On March 31,2016,Ashley,Inc.'s bondholders exchanged their convertible bonds for common stock.The book value of these bonds on Ashley's books was less than the fair value but greater than the par value of the common stock issued.If Ashley used the book value method of accounting for the conversion,which of the following statements correctly states an effect of this conversion?
A)Shareholders' equity is increased.
B)Additional paid-in capital is decreased.
C)Retained earnings is increased.
D)A loss is recognized.

Question

Quizplus · Accepted Answer

According to the book value method of accounting for bond conversion, the common stock issued is recorded at the book value of the bonds on the company's books. As the book value of the bonds was greater than the par value of the common stock, the issuance of common stock results in an increase in shareholders' equity. Therefore, Option A is the correct answer. Options B and C are not affected by this conversion, and Option D is not applicable as there is no loss recognized in this transaction.