Immediately after the last interest payment, Henry Company converted $2,700,000 of its bonds into 270,000 shares of $10 par value common stock. The unamortized premium on the bonds at the date of the conversion was $900,000. As a result of this conversion:
A)liabilities decreased by $3,600,000 and stockholders' equity decreased by $3,600,000.
B)liabilities decreased by $2,700,000 and stockholders' equity increased by $2,700,000.
C)liabilities decreased by $3,600,000 and stockholders' equity increased by $3,600,000.
D)liabilities decreased by $900,000 and stockholders' equity increased by $900,000.

Question

Quizplus · Accepted Answer

The conversion of bonds into common stock results in a decrease in liabilities and an increase in stockholders' equity. The amount of the decrease in liabilities is equal to the face value of the bonds converted, which is $2,700,000. The amount of the increase in stockholders' equity is equal to the par value of the common stock issued, which is $2,700,000, plus the unamortized premium on the bonds, which is $900,000. Therefore, the total decrease in liabilities is $2,700,000 + $900,000 = $3,600,000, and the total increase in stockholders' equity is $2,700,000 + $900,000 = $3,600,000.

Immediately After the Last Interest Payment, Henry Company Converted $2,700,000