Question

Assume that Helloid, Inc. has outstanding $1,000,000 par value convertible debentures convertible into 100,000 shares of $1 par value common stock. Helloid wishes to reduce its annual interest cost. To do so, Helloid agrees to pay the holders of its convertible debentures an additional $80,000 if they will convert. Assuming conversion occurs, Helloid makes the following entry

Answer 1

The question focuses on the conversion of convertible debentures into common stock, and the associated accounting entries, specifically in a scenario where an additional cash incentive is offered to encourage debenture holders to convert.

Step-by-step explanation:

The student question deals with convertible debentures and the accounting entry required when these debentures are converted into common stock. In the scenario provided, Helloid, Inc. is looking to encourage conversion of its debentures by offering an additional $80,000 to debenture holders.

Upon conversion of the convertible debentures, the appropriate accounting entry would involve debiting the convertible debentures account to remove the liability from the books, debiting the premium on convertible debentures if the debentures were issued at a premium, crediting common stock for the par value of the shares issued, crediting additional paid-in capital for any amount above the par value, and also debiting cash for the $80,000 paid as an incentive for conversion.