 Hello and welcome to this session in which we would look at convertible bond example. Atom company has $2,000, $1,000 bonds each convertible into 50 shares of $1 power value common stock. Let's translate into simple English. Atom company has right now 2,000 bonds each bond has a face value of 1,000 and each bond is converted into 50 shares. So if we take those 1,000 bonds multiply them by 50 each each into 50 shares will give us 1,000 times 50 will give us 50,000 new stocks if we convert. What's the power value per stock? The power value per stock is a dollar. Now when the unamortized discount on the bonds was 30,000 so those bonds are are recorded are on the books at a discount and there's 30,000 of unamortized bond the bonds were converted into common stock. Well let's take a look at our if we look at our books and our books right now it would look as we have two million dollars in bonds payable how did we come up with two million dollars we have two thousand bonds and each bond has a face value of a thousand that's going to give us two million in bonds payable. We also have 30,000 discount on bonds payable discount on bonds payable is a counter liability so you need to know it has a debit balance so this is what we have right now. Before we proceed any further I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses my CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Myles my accounting courses are aligned with your accounting courses broken down by chapter and topics my resources consist of lectures multiple choice questions true false questions as well as exercises go ahead start your free trial today no obligation no credit card required. Now the market value per share of common stock is twenty two dollars so the company stock is selling at twenty two dollars using the book value approach record the conversion so we want to record the conversion well at this point once I know I'm using the book value this is what usually happened you would use the book value the fair value per share the market value is irrelevant the book value means take out the bonds replace them with stocks no gain no loss this is what the book value is it means no gain and no loss it means the fair market value of the stock are useless so how do I convert well to convert I have to remove the bonds well the first thing I have to debit bonds payable two million to bring bonds payable go down to zero so I will debit bonds payable this discount exists to serve this account so if this account is being eliminated I have to eliminate the discount I have to credit the discount of thirty thousand to bring that balance to zero so I will credit the discount thirty thousand so simply put the bonds and its related discount account which is the sub account of the bonds are gone now I need to issue the stocks well how many stocks am I showing again each bond is converted into fifty stocks not fifty dollars fifty stocks I am issuing fifty thousand shares the par value is a dollar therefore I am going to credit common stock for this amount of fifty thousand which is the number of shares I am issuing times which is fifty thousand shares times the par value the par value is a dollar now the par value is five dollars I multiply by five of the par value is ten I multiply by ten remember common stock is credited by the number of shares times the par value which will be given make sure you notice you make sure you memorize this so okay now I have I issued the common stock but what else do I have to do well obviously I have additional paid in capital because when I issue the stock the common stock is fifty thousand and that's replacing one million nine hundred and seventy of bonds it means the remainder is a plug-in of additional paid in capital or paid in capital common stock which is one million nine hundred and twenty and this number is a plug plug means whatever I need to do to make the entry balance assuming I accounted for everything is paid in capital of common stock so this is what I did I removed the bonds so the purpose is to convert convert means get rid of the bonds I got rid of the bonds then I issue the stocks I replace the bond with the stocks and I don't record the gain I don't record the loss because and because I'm using the book value book value means there is no gain and no loss you are basically exchanging your capital structure there is no justification from the company's perspective to book a gain which an account goes on the income statement or a loss there is no such a thing so this is how you'll work with a convertible bond situation what should you do now go to farhat lectures look at additional resources examples that's going to help you understand this concept which is which you will see it in your accounting course CPA exam CMA exam as well as other certification good luck study hard and of course stay safe