Asked by Sameer Ishaq on May 25, 2024
Verified
When bonds are converted to common stock
A) the market value method adds book value to stockholder's equity
B) the market value method subtracts loss from retained earnings
C) the book value method adds market value to stockholder's equity
D) the book value method subtracts loss from retained earnings
Market Value Method
An accounting method that values assets or securities at their current market prices rather than at historical costs or book values.
Book Value Method
An accounting technique where assets are valued in the balance sheet at their original cost minus any accumulated depreciation.
Stockholder's Equity
The residual interest in the assets of the corporation after deducting liabilities, representing the ownership interest of shareholders.
- Evaluate the effect of bond conversion on the elements constituting shareholders' equity.
Verified Answer
ML
Marie LinceMay 27, 2024
Final Answer :
B
Explanation :
DWhen bonds are converted to common stock using the market value method, if the market value of the stock issued is less than the book value of the bonds, the difference is recognized as a loss and subtracted from retained earnings. Similarly, under the book value method, if there's a loss due to the conversion (though this method typically focuses on the book values rather than market values), it would also be subtracted from retained earnings.
Learning Objectives
- Evaluate the effect of bond conversion on the elements constituting shareholders' equity.