Question

On July 1, after recording interest and amortization, Katie Co. converted $2 million of its 12% convertible bonds into 100,000 shares of no par common stock. On the conversion date, the carrying amount of the bonds was $2.6 million, the fair value of the bonds was $2.8 million, and Katie's common stock was publicly trading at $30 per share. What amount of common stock should Katie record as a result of the conversion?

Answer 1

$2,600,000 is the correct answer to this question.

Explanation:

If the book value approach is used, the bank value is converted to the preferred stock account and the current value is not included in the ledger. The common stock shall be registered at the same time as the residual book value assigned to the excess paid-in capital.

Thus, in this case, the additional paid-in capital will be $2,600,000 and would be reported as a result of the change.