Question

Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 shares of common stock (par value $25). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the stock is quoted on the market at $60 per share. 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?

a. $40,000
b. $22,000
c. $32,000
d. $25,000

Answer 1

The amount of paid-in capital in excess of par to be recorded on the conversion of the bonds is $22,000.

Step-by-step explanation:

To determine the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds, we need to calculate the bond's conversion value and compare it to the book value of the bonds.

Conversion value = Number of shares x Market price of shares = 2,000 x $60 = $120,000

Book value of the bonds = Face value of the bonds - Unamortized premium = $100,000 - $2,000 = $98,000

Therefore, the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds is the difference between the conversion value and the book value of the bonds, which is $120,000 - $98,000 = $22,000.