Vargo Company has bonds payable outstanding in the amount of $500,000, and the Premium on Bonds Payable account has a balance of $7,500. Each $1,000 bond is convertible into 20 shares of preferred stock of par value of $50 per share. All bonds are converted into preferred stock.

Assuming that the book value method was used, what entry would be made?

Answer and Explanation:

The journal entry is shown below:

Bonds Payable $500,000

Premium on Bonds Payable $7,500

To Preferred Stock ($500,000 : $1,000 * 20 * $50) $500,000

To Paid-in Capital in Excess of Par (Preferred Stock) $7,500

(Being the preferred stock is recorded)

For recording this we debited the bond payable and premium on bond payable as it decreased the liabilities and credited the preferred stock and paid in capital as it increased the stockholder equity