Question

In 2017, Concord Corporation, issued for $103 per share, 93500 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Concord's $20 par value common stock at the option of the preferred stockholder. In August 2018, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $25 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock?

Answer 1

Answer:

The value to be credited as additional Paid in Capital from Common stock however, will be the Par Value of $5,610,000.

Explanation:

Number of Convertible Preferred Stock issued = 93,500

Conversion ratio is one preferred stock for 3 common stock = 3

At 100% conversion in August 2018,

The admissible new number of common stock added = 93,500 x 3 = 280,500

Par Value of these holdings is $20 Per Share = $5,610,000

The Market Value however is $25 Per Share = $7,012,500

The value to be credited as additional Paid in Capital from Common stock however, will be the Par Value of $5,610,000.

This is because Paid in Capital is recognized at Par and premium is only a basis of Stock issuance above Par Value, in this case the $5 extra valuation is an external Valuation which should flow in through the retained earnings of the Business in an ideal situation.