This year, the bondholders of Brick, Inc. exchanged convertible bonds for common stock. Brick's carrying amount of these bonds was less than the market value but greater than the par value of the common stock issued upon conversion. If Brick used the book value method of accounting for the conversion, which of the following occurred as a result of recording this conversion?

Question

Quizplus · Accepted Answer

Under the book value method, the convertible bonds are removed from the balance sheet at their carrying (book) value, and common stock is issued at the same amount. Since the carrying amount of the bonds was greater than the par value of the stock issued, the excess is credited to additional paid-in capital, increasing stockholders' equity. No loss is recognized, retained earnings are not affected, and additional paid-in capital does not decrease.

This Year, the Bondholders of Brick, Inc