Question

Sunland Company has $4050000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2021, the holders of $1250000 bonds exercised the conversion privilege. On that date the market price of the bonds was 106 and the market price of the common stock was $35. The total unamortized bond premium at the date of conversion was $288000. Sunland should record, as a result of this conversion, a

Answer 1

Answer: credit of $213876.80 to Paid-in Capital in Excess of Par.

Explanation:

First and foremost, we have to calculate the exercised ratio which will be:

= Converted value for bonds / Total value if convertible bonds

= $1250000 / $4050000

= 0.3086

The unamortized premium will then be calculated thus:

= $1250000 + ($288000 × 0.3086) - (1250 × $30 × 30)

= $1250000 + $88876.80 - $1125000

= $213876.80

Therefore, credit of $213876.80 to Paid-in Capital in Excess of Par.