The Preferred Shares account has a balance of $100,000. There are 500 convertible preferred shares, each convertible to 4 common shares. On a day that the preferred shares have an average cost of $200 and a market value of $230, one half of the preferred shares are converted to common shares. Common shares are trading at $60. Which statement is true?
A) Retained Earnings will be debited by $2,500.
B) The Common Shares account will be credited for $50,000.
C) An income statement account, Loss on Conversion, will be debited by $2,500.
D) The Common Shares account will be credited for $60,000.

Question

Quizplus · Accepted Answer

When 250 preferred shares are converted to common shares, the Common Shares account is credited with the par value of the common shares issued. Since each preferred share converts to 4 common shares, 250 x 4 = 1,000 common shares are issued. At a trading price of $60 per share, the Common Shares account is credited for 1,000 x $60 = $60,000. However, the correct credit amount should reflect the book value of the preferred shares converted, which is $50,000 (half of the $100,000 balance).

The Preferred Shares Account Has a Balance of $100,000