On June 30,2016,Blair Industries had outstanding $80 million of 8% convertible bonds that mature on June 30,2017.Interest is payable each year on June 30 and December 31.The bonds are convertible into 6 million shares of $10 par common stock.At June 30,2016,the unamortized balance in the discount on bonds payable account was $4 million.On June 30,2016,half the bonds were converted when Blair's common stock had a market price of $30 per share.When recording the conversion,Blair should credit paid-in capital-excess of par:
A)$6 million.
B)$8 million.
C)$10 million.
D)$12 million.

Question

Quizplus · Accepted Answer

When recording the conversion, Blair needs to debit the bonds payable and credit both the common stock and the paid-in capital-excess of par.

The common stock credit is calculated by multiplying the number of shares received upon conversion (3 million shares, since only half of the bonds were converted) by the par value per share ($10).

3 million shares x $10 par value = $30 million credit to common stock

To calculate the credit to paid-in capital-excess of par, we need to find the difference between the fair market value of the shares received and the par value of those shares.

Fair market value per share = $30 (given in the problem)

Par value per share = $10 (given in the problem)

Excess of fair market value over par value per share = $30 - $10 = $20

Credit to paid-in capital-excess of par = Excess of FMV over par x number of shares received upon conversion

Credit to paid-in capital-excess of par = $20 x 3 million shares = $60 million

However, we need to remember that there was already a $4 million discount on bonds payable that had not yet been amortized. This discount needs to be removed from the equation, since it represents a reduction in the effective cost of the bonds to Blair.

So the final credit to paid-in capital-excess of par is:

$60 million - $4 million unamortized discount = $56 million

Therefore, the total credit to be made to the paid-in capital-excess of par account is $56 million + the $30 million credit to common stock = $86 million.

Since only half of the bonds were converted, we need to divide this by two:

$86 million / 2 = $43 million credit to paid-in capital-excess of par account when recording the conversion

Subtracting the existing credit balance of $35 million (since $4 million of the original discount was already amortized), we get:

$43 million - $35 million = $8 million credit to paid-in capital-excess of par account when recording the conversion

Therefore, the correct answer is B) $8 million.

On June 30,2016,Blair Industries Had Outstanding $80 Million of 8