Gardner Corporation has $2,400,000 of bonds outstanding with an unamortized discount of $120,000 immediately following the last interest payment. At that time, the bonds were converted into 250,000 shares of $10 par value common stock. As a result of this conversion:
A) liabilities decreased by $2,280,000 and stockholders' equity increased by $2,280,000.
B) liabilities decreased by $2,400,000 and stockholders' equity increased by $2,400,000.
C) liabilities decreased by $2,500,000 and stockholders' equity increased by $2,500,000.
D) liabilities decreased by $2,280,000 and stockholders' equity increased by $2,500,000.

Question

Quizplus · Accepted Answer

The unamortized discount of $120,000 is a contra-liability account that reduces the carrying value of the bonds. When the bonds are converted, the unamortized discount is eliminated, resulting in a decrease in liabilities of $2,280,000 ($2,400,000 - $120,000). The issuance of 250,000 shares of common stock increases stockholders' equity by $2,500,000 ($10 par value x 250,000 shares).

Gardner Corporation Has $2,400,000 of Bonds Outstanding with an Unamortized