Fogel Co. has $3,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2014, the holders of $960,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $210,000. Fogel should record, as a result of this conversion, a

Question

Quizplus · Accepted Answer

The conversion of bonds into stock is accounted for using the book value method, where the carrying amount of the bonds (including any premium or discount) is transferred to equity. The premium on the bonds is amortized over the life of the bonds, reducing the carrying amount. When $960,000 of the bonds are converted, the entire carrying amount of these bonds, including any unamortized premium, is transferred to equity. The calculation for the credit to Paid-in Capital in Excess of Par involves determining the amount by which the equity credited (based on the par value of the stock issued and any additional paid-in capital) exceeds the carrying amount of the bonds converted. Given the information, the correct calculation leads to a credit of $163,200 to Paid-in Capital in Excess of Par, reflecting the excess of the equity value of the shares issued over the book value of the bonds converted.

Fogel Co Has $3,000,000 of 8% Convertible Bonds Outstanding