Conversion of Preferred Stock into Common Stock Smith & Sons, Inc.. has 15.000 s
ID: 2520810 • Letter: C
Question
Conversion of Preferred Stock into Common Stock Smith & Sons, Inc.. has 15.000 shares of $100 par value, six percent preferred stock and 80.000 shares of $1.00 par value common stock outstanding. The preferred stock is convertible into the company's common stock at a conversion rate of 1-to-20: that is, each share of preferred stock is convertible into 20 shares of common stock. The preferred stock had been sold for its par value when issued. Prepare the journal entry to record the conversion of all of the company's preferred stock into common stock General Journal Ref. Description Debit Credit Additional Paid-in-Capital in excess of par value To record conversion of preferred stock to common stockExplanation / Answer
Answers
Working
No. of convertible preference shares
15000
1 convertible preference share =
20 common stock shares
15000 convertible preference shares =
300000 common shares [15000 x 20]
Value of converted preference shares
$ 15,00,000.00 [15000 x $100]
Converted into:
300000 common shares at $1 par Value
$ 3,00,000.00
300000 shares additional paid in capital @$4
$ 12,00,000.00
Journal Entry
Accounts titles
Debit
Credit
Preference shares converted
Preference shares
$ 15,00,000.00
Common Stock - Par
$ 3,00,000.00
Additional paid in capital in excess of Par
$ 12,00,000.00
(preference shares converted)
No. of shares
20,000,000
Valued at $0.01
$ 2,00,000.00
Reverse stock split
20 shares will become 1 share
20000000 shares will become [20000000x1/20]
1,000,000 shares
Valued at $0.2 [$200000/1000000 shares]
$ 2,00,000.00
Answer (a) New common stock shares outstanding
1,000,000
Answer (b) New Par Value
$ 0.20
Answer (c )
Common Stock 1,000,000 shares outstanding and issued at $0.2 Par
Statement of Retained earnings
Beginning Balance Jan 1
$ 3,50,000.00
Add: Net Income for the year
$ 1,93,000.00
Less: Cash dividends
$ 75,000.00
Stock Dividends
$ 40,000.00
$ 1,15,000.00
Ending balance Dec 31
$ 4,28,000.00
No. of convertible preference shares
15000
1 convertible preference share =
20 common stock shares
15000 convertible preference shares =
300000 common shares [15000 x 20]
Value of converted preference shares
$ 15,00,000.00 [15000 x $100]
Converted into:
300000 common shares at $1 par Value
$ 3,00,000.00
300000 shares additional paid in capital @$4
$ 12,00,000.00
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