Answer:
bonds payable 400,000 debit
premium on BP 6,200 debit
preferred stock 40,000 credit
additional paid-in PS 366,200 credit
Explanation:
We will convert the bonds into shares based on their curent value this will make create an aditional paid-in preferred stock if higher or decrease retained earnings if lower:
$400,000 bonds + $6,200 premium = $406,200 book value
$400,000 / $1,000 each = 400 x 20 shares each = 800 preferred shares x 50 dollar each = $40,000
The differenct will be adidtional paid.in capital
Answer:
Each $1,000 bond is convertible into 20 shares of preferred stock of par value of $50 per share, Whispering Company has $400,000 bonds payable so on conversion,
400,000 / 1,000 = 400
400 * 20 = The company has 8,000 shares of par value $50.
The book value method is a technique for recording the conversion of a bond into stock. The value at which the bonds were recorded on the books of the issuer is transferred into the applicable stock account.
Total Book Value of bonds: Bonds Payable + Premium on Bonds = 400,000 + 6,200 = $406,200
Preferred Stock on conversion = (8,000 X $50) = 400,000
The rest of $6,200 would be credited to the additional paid-in capital account paid in excess of par value.
So the Journal Entry for the conversion into preferred stock would be the following:
Account Title Debit Credit
Bonds Payable.................................400,000
Premium on Bonds Payable..........6,200
Preferred Stock (8,000 X $50).....................................400,000
Paid-in Capital in Excess of Par
(Preferred Stock)..................................................................6,200
