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 ordinary shares immediately after an interest payment date. At that time, the market price of the debentures is 104, and the ordinary shares are selling at \(14 per share (par value \)10). At date of issue, the company recorded Share Premium— Conversion Equity of $50,000. The company records the conversion as follows.

Bonds Payable 960,000

Share Premium—Conversion Equity 50,000

Share Capital—Ordinary 800,000

Share Premium—Ordinary 210,000

Discuss the propriety of this accounting treatment.

An organization's methodology of recording a trading of shares and debentures for common shareholders can be supported on the premise that in any event, when the convertible debentures are given, the returns could reflect though the receivables for a stock.

Therefore, when an obligation is converted, a book value is essentially moved to a stock that was traded for it. Another contention is that a change is an exchange influencing stockholders that truly shouldn't bring about an increase or a misfortune.

It is easily proven whether the giving of a common stock ought to be recorded in a book worth of the debentures. It very well may be contended that the trading a stock for something like the debentures finishes the payment cycle for the debentures, while beginning another cycle for the stocks.

The pay or worth displayed in this new exchange cycle should be in accordance to the sum received, assuming the debentures were sold instead of traded, or the sums got on the off chance that the related stock were sold, whichever is clearer at the hour of a trade. This approach recognizes changes in values that subordinate a thought laid out at the time a debenture was given.