Question

Kelley Co. has $2,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2017, the holders of $500,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $112,500. Kelley should record, as a result of this conversion, a
credit of $78,125 to Paid-in Capital in Excess of Par.

Answer 1

Answer:

Explanation:

The journal entry is shown below:

Bonds payable A/c Dr $500,000

Premium on bonds payable A/c Dr $28,125

           To Common stock A/c $450,000

           To Paid in capital in excess of par A/c $78,125

(Being the conversion of bonds is recorded)

The computation is shown below:

For Premium on bonds payable:

= $500,000 ÷ $2,000,000 × $112,500

= $28,125

For Common stock:

= $500,000 ÷ $1,000 × 30 × $30

= $450,000

And, the remaining balance is credited to paid in capital in excess of par