Immediately after the last interest payment, Henderson Company converted $3,000,000 of its bonds into 300,000 shares of $10 par value common stock. The unamortized premium on the bonds at the date of the conversion was $870,000. As a result of this conversion:
A) liabilities decreased by $3,870,000 and stockholders' equity increased by $3,000,000.
B) liabilities decreased by $3,000,000 and stockholders' equity increased by $3,000,000.
C) liabilities decreased by $3,870,000 and stockholders' equity increased by $3,870,000.
D) liabilities decreased by $870,000 and stockholders' equity increased by $870,000.

Question

Quizplus · Accepted Answer

When bonds are converted into stock, liabilities decrease by the amount of the face value of the bonds, which in this case is $3,000,000. Stockholders' equity increases also by $3,000,000. The unamortized premium on the bonds has no impact on the conversion, so it is not included in the accounting entry. Therefore, only the face value of the bonds is used in the entry, resulting in a decrease in liabilities for $3,000,000 and an increase in stockholders' equity for $3,000,000.

Immediately After the Last Interest Payment, Henderson Company Converted $3,000,000