During 2009 Bradley Corporation issued for $110 per share, 5,000 share of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Bradley’s $25 par value common stock at the option of the preferred stockholder. On December 31, 2010, all of the preferred stock was converted into common stock. The market value of the common stock at the conversion date was $40 per share. What amount should be credited to the common stock account on December 31, 2010?

Question

During 2009 Bradley Corporation issued for $110 per share, 5,000 share of $100 par value convertible preferred stock.  One share of preferred stock can be converted into three shares of Bradley’s $25 par value common stock at the option of the preferred stockholder.  On December 31, 2010, all of the preferred stock was converted into common stock.  The market value of the common stock at the conversion date was $40 per share.  What amount should be credited to the common stock account on December 31, 2010?
	a.	$375,000
	b.	$500,000	
	c.	$550,000
	d.	$600,000

375,000 · Answer

This answer is correct. All 5,000 shares of the convertible preferred stock were converted to common stock at the rate of 3 to 1 (making 15,000 common shares issued). The common stock account is credited for the par value of these shares: 15,000 × $25 or $375,000. Although not necessary, the journal entry to record the conversion can be prepared

Preferred stock 500,000 (5,000 × $100)
Paid-in capital—PS 50,000
(5,000 × $10)
Common stock 375,000 (15,000 × $25)
Paid-in capital—CS 175,000 (plug)
The $40 market value of the common stock is ignored. Gains (losses) are not recognized on the conversion of preferred stock. The book value method is used and the paid-in capital, common stock account is credited for the amount necessary to balance the entry.