Madison Corporation had two issues of securities outstanding-- common stock and a 5 percent convertible bond issue in the face amount of $10,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitles the bondholders to receive 40 shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2011, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $500,000. What amount should Madison credit to the account "Paid-In Capital in Excess of Par" as a result of this conversion assuming Madison does not want to recognize any gain (or loss) on the conversion?

Question

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The amount credited to "Paid-In Capital in Excess of Par" is equal to the difference between the market value of the common stock issued and the face value of the bonds converted. In this case, the market value of the common stock issued is $1,800,000 x 40 x $35 = $2,520,000, and the face value of the bonds converted is $1,800,000. Therefore, the amount credited to "Paid-In Capital in Excess of Par" is $2,520,000 - $1,800,000 = $720,000. However, since Madison does not want to recognize any gain (or loss) on the conversion, the amount credited to "Paid-In Capital in Excess of Par" is reduced by the unamortized bond discount of $500,000. Therefore, the amount credited to "Paid-In Capital in Excess of Par" is $720,000 - $500,000 = $270,000.

Madison Corporation Had Two Issues of Securities Outstanding-- Common Stock