On July 1, 2017, an interest payment date, $180,000 (par value)of Lusaka Corp.bonds were converted into 3,600 of their no par common shares.At this time, the unamortized discount on the bonds was $7,200.When the bonds were originally issued, the equity portion of the bond was valued at $1,700.Using the book value method, Lusaka would record
A)an $174,500 increase in Common Shares.
B)an $172,800 increase in Common Shares.
C)an $171,100 increase in Common Shares.
D)no change to Contributed Surplus.

Question

Quizplus · Accepted Answer

The book value of the bonds, which is the carrying value, can be calculated as follows:
$180,000 par value - $7,200 unamortized discount = $172,800 carrying value

The equity portion of the bond, which is the difference between the par value and the carrying value, can be calculated as follows:
$180,000 par value - $172,800 carrying value = $7,200 equity portion

When the bonds are converted, the equity portion is transferred to the common shares. Therefore, the common shares would be recorded as follows:
3,600 shares x ($7,200 equity portion / $180,000 par value) = $144 increase in Common Shares

In addition, the contributed surplus account should be adjusted for the difference between the equity portion of the bond and the book value of the equity portion at the time of issuance. The contributed surplus adjustment can be calculated as follows:
$7,200 equity portion - $1,700 book value of equity portion = $5,500 contributed surplus adjustment

Therefore, the journal entry to record the conversion would be:
Common Shares  $174,500 ($144 increase in Common Shares x 1,215 market value per share)
Contributed Surplus $5,500 
Bonds Payable    $180,000 
Discount on Bonds Payable   $7,200

On July 1, 2017, an Interest Payment Date, $180,000 (Par