1. Litke Corporation issued at a premium of $10,000 a $200,000 bond issue convertible into 4,000 shares of common stock (par value $20). At the time of the conversion, the unamortized premium is $4.000. If the bonds are converted into common, what is the amount of "Paid-in capital in excess of par" to be recorded on the conversion of the bonds? Additional Paid In Capital, Common Stock = Helpful Hints Not required, but if you did the journal entry - you would calculate the answer Refer to pages 2-3 of outline but this problem has a Premium, not a discount T-Accounts would help to answer this question . Accounting for Convertible Debt Time of issuance Time of Conversion Time of Retirement Time of Issuance Follows method used to record straight debt issue, with any discount or premium amortized over the term of debt None of the proceeds are recorded as equity Example: Miller Corporation issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Record the entry at date of issuance. Cash Discount on Bonds Payable 3,960,000 40,000 Bonds Payable 4,000,000 Issue Price = ($4,000,000 x 99% = $3,960,000) At Time of Conversion Companies use the book value method when converting bonds Book value method records the securities exchanged for the bond at the carrying amount of the bond When the debt holder converts the debt to equity, the issuing company recognizes no gain or loss upon conversion Example: Moore Corporation has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2017, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Prepare the entry to record the conversion of the bonds. On the date of conversion December 31, 2017: Moore Corporation issues 100,000 shares (2,000 bonds x 50 shares per bond) to bondholders as payment for the outstanding 2,000 bonds (face value $1,000 each) . On this date, the bonds unamortized discount was $30,000 Moore must record the issuance of common stock and take the Bonds Payable and Bond Discount off the books Book Value = $1,970,000 (Prior to Conversion) Bond Payable Discount $ 2,000,000 $ 30,000 After Conversion Bond Payable Discount $ 2,000,000 $ 12/31/2017 $2,000,000 30,000 $ $0 30,000 12/31/2017 $0 Common Stock Additional Paid In Capital $ 1,000,000 12/31/2017 $ 970,000 12/31/2017 $ 1,000,000 $ 970,000 12/31/17 - Journal Entry $2,000,000 Bonds Payable Discount on Bonds Payable Common Stock Paid-in Capital in Excess of Par-Common (2,000 x $1,000) 30,000 Given $ 1,000,000 (2,000 x 50 x $10) $ 970,000 ($1,970,000 - $1,000,000)