Question

Vargo Company has bonds payable outstanding in the amount of $440,000, and the Premium on Bonds Payable account has a balance of $7,400. Each $1,000 bond is convertible into 20 shares of preferred stock of par value of $50 per share. All bonds are converted into preferred stock.Assuming that the book value method was used, what entry would be made?

Answer 1

Explanation:

The journal entry is shown below:

Bond payable $440,000

Premium on bond payable  $7,400

           To Preferred stock $440,000

           To Paid in excess of par - Preferred stock $7,400

(Being the conversion is recorded)

The computation is shown below:

For preferred stock

= $440,000 ÷ $1,000 × 20 shares × $50

= $7,400