Dakar Inc.has $3,000,000 (par value), 8% convertible bonds outstanding.Each $1,000 bond is convertible into thirty no par value common shares.The bonds pay interest on January 31 and July 31.On July 31, 2017, the holders of $900,000 worth of bonds exercised the conversion privilege.On that date the market price of the bonds was 105, the market price of the common shares was $36, the carrying value of the common shares was $18 and the Contributed Surplus-Conversion Rights account balance was $450,000.The total unamortized bond premium at the date of conversion was $210,000.Using the book value method, Dakar should record, as a result of this conversion,
A)a credit of $135,000 to Contributed Surplus-Conversion Rights.
B)a debit of $135,000 to Contributed Surplus-Conversion Rights.
C)a credit of $63,000 to Bonds Payable.
D)a debit of $210,000 to Bonds Payable.

Question

Quizplus · Accepted Answer

The book value method requires the carrying amount of the bonds to be transferred to equity accounts. The conversion involves debiting the Bonds Payable and Bond Premium accounts and crediting Common Shares and Contributed Surplus-Conversion Rights. The debit to Contributed Surplus-Conversion Rights is the difference between the carrying value of the bonds converted and the par value of the common shares issued.

Dakar IncHas $3,000,000 (Par Value), 8% Convertible Bonds Outstanding