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 into ordinary shares, what is the amount of share premium to be recorded on the conversion of the bonds?

Question

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The share premium is calculated as the difference between the book value of the bonds and the par value of the shares issued. The book value of the bonds is $102,000 ($100,000 face value + $2,000 unamortized premium). The par value of the shares issued is $80,000 (2,000 shares x $40 par value). Therefore, the share premium is $22,000 ($102,000 - $80,000).

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