Question

In 2015 Company A issued for $45 per share, 120,000 shares of $12 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Companh A $5 par value common stock at the option of the preferred stockholder. In August 2015 20,000 shares of the preferred stock were converted into common stock. The market value of the common stock at the date of the conversion was $55 per share. What amount should be credited to additional paid-capital from common stock as a result of the conversion?

Answer 1

The amount that should be credited to additional paid-capital from common stock as a result of the conversion

= (Issue price of preferred stock x No of preference shares converted into common stock)-(No of common stock issued on conversion x Par value of common stock)

=($45 x 20,000 shares) - (20000 x 3 shares x $5)

=$900,000 - $300,000

=$600,000

Note-

The journal entry on conversion would be

Preferred Stock(20,000 x 12)	$240,000
Paid in capital in excess of par- preferred stock (45-12)x20,000	$660,000
Common Stock (20000 x 3 x $5)		$300,000
Paid in capital in excess of par- Common Stock(240000+660000-300000)		$600,000