B is corrent. Under the book value method, the common stock is recorded at the carrying amount of the converted bonds less any conversion expenses. No gain or loss is recognized. $500,000 of the $1,000,000 of bonds are converted. The premium relating to these bonds is 500/1,000 of $30,000, or $15,000. Therefore, the carrying amount of the converted bonds is $515,000 ($500,000 + $15,000). The common stock must be recorded at this amount less the conversion expenses ($10,000), or $505,000. Since the par value of the stock issued is $400,000 (20,000 x $20), APIC is credited for $105,000 ($505,000 – $400,000). The journal entry is | Bonds payable | 500,000 | | | Premium on BP | 15,000 | | | | Common stock | | 400,000 | | | APIC | | 105,000 | | | Cash | | 10,000 |
A is incorrect. Under the book value method, the common stock is recorded at the carrying amount of the converted bonds less any conversion expenses. No gain or loss is recognized. $500,000 of the $1,000,000 of bonds are converted. The premium relating to these bonds is 500/1,000 of $30,000, or $15,000. Therefore, the carrying amount of the converted bonds is $515,000 ($500,000 + $15,000). The common stock must be recorded at this amount less the conversion expenses ($10,000), or $505,000. Since the par value of the stock issued is $400,000 (20,000 x $20), APIC is credited for $105,000 ($505,000 – $400,000). The journal entry is | Bonds payable | 500,000 | | | Premium on BP | 15,000 | | | | Common stock | | 400,000 | | | APIC | | 105,000 | | | Cash | | 10,000 |
C is incorrect. Under the book value method, the common stock is recorded at the carrying amount of the converted bonds less any conversion expenses. No gain or loss is recognized. $500,000 of the $1,000,000 of bonds are converted. The premium relating to these bonds is 500/1,000 of $30,000, or $15,000. Therefore, the carrying amount of the converted bonds is $515,000 ($500,000 + $15,000). The common stock must be recorded at this amount less the conversion expenses ($10,000), or $505,000. Since the par value of the stock issued is $400,000 (20,000 x $20), APIC is credited for $105,000 ($505,000 – $400,000). The journal entry is | Bonds payable | 500,000 | | | Premium on BP | 15,000 | | | | Common stock | | 400,000 | | | APIC | | 105,000 | | | Cash | | 10,000 |
D is incorrect. Under the book value method, the common stock is recorded at the carrying amount of the converted bonds less any conversion expenses. No gain or loss is recognized. $500,000 of the $1,000,000 of bonds are converted. The premium relating to these bonds is 500/1,000 of $30,000, or $15,000. Therefore, the carrying amount of the converted bonds is $515,000 ($500,000 + $15,000). The common stock must be recorded at this amount less the conversion expenses ($10,000), or $505,000. Since the par value of the stock issued is $400,000 (20,000 x $20), APIC is credited for $105,000 ($505,000 – $400,000). The journal entry is| Bonds payable | 500,000 | | | Premium on BP | 15,000 | | | | Common stock | | 400,000 | | | APIC | | 105,000 | | | Cash | | 10,000 |
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