Question

In 2018, preferred shareholders elected to convert 4.58 million shares of preferred stock ($39 million book value) into common stock. Rather than issue new shares, the company granted 4.58 million shares held in treasury stock to the preferred shareholders, with a total cost of $33 million.
a. Prepare a journal entry to illustrate how this transaction would have been recorded.

Answer 1

Answer:

The answer is given below;

Explanation:

Preferred Stock   Dr.$39,000,000

Common Stock    Cr.$33,000,000

Paid in capital in excess of par-Common stock  (39,000,000-33,000,000)        Cr.$6,000,000  

As the book value of preferred stock is greater than the price paid at the time of conversion into common stock,therefore excess amount is paid in capital in excess of par for common stocks.As the preferred stock is reduced by their book value,therefore it is debited and common stock is credited with its cost.