Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at $14 per share (par value $10). The company records the conversion as follows.
|
Bonds Payable |
1,000,000 |
|
Discount on Bonds Payable |
40,000 |
|
Common Stock |
800,000 |
|
Paid in Capital in Excess of Par—Common Stock |
160,000 |
Discuss the propriety of this accounting treatment.