[jessanqi]

Hi, I don’t understand why the incurred expenses of $30,000 are not deducted from the retained earnings??

ANYONE???

Thank you!! 🙂

On June 30, 20X1, Harper, Inc., had outstanding 8%, $1,000,000 face value, convertible bonds maturing on June 30, 20X6. Interest is payable on June 30 and December 31. The unamortized balance in the bond premium account was $50,000 on June 30, 20X1. On this date all of these bonds were converted into 40,000 shares of $20 par value common stock. Harper incurred expenses of $30,000 in connection with the conversion. Under the book value method, the total amount by which additional paid-in-capital should increase is

A. $180,000
B. $200,000
C. $220,000
D. $250,000

Explanation
The correct answer is C. Under the book-value method, the full book value of the converted debt is recorded as paid-in capital, net of any costs incurred in connection with the conversion. In this situation, the net book value of the debt on the conversion date is $1,050,000 ($1,000,000 face value + $50,000 unamortized bond premium). Since the bonds are converted into 40,000 shares of $20 par value common stock, the amount allocated to common stock is $800,000. Thus, we have:
Book value of converted bonds
$1,050,000
Less: Par value of stock issued $800,000
Expenses incurred $30,000 $830,000
Amount allocated to additional paid-in capital
$220,000