Detailed Answer
(a) All 5,000 shares of convertible preferred stock were
converted to common stock at a rate of 3 shares of common for
every share of preferred. Therefore, 15,000 shares of common
stock were issued (5,000 × 3). The common stock account is
credited for the par value of these shares (15,000 × $25 =
$375,000). APIC −CS ($550,000 – $375,000 = $175,000) is
credited for the difference between the carrying amount of the
preferred stock (5,000 × $110 = $550,000) and the par value of
the common stock. The journal entry is
Preferred stock 500,000
APIC-PS 50,000
Common stock 375,000
APIC-CS 175,000
Note that the $40 market value of the common stock is ignored.
The book value method must be used for conversion of preferred
stock, so no gains or losses can be recognized.