Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 ordinary shares (par value $40).At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the shares are quoted on the market at $60 per share.If the bonds are converted ordinary shares, what is the amount of share premium to be recorded on the conversion of the bonds?

Question

Quizplus · Accepted Answer

The bondholders will receive 2,000/10=200 shares per bond. 
The market value of 200 shares is 200*$60=$12,000. 
The carrying amount of the bond to be converted to shares is $110,000 – $2,000 = $108,000.
The entry to record the conversion is:
Ordinary share capital $80,000 (2,000 shares*$40 par value)
Share premium on conversion $22,000 ([$12,000-$40*2,000]*1.1)
Bonds payable $100,000
Premium on bonds payable $5,000
(Record the conversion of 1 bond)
Therefore, the amount of share premium to be recorded on the conversion of the bonds is $22,000 (choice B).

Litke Corporation Issued at a Premium of $5,000 a $100,000