Whispering Company has bonds payable outstanding in the amount of $400,000, and the Premium on Bonds Payable account has a balance of $6,200. Each $1,000 bond is convertible into 20 shares of preferred stock of par value of $50 per share. All bonds are converted into preferred stock.

Required:
Assuming that the book value method was used, what entry would be made?

bonds payable 400,000 debit

premium on BP    6,200 debit

     preferred stock            40,000 credit

     additional paid-in PS 366,200 credit

Explanation:

We will convert the bonds into shares based on their curent value this will make create an aditional paid-in preferred stock if higher or decrease retained earnings if lower:

$400,000 bonds + $6,200 premium = $406,200 book value

$400,000 / $1,000 each = 400 x 20 shares each = 800 preferred shares x 50 dollar each = $40,000

The differenct will be adidtional paid.in capital

Each $1,000 bond is convertible into 20 shares of preferred stock of par value of $50 per share, Whispering Company has $400,000 bonds payable so on conversion,

400,000 / 1,000 = 400

400 * 20 = The company has 8,000 shares of par value $50.

The book value method is a technique for recording the conversion of a bond into stock. The value at which the bonds were recorded on the books of the issuer is transferred into the applicable stock account.

Total Book Value of bonds: Bonds Payable + Premium on Bonds = 400,000 + 6,200 = $406,200

Preferred Stock on conversion = (8,000 X $50) = 400,000

The rest of $6,200 would be credited to the additional paid-in capital account paid in excess of par value.

So the Journal Entry for the conversion into preferred stock would be the following:

Account Title                                 Debit                    Credit

Bonds Payable400,000

Premium on Bonds Payable6,200

Preferred Stock (8,000 X $50)400,000

Paid-in Capital in Excess of Par

(Preferred Stock)6,200

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