Morgan Corporation had two issues of securities outstanding: common stock and an

Question

Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $12,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2014, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $750,000. In applying the book value method, what amount should Morgan credit to the account &paid-in capital in excess of par,& as a result of this conversion?

Explanation / Answer

ANS : $247,500

Explanation

Common stock = ($1,800,000 ÷ 1000) × 40 × $$20

  =$1,440,000

Unamortized discount =( $1,800,000  ÷$ 1,200,000) × $750,000

=$112,500

Amount credit to the account &paid-in capital in excess of par,& as a result of this conversion

= $1,800,000-$1,440,000-$112500

= $247,500

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