B is corrent. All 5,000 shares of the convertible preferred stock were converted to common stock at the rate of 3 to 1 (making 15,000 common shares issued). The common stock account is credited for the par value of these shares: 15,000 × $25 or $375,000. Although not necessary, the journal entry to record the conversion can be prepared
| Preferred stock |
500,000 |
|
(5,000 × $100) |
| Paid-in capital—PS |
50,000 |
|
(5,000 × $10) |
| Common stock |
|
375,000 |
(15,000 × $25) |
| Paid-in capital—CS |
|
175,000 |
(plug) |
The $40 market value of the common stock is ignored. Gains (losses) are not recognized on the conversion of preferred stock. The book value method is used and the paid-in capital, common stock account is credited for the amount necessary to balance the entry.
A is incorrect. All 5,000 shares of the convertible preferred stock were converted to common stock at the rate of 3 to 1 (making 15,000 common shares issued). The common stock account is credited for the par value of these shares: 15,000 × $25 or $375,000. Although not necessary, the journal entry to record the conversion can be prepared
| Preferred stock |
500,000 |
|
(5,000 × $100) |
| Paid-in capital—PS |
50,000 |
|
(5,000 × $10) |
| Common stock |
|
375,000 |
(15,000 × $25) |
| Paid-in capital—CS |
|
175,000 |
(plug) |
The $40 market value of the common stock is ignored. Gains (losses) are not recognized on the conversion of preferred stock. The book value method is used and the paid-in capital, common stock account is credited for the amount necessary to balance the entry.
C is incorrect. All 5,000 shares of the convertible preferred stock were converted to common stock at the rate of 3 to 1 (making 15,000 common shares issued). The common stock account is credited for the par value of these shares: 15,000 × $25 or $375,000. Although not necessary, the journal entry to record the conversion can be prepared
| Preferred stock |
500,000 |
|
(5,000 × $100) |
| Paid-in capital—PS |
50,000 |
|
(5,000 × $10) |
| Common stock |
|
375,000 |
(15,000 × $25) |
| Paid-in capital—CS |
|
175,000 |
(plug) |
The $40 market value of the common stock is ignored. Gains (losses) are not recognized on the conversion of preferred stock. The book value method is used and the paid-in capital, common stock account is credited for the amount necessary to balance the entry.
D is incorrect. All 5,000 shares of the convertible preferred stock were converted to common stock at the rate of 3 to 1 (making 15,000 common shares issued). The common stock account is credited for the par value of these shares: 15,000 × $25 or $375,000. Although not necessary, the journal entry to record the conversion can be prepared
| Preferred stock |
500,000 |
|
(5,000 × $100) |
| Paid-in capital—PS |
50,000 |
|
(5,000 × $10) |
| Common stock |
|
375,000 |
(15,000 × $25) |
| Paid-in capital—CS |
|
175,000 |
(plug) |
The $40 market value of the common stock is ignored. Gains (losses) are not recognized on the conversion of preferred stock. The book value method is used and the paid-in capital, common stock account is credited for the amount necessary to balance the entry.
