Question

Sheffield Corporation issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $65 per share. The common stock is trading at $26 per share at the time of conversion.

a. Record the conversion of the preferred stock.

Answer 1

Conversion of preferred stocks:

The conversion of the preferred stock is as follows,

Debit== Preferred Stock

`\rightarrow(1,000*\$50) = 50,000`

Debit== Paid-in Capital in Excess of Par - Preferred Stock

`\rightarrow(\$65 - \$50)*1,000=15,000`

Cr. Common Stock

`\rightarrow(2,000* \$10) = 20,000`

Cr. Paid-in Capital in Excess of Par—Common Stock

`\rightarrow(\$65*1,000) - (2,000*\$10) = 45,000`

Note: Before issuing any convertible preferred stock, company fixes the conversion ratio.