Question

Buffalo Corporation has outstanding 2,000 $1,000 bonds, each convertible into 70 shares of $10 par value common stock. The bonds are converted on December 31, 2020, when the unamortized discount is $28,600 and the market price of the stock is $21 per share. 

Record the conversion using the book value approach.

Answer 1

In book value approach, the bonds gets converted into shares at the book value at which bonds were recorded in the books of company. Therefore, there will be no gain no loss on conversion.

Any unamortized discount will be credited. The par value of the shares will be credited to stock account. Then balance then remaining, if any, will be credited to Additional paid-up capital account.

Total number of share of $10 par value to be issued on conversion = 2,000 bonds*70shares = 140,000 shares

Credit ($) Journal entry in the books of Buffalo Corporation Date Particulars | Debit ($) | 31/12/2020 Bonds payable A/c ------ Dr 2,000,000 To, Discount on bonds payable A/c To, Common Stock A/c To, Additional paid-in capital A/C (Being 2,000 convertible bonds of $1,000 each are converted into 70 share for each bond of $10 par value each. Unamortized discounts on bonds is written off.). 28,600 1,400,000 571,400