Asked by Haley Ochocinski on Jul 28, 2024
Verified
Refer to Exhibit 14-9.The entry to record the conversion using the book value method would include a
A) debit to Loss on Conversion for $5, 000
B) debit to Retained Earnings for $5, 000
C) debit to Discount on Bonds Payable for $5, 000
D) credit to Additional Paid-in Capital from Bond Conversion for $5, 000
Convertible
A security, often bonds or preferred shares, that can be converted into a specified number of another form, commonly shares of the issuing company's common stock.
Discount On Bonds Payable
The difference by which a bond's selling price is less than its face value, which effectively increases the interest yield for investors.
Additional Paid-In Capital
An amount paid by investors for shares that exceeds the par value of the shares; it reflects the excess amount investors are willing to pay above the nominal value.
- Assess the impact of bond conversion on stockholders' equity components.
Verified Answer
CC
cindy cirutaJul 29, 2024
Final Answer :
B
Explanation :
When using the book value method to record the conversion of bonds into common stock, the company compares the book value (carrying value) of the bonds being converted to the fair value (market value) of the common stock received. If the fair value of the common stock is greater than the book value of the bonds, no gain or loss is recognized on the conversion.
In this case, one-half of the $500,000 bonds were converted, which equals $250,000 face value. The book value of the bonds at the time of conversion can be calculated as follows:
Original proceeds from sale of bonds = $500,000
Less: Amortization of discount (8% x 96/100 x $500,000 x 5 years) = $192,000
Carrying value of bonds at conversion = $308,000
The market value per share of the common stock received is $14, and each bond is convertible into 100 shares. Therefore, the fair value of the common stock received is $1,400 per bond.
Since the fair value of the common stock received ($1,400) is greater than the book value of the bonds being converted ($308,000), no gain or loss needs to be recognized on the conversion.
The entry to record the conversion would be:
Debit: Bonds Payable - $250,000 (to remove the bonds being converted)
Credit: Common Stock - $25,000 (100 shares per bond x 0.50 bonds x $10 par value)
Credit: Additional Paid-in Capital - Bonds Converted - $233,000 [$308,000 (book value of bonds) - $25,000 (par value of common stock)]
In this case, one-half of the $500,000 bonds were converted, which equals $250,000 face value. The book value of the bonds at the time of conversion can be calculated as follows:
Original proceeds from sale of bonds = $500,000
Less: Amortization of discount (8% x 96/100 x $500,000 x 5 years) = $192,000
Carrying value of bonds at conversion = $308,000
The market value per share of the common stock received is $14, and each bond is convertible into 100 shares. Therefore, the fair value of the common stock received is $1,400 per bond.
Since the fair value of the common stock received ($1,400) is greater than the book value of the bonds being converted ($308,000), no gain or loss needs to be recognized on the conversion.
The entry to record the conversion would be:
Debit: Bonds Payable - $250,000 (to remove the bonds being converted)
Credit: Common Stock - $25,000 (100 shares per bond x 0.50 bonds x $10 par value)
Credit: Additional Paid-in Capital - Bonds Converted - $233,000 [$308,000 (book value of bonds) - $25,000 (par value of common stock)]
Learning Objectives
- Assess the impact of bond conversion on stockholders' equity components.