Question

Four years after issue, debentures with a face value of \(1,000,000 and book value of \)960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at \(14 per share (par value \)10). The company records the conversion as follows. Bonds Payable 1,000,000 Discount on Bonds Payable 40,000 Common Stock 800,000 Paid-in Capital in Excess of Par— Common Stock 160,000 Discuss the propriety of this accounting treatment.

Short answer

The procedure used by the association to record the exchanging of convertible debentures for common stock can be maintained because when the association gave the convertible debentures, the profits could address thought got for the stock.

Step-by-step solution

The properties of accounting treatment are discussed as follows

The strategy utilized by the organization to record the trading of convertible debentures for common stock can be upheld because when the organization gave the convertible debentures, the returns could address thought got for the stock. Consequently, when conversion happens, the book worth of the commitment is essentially moved to the stock exchanged for it. Further, it can be defined that transformation addresses an exchange with investors which stockholders should not give rise to a gain or loss.

Accounting of convertible debentures or bonds

Recording the issue of the common stock at the book worth of the debentures is up in the air. It very well might be contended that trading of stock for the debentures finishes the exchange cycle for debentures and starts another cycle for stock. The thought or worth utilized for this new exchange cycle should then be the sum which would be gotten assuming that the debentures were sold rather than traded, or the sum which would be gotten if the connected stock were sold, whichever is more plainly definite at the hour of the trade. This strategy perceives changes in values which have happened, and subordinates not entirely settled at the time the debentures were given.

Therefore, when transformation occurs, the book worth of the responsibility is moved to the stock traded for it. another characteristic is that change tends to a trade with financial backers which investors ought not lead to an addition or misfortune.