Question

Fogel Co. has $3,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2014, the holders of $960,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $210,000. Fogel should record, as a result of this conversion, a

a. credit of $163,200 to Paid-in Capital in Excess of Par.

b. credit of $144,000 to Paid-in Capital in Excess of Par.

c. credit of $67,200 to Premium on Bonds Payable.

d. loss of $9,600.

Answer 1

The correct answer is option (a) credit of $163,200 to Paid-in Capital in Excess of Par.

Step-by-step explanation:

Solution

Now,

For a $3,000,000 worth of bonds, $210,000 is the premium of unamortized

Hence, for $960,000 worth of bonds is denoted as

= $210,000 / $3,000,000 x $960,000 = $67,200 is the unamortized premium.

Thus,

For Each $1,000 bond = 30 shares

so,

$960,000 worth of bonds is = 30/1000 x $960,000 = 28,800 common shares

Then again, we are taking out the $960,000 worth of bonds beside with $67,200 premium by removing both.

The per value of common stock is credited. also, the balancing figure is added to Paid in capital in excess of par (960,000 + 67,200 – 864,000 = $163,200)