How to Convert Bonds to Stock Journal Entries

One of the ways that companies raise funds is through the sale of convertible bonds.

Businesses raise capital in several ways. They can sell stock, which allows stockholders to become partial owners, or they can issue bonds, which can provide a stream of income to investors. There is also another option that some companies take advantage of--convertible bonds. These bonds are sold like normal bonds, but holders of the bonds have the option to turn them to common stock within a specified period of time. If this occurs, a journal entry must be made to change the bonds to stock.

Things You'll Need

• Amount of bonds payable
• Carrying value of bonds
• Amount of any unamortized bond discount or premium
• Par value of common stock

Instructions

1. Write the date of the transaction and "Bonds Payable" in the description for the journal entry in the space provided in the general journal. Next to the description space, there should be two columns--one for debits and one for credits. Each journal entry has to have an equal amount of "Debits" (left column) and "Credits" (right column) in order to balance. Write the amount of "Bonds Payable" to be retired in the debit section next to the item description.

2. Write "Discount on Bonds Payable" or "Premium of Bonds Payable" in the space underneath "Bonds Payable". If you have a discount, write that amount in the "Credit" column, then write the amount of a premium in the "Debit" column. This entry should only be made if you still have an unamortized premium or discount on the bonds.

3. Write "Common Stock" in the space under the "Premium" or "Discount" entry. Write the amount of stock that the bonds convert to in the "Credit" column. For example, if the bonds you sell have an option to convert to 200 shares of $2.00 par value stock, the credit entry would be $400.

4. Write "Paid in Capital in Excess of Par" underneath the "Common Stock" entry. Write the amount leftover for the journal entry to be balanced. This is the amount of investment over the par value investment of the stock. The stock can only be recorded at par value, so any extra will be recorded as excess capital.

References

• University of Texas at El Paso: Bonds and Long-Term Notes