Kelley co. has $2,000,000 of 8% convertible bonds outstanding. each $1,000 bond is convertible into 30 shares of $30 par value common stock. the bonds pay interest on january 31 and july 31. on july 31, 2017, the holders of $500,000 bonds exercised the conversion privilege. on that date the market price of the bonds was 105 and the market price of the common stock was $36. the total unamortized bond premium at the date of conversion was $112,500. kelley should record, as a result of this conversion, a
credit of $78,125 to paid-in capital in excess of par.

Explanation:

The journal entry is shown below:

Bonds payable A/c Dr $500,000

Premium on bonds payable A/c Dr $28,125

           To Common stock A/c $450,000

           To Paid in capital in excess of par A/c $78,125

(Being the conversion of bonds is recorded)

The computation is shown below:

For Premium on bonds payable:

= $500,000 ÷ $2,000,000 × $112,500

= $28,125

For Common stock:

= $500,000 ÷ $1,000 × 30 × $30

= $450,000

And, the remaining balance is credited to paid in capital in excess of par

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