Sheffield Corporation has outstanding 1,800 $1,000 bonds, each convertible into 40 shares of $10 par value common stock. The bonds are converted on December 31, 2020, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book value approach.

Answer and Explanation:

The Journal entry is shown below:-

Bonds payable Dr,            $1,800,000

(1,800 × $1,000)

    To Discount on bonds payable        $30,000

    To Common stock                              $720,000

(1,800 × 40 × $10)

     To Paid-in-capital in excess of par   $1,050,000

(Being conversion of bond into common stock is recorded)

Therefore for recording the conversion using the book value approach we simply debited the bonds payable and credited the discount on bonds payable, common stock and paid-in-capital in excess of par.