Arco,Inc.issued $500,000 of 4%,10-year convertible bonds at 102 on July 1,2012.On July 1,2017,bondholders converted all bonds to common stock when the market value of the stock was $40.Arco accounts for premiums and discounts on a straight-line basis.Each $1,000 bond is convertible into 30 shares of Arco's $5 par value stock.What is the proper entry to record the conversion of the bonds?

Question

Quizplus · Accepted Answer

To record the conversion of the bonds, the company needs to debit the bond payable account and credit the common stock and additional paid-in capital accounts. The common stock and additional paid-in capital accounts should be credited for the fair value of the shares issued upon conversion ($40 market value x 30 shares per bond), which is $1,200 per bond. The bond payable account should be debited for the book value of the bonds ($510,000 book value - $10,000 unamortized premium). The entry to record the bond conversion is as follows:

Debit Bond Payable: $500,000 book value - $10,000 unamortized premium = $490,000

Credit Common Stock: $40 market value x 30 shares per bond x 500 bonds = $600,000

Credit Additional Paid-in Capital: $1,200 fair value - $200 par value = $1,000 x 500 bonds = $500,000

Therefore, the correct entry to record the conversion of the bonds is B.

Arco,IncIssued $500,000 of 4%,10-Year Convertible Bonds at 102 on July