid-in capital will be $10,800 - $2,400 = $8,400. Therefore, option (d) - a $4,800 increase in paid-in capital in excess of par - is correct.

Answer 2

Using the book value method, Parks Co. would calculate the book value of the bonds, including unamortized discount, and convert that into common stock. The increase in paid-in capital in excess of par would be $3,600, the difference between the book value of the bonds converted and the book value of the common stock issued.Thus (option b) is right answer.

Step-by-step explanation:

Using the book value method to record a bond conversion, Parks Co. would determine the book value of the bonds and then convert that amount into the company’s common stock. Since the bonds are being converted on an interest payment date, the unamortized discount is considered in the calculation. The book value of the bonds to be converted is the face value minus any unamortized discount. The book value of the common stock is the par value times the number of shares issued.

In this scenario:

Face value of bonds being converted: $60,000

Unamortized discount on the bonds: -$2,400

Book value of bonds to be converted: $60,000 - $2,400 = $57,600

Par value of common stock: $45

Number of common stock shares issued: 1,200

Book value of common stock issued: $45 x 1,200 = $54,000

Paid-in capital in excess of par (calculated as the book value of bonds converted minus the book value of common stock issued): $57,600 - $54,000 = $3,600

Thus, Parks Co. would record a $3,600 increase in paid-in capital in excess of par.

Thus (option b) is right answer.