Kelley Co. has $2,000,000 of 8% convertible bonds outstanding. Each $1,000 bond
ID: 2426461 • Letter: K
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, 2014, 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.
(Can you explain the calculation for this answer)
Explanation / Answer
The book value of convertible bonds is transferred to common stock and additional paid-in capital when they are converted: $500,000 + ($112,500 × .25) - (500 × 30 × $30) = $78,125. Entry Would be Subscription Particulars Dr Amt Cr Amt Bonds Payable Dr 500,000.00 Premium on Bonds Payable = 500,000/2,000,000 *112,500 28,125.00 To Common Stock = 500,000/1000 *30*30 450,000.00 To Paid in capital in excess of Par (Bal Fig) = 500,000 + 28125 -450,000 78,125.00
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