Madison Corp had two issues of securities outstanding - - common stock and a 5 p

ID: 2349294 • Letter: M

Question

Madison Corp had two issues of securities outstanding - - common stock and a 5 percent convertible bond issue in the face amount of $10,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitles the bondholders to receive 40 shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2011, the holders of $1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that dates was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $500,000. What amount should Madison credit to the account “Paid-In Capital in Excess of Par” as a result of this conversion, assuming Madison does not want to recognize any gain (or loss) on the conversion?

Explanation / Answer

Debit

Credit

Bonds payble

1800000

Discount on un amortised premium

500000

common stock

1440000

Paid in capital execess of par

860000