Wang Inc. has $ 3,000,000 (par value), 8% convertible bonds outstanding. Each $ 1,000 bond is convertible into thirty no par value common shares. The bonds pay interest on January 31 and July 31. On July 31, 2020, the holders of $ 900,000 worth of bonds exercised the conversion privilege. On that date the market price of the bonds was 105, the market price of the common shares was $ 36, the carrying value of the common shares was $ 18 and the Contributed Surplus-Conversion Rights account balance was $ 450,000. The total unamortized bond premium at the date of conversion was $ 210,000. Using the book value method, Wang should record, as a result of this conversion,
A) a credit of $ 135,000 to Contributed Surplus-Conversion Rights.
B) a debit of $ 135,000 to Contributed Surplus-Conversion Rights.
C) a credit of $ 63,000 to Bonds Payable.
D) a debit of $ 210,000 to Bonds Payable.

Question

Quizplus · Accepted Answer

Under the book value method, the bonds are recorded at their carrying value (face value plus unamortized premium). Therefore, the entry to record the conversion of bonds into shares in this case would be:
Debit: Bonds Payable ($ 900,000 / $1,000 = 900 bonds x $1,000 face value) $900,000
Debit: Unamortized bond premium $210,000 
Credit: Common shares ($36 x 30 shares per bond x 900 bonds) $972,000 
Credit: Contributed Surplus-Conversion Rights [($36 - $18) x 30 x 900] - Unamortized bond premium = $135,000

Therefore, the correct answer is B, a debit of $135,000 to Contributed Surplus-Conversion Rights.

Wang Inc Has $ 3,000,000 (Par Value), 8% Convertible Bonds Outstanding