A bond with a carrying value of $790,000 was converted into 100,000 shares of $5 per share par value common stock at a time when the market value per share was $9.00 per share.Which of the following statements does not accurately describe the financial accounting for the conversion?

Question

Quizplus · Accepted Answer

The book value of the bond is $790,000, which is the carrying value of the bond. When the bond is converted into stock, the total owners' equity will increase by the same amount, regardless of the method used to record the conversion.

If the market value method is used, the loss on conversion will be calculated as the difference between the carrying value of the bond and the market value of the stock issued. In this case, the loss will be $110,000 (100,000 x ($9 - $7.9)), which will be recognized in the income statement and reduce net income.

Therefore, statement D is incorrect as it suggests that the market value method would result in a $900,000 increase in owners' equity, which is not accurate.

A Bond with a Carrying Value of $790,000 Was Converted