Lamd Co. has $5,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2004, the holders of $1,500,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $350,000. Klugg should record, as a result of this conversion, a

 a. credit of $255,000 to Paid-in Capital in Excess of Par.

 b. credit of $225,000 to Paid-in Capital in Excess of Par.

 c. credit of $105,000 to Premium on Bonds Payable.

 d. loss of $15,000.

how to record this conversion

Hey, this must be the first question that you post and I might have an idea on it!

DR Bond 1,500,000

DR Unamortized premium 105,000 (350,000/5,000,000*1,500,000)

         CR C/S 1,350,000 (1500bonds*30shares*30 par)

         CR APIC 255,000 (plug to balance)

I have assumed that the book value method is used, because under the par method I think it would be:

DR 1,500,000-BOND

DR 105,000 -premium

DR loss 15,000 (plug to balance)

               CR C/S 1,350,000

               CR APIC 270,000 (1500bonds*30shares*6 in excess of par)

So I think that the question is not so clear because it does not mention which method we should use

Thank you Cinnamon

Just to add on, "book value" method is a GAAP method... so, may be in such a case, we would go for this method..

In case, we face a similar question in the exam, so which method we would go for should be clear... Taxygood, do confirm from the correct answer given in your home test that which method was used.

Thanks!