On July 1, year 1, Golden Corporation’s bondholders exchanged their convertible bonds for $1 par value common stock. The carrying value of the bonds was $50 less than the market value of the common stock issued. Golden uses the book value method of accounting for the conversion. Which of the following statements is true regarding the conversion of Golden bonds?
A. An extraordinary loss is recognized.
B. Additional paid-in capital is decreased.
C. Stockholders’ equity is increased.
D. Retained earnings is increased
Answer:C
This answer is correct. Stockholders’ equity is increased. Under the book value method, the common stock is recorded at the book value of the bonds at the date of conversion. Thus, no gain or loss is recognized on the conversion. The entry for conversion is to debit Bonds Payable and credit common stock and additional paid-in capital, which increases stockholders’ equity. The amount of paid-in capital is the difference between the book value of the bonds and the par value of the stock. The conversion has no effect on retained earnings. No gain or loss is recognized.
