Convertible preferred stock includes an option for the holder to convert preferred shares into a fixed number of common shares.
-Convertible preferred stock is considered part of stockholders’ equity.
- No gain or loss recognized when converted.
- Use book value method.
Ex:
Gall Inc. issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share. The common stock is trading at $26 per share at the time of conversion.
Journal entry to record conversion:
Preferred stock 50,000
Paid-in capital – Preferred stock 10,000
Common stock (2,000 x $10 par) 20,000
Paid-in capital – Common stock 40,000
