Question

Litke Corporation issued at a premium of $10,000 a $200,000 bond issue convertible into 4,000 shares of common stock (par value $20). At the time of the conversion, the unamortized premium is $4,000, the market value of the bonds is $220,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds?

Answer 1

Under book value method, the bonds are converted into stock. The book value of bonds are shifted to equity account.

Carrying/Book Value of Bonds at the time of Conversion = Face Value $200,000 + Unamortized Premium $4,000

= $204,000

Number of Shares to be issued = Carrying Value of Bonds $204,000 / Market Price per share 60 = 3,400 Shares

The below entry is made for conversion of bonds into stock:

Debit --- Bonds Payable (face Value) $200,000

Debit - Premium on Bonds Payable (Unamortized Premium) $4,000

Credit -- Common Stock (3,400 Shares * Par Value 20) $68,000

Credit -- Paid in Capital in Excess of Par (3,400 Shares * $40) $136,000

The amount of paid-in capital in excess of par to be recorded on the conversion of the bonds = $136,000