Accounting for a Beneficial Conversion Feature

Accounting for a Beneficial Conversion Feature

conversion of preferred stock to common stock journal entry

One risk is that the company may not perform well and the common stock may not appreciate as expected. This could lead to a loss on the investment if the shares are converted at a lower price than the conversion price set when the security was issued. Another risk is that the market value of the common stock may decline, which could also lead to a loss if the shares are converted. As mentioned earlier in this chapter, all common stockholders are entitled to share proportionally in any dividend distributions.

This option gives investors the benefit of capital appreciation while also enjoying the benefits of being a preferred shareholder. As a result, convertible preferred shares will often trade at a relative premium and offer a lower dividend rate. The danger in converting is that the investor becomes a common shareholder, at the mercy of swings in the stock price.

Par Value of Preferred Stock

Bondholders have the right to convert this security to fifty shares of Company A’s common stock, which is currently selling for $22.00 per share. Swan Creek Company has 40,000 shares of cumulative preferred 2% stock, $60 par and 50,000 shares of $50 par common stock. If ten thousand shares of this preferred stock are each issued for $101 in cash ($1,010,000 in total), the company records the following journal entry.

  • Total paid-in capital$ 220,000When it issues no-par stock with a stated value, a company carries the shares in the capital stock account at the stated value.
  • A separate set of accounts should be used for the par value of preferred stock and any additional paid‐in‐capital in excess of par value for preferred stock.
  • After issuance, similar bonds were sold at 96, and the warrants had a fair value of $3.
  • For par value preferred stock, the dividend is usually stated as a percentage of the par value, such as 8% of par value; occasionally, it is a specific dollar amount per share.
  • As a corporation cannot be its own shareholder, any shares purchased by the corporation are not considered assets of the corporation.

The price is determined by the investors in the open market. The minimum price at which a class of share can be traded on the initial offering is called the par value of that share. Whenever a business is incorporated, the corporate charter may or may not assign a par value for the shares to be issued by conversion of preferred stock to common stock journal entry the company. Discuss the distribution of dividends to preferred stockholders. In exchange for other preferences, preferred stockholders give up their voting rights. Issued 10,000 shares of common stock to attorneys in payment of their bill of $50,000 for services rendered in helping the company organize.

Accounting for Convertible Securities

When a company has more than one class of stock, it usually keeps a separate additional paid-in capital account for each class. The accounting entry for a no-par-value stock will be a debit to the cash account and credit to the common stock account within shareholder’s equity. Acquisition of treasury stock can be used as a tactic to push up the market price of a company’s stock in order to please the remaining stockholders. Usually, a large scale repurchase indicates that management believes the stock is undervalued at its current market price. Buying treasury stock reduces the supply of shares in the market and, according to economic theory, forces the price to rise.

  • On May 1, Y4, Wellington Limited paid $325 for a call to purchase 1,000 shares of London Corporation.
  • The per share par value is $1, book value $32 and market value is $40.
  • Each $1,000 bond may be converted into 500 common shares, which are currently trading at $3.50 per share.
  • On May 1, 2011, 9,000 options were exercised when the market price of Scooby’s stock was $30 per share.
  • Preferred Value → The preferred value formula contains a “MIN” function that links to the original $100mm capital investment and the value of the exit proceeds.

Assume that the instrument is now a futures contract that is publicly traded on the futures exchange. On January 15, the present value of the future cash flows of the contract was $25. Prepare the entries, if any, for January 1, 2020, and January 15, 2020. The remaining bonds were not converted, and at their maturity date they were retired. A dividend is a distribution of assets that represents a withdrawal of earnings by the owners.

Share This Book

Then, the conversion price can be calculated by dividing the par value of the convertible preferred stock by the number of common shares that could be received. Companies often establish two separate “capital in excess of par value” accounts—one for common stock and one for preferred stock. They are then frequently combined in reporting the balances within stockholders’ equity. Gall Inc. issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The common stock is trading at $26 per share at the time of conversion.

How do you record conversion of preferred stock?

For convertible preferred stock, the charge should be recognized as a dividend in retained earnings and earnings per share.