**Transcription:**On January 1, 2020, Castaway Corp. issued 5,000 shares of preferred stock ($15 par value) at $45 per share. Each share of preferred stock is convertible into 2 shares of common stock ($1 par value) at the option of the holder. On September 1, 2020, preferred shareholders holding 2,000 shares of preferred stock converted the stock to common shares when the common stock was trading at $20 per share.The entry recorded by Castaway Corp. on September 1, 2020, would include the following:- ○ A credit to Paid-in Capital in Excess of Par—Common Stock for $60,000.- ○ A debit to Loss on Conversion for $10,000.- ○ A credit to Paid-in Capital in Excess of Par—Common Stock for $86,000.- ○ A debit to Retained Earnings for $10,000.

Answered: On January 1, 2020, Castaway Corp.…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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**Transcription:**

On January 1, 2020, Castaway Corp. issued 5,000 shares of preferred stock ($15 par value) at $45 per share. Each share of preferred stock is convertible into 2 shares of common stock ($1 par value) at the option of the holder. On September 1, 2020, preferred shareholders holding 2,000 shares of preferred stock converted the stock to common shares when the common stock was trading at $20 per share.

The entry recorded by Castaway Corp. on September 1, 2020, would include the following:

- ○ A credit to Paid-in Capital in Excess of Par—Common Stock for $60,000.
- ○ A debit to Loss on Conversion for $10,000.
- ○ A credit to Paid-in Capital in Excess of Par—Common Stock for $86,000.
- ○ A debit to Retained Earnings for $10,000.

Expert Solution

Step 1: Introduction

When preferred stock is converted into common stock, it means that the owners of preferred shares are choosing to exchange their preferred shares for common shares in the same company. This conversion typically occurs at a predetermined ratio or conversion price, which is specified in the terms of the preferred stock.

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