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Sixty $1,000 convertible bonds with a carrying value of $69,000 are converted into 9,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. Prepare the journal entry to record the conversion of the bond to common stock.

Sixty $1,000 convertible bonds with a carrying value of $69,000 are converted into 9,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. Prepare the journal entry to record the conversion of the bond to common stock.

FINANCIAL ACCOUNTING
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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Prepare journal entry to record conversion of bond to common stock

**Convertible Bonds to Common Stock Conversion** --- ### Case Study: Conversion of Convertible Bonds to Common Stock In this scenario, we observe the financial transaction of converting bonds into common stock. The details of the conversion are as follows: - **Convertible Bonds** - Quantity: 60 - Face Value: $1,000 each - Total Carrying Value: $69,000 - **Converted into Common Stock** - Total Shares Issued: 9,000 shares - Par Value per Share: $5 - Market Value per Share: $9 (on the date of conversion) #### Objective: Prepare the journal entry to record the conversion of the bond to common stock. When preparing the journal entry, you would typically record the elimination of the bond liability and the corresponding increase in both common stock and additional paid-in capital accounts. --- **Journal Entry Preparation:** To properly document this conversion, follow these steps: 1. **Debit Bonds Payable:** Eliminate the carrying value of the bonds from the liabilities. 2. **Credit Common Stock:** Reflect the par value of the shares issued. 3. **Credit Additional Paid-In Capital:** This accounts for the excess amount received over the par value of the common stock issued. **Journal Entry:** | Account Name | Debit ($) | Credit ($) | |------------------------------------|-------------|-------------| | Bonds Payable | 69,000 | | | Common Stock (9,000 shares * $5) | | 45,000 | | Additional Paid-In Capital | | 24,000 | **Explanation:** - **Bonds Payable** is debited by $69,000 to eliminate the carrying value of the bonds. - **Common Stock** is credited by $45,000, which is calculated based on the total number of shares issued multiplied by the par value per share (9,000 shares * $5). - **Additional Paid-In Capital** is credited by the remaining $24,000, representing the excess amount over the par value (Actual value - Par value). This results in the proper balancing and accounting of the transaction on the company's financial records. --- This journal entry exemplifies how companies manage the transition of debt to equity, reflecting changes in their financial structure. Understanding this can help in comprehending broader financial strategies and impacts on shareholder's equity.
Transcribed Image Text:**Convertible Bonds to Common Stock Conversion** --- ### Case Study: Conversion of Convertible Bonds to Common Stock In this scenario, we observe the financial transaction of converting bonds into common stock. The details of the conversion are as follows: - **Convertible Bonds** - Quantity: 60 - Face Value: $1,000 each - Total Carrying Value: $69,000 - **Converted into Common Stock** - Total Shares Issued: 9,000 shares - Par Value per Share: $5 - Market Value per Share: $9 (on the date of conversion) #### Objective: Prepare the journal entry to record the conversion of the bond to common stock. When preparing the journal entry, you would typically record the elimination of the bond liability and the corresponding increase in both common stock and additional paid-in capital accounts. --- **Journal Entry Preparation:** To properly document this conversion, follow these steps: 1. **Debit Bonds Payable:** Eliminate the carrying value of the bonds from the liabilities. 2. **Credit Common Stock:** Reflect the par value of the shares issued. 3. **Credit Additional Paid-In Capital:** This accounts for the excess amount received over the par value of the common stock issued. **Journal Entry:** | Account Name | Debit ($) | Credit ($) | |------------------------------------|-------------|-------------| | Bonds Payable | 69,000 | | | Common Stock (9,000 shares * $5) | | 45,000 | | Additional Paid-In Capital | | 24,000 | **Explanation:** - **Bonds Payable** is debited by $69,000 to eliminate the carrying value of the bonds. - **Common Stock** is credited by $45,000, which is calculated based on the total number of shares issued multiplied by the par value per share (9,000 shares * $5). - **Additional Paid-In Capital** is credited by the remaining $24,000, representing the excess amount over the par value (Actual value - Par value). This results in the proper balancing and accounting of the transaction on the company's financial records. --- This journal entry exemplifies how companies manage the transition of debt to equity, reflecting changes in their financial structure. Understanding this can help in comprehending broader financial strategies and impacts on shareholder's equity.
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