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Knutson Eyewear issued 7,000 shares of common stock (par value $5) upon conversion of 7,000 shares of preferred stock (par value $3). The preferred stock initially sold for a premium of $1,400. For how much would Knutson have to debit retained earnings upon conversion?

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Answer:

Knutson have to debit $12,600 of retained earnings upon conversion

Explanation:

shares issued = 7,000 x $5 = $35,000

Conversion of preferred stock = 7,000 x $3 = $21,000

Retained earning = shares issued - Conversion of preferred stock - premium of preferred stock sold = $35,000 - $21,000 - $1,400 = $12,600

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