# Convertible Preferred Stock Journal Entry

## Overview

The company may sometimes issue the convertible preferred stock in order to raise funds for its business operations. In this case, it needs to make a proper journal entry when the convertible preferred stock is converted to the common stock by transferring the amount in the preferred stock account to the common stock account based on the specific conversion ratio. The conversion ratio of the convertible preferred stock is usually stated in the convertible preferred stock contract.

The main advantage of convertible preferred stock is that it allows the stockholders of such stock to retain preference dividends if the company is not doing well. And if the company is doing well and its market value of the common stock increases, the stockholders can convert their convertible preferred stock to common stock to enjoy the benefits from the increase of common stock value.

## Convertible preferred stock journal entry

The company can make the convertible preferred stock journal entry when it is converted into common stock by debiting the preferred stock and additional paid-in capital – preferred stock account and crediting the common stock and additional paid-in capital – common stock account.

Account Debit Credit
Preferred stock 000
Additional paid-in capital – preferred stock 000
Common stock 000
Additional paid-in capital – common stock 000

## Convertible preferred stock example

For example, on June 01, the company ABC issues 10,000 shares of convertible preferred stock at the price of \$8 per share. The convertible preferred stock has a par value of \$5 per share and the stockholders have the option to convert each share of preferred stock into 2 shares of common stock. The common stock has a par value of \$1 per share.

Later, the stockholders decide to convert all 10,000 shares of convertible preferred stock above into common stock.

What are the journal entries for the convertible preferred stock above?

Solution:

On June 01 when the company issues the stock:

When the company ABC issues the 10,000 shares of convertible preferred stock, it can record the convertible preferred stock in the journal entry as below:

Account Debit Credit
Cash 80,000
Preferred stock 50,000
Additional paid-in capital – preferred stock 30,000

On the day of converting the preferred stock into common stock:

When all 10,000 shares of convertible preferred stock are converted into common stock, the company can record the transaction with the journal entry as below:

Account Debit Credit
Preferred stock 50,000
Additional paid-in capital – preferred stock 30,000
Common stock 20,000
Additional paid-in capital – common stock 60,000

As each share of convertible preferred stock can be converted into 2 shares of common stock, the 10,000 shares of preferred stock equal 20,000 shares of common stock. Likewise, the \$20,000 of common stock in the journal entry above comes from the 20,000 shares of common stock multiplying with \$1 of the par value (20,000 shares x 1\$).

The \$60,000 of additional paid-in capital-common stock is the premium that comes from the \$80,000 of total preferred stock value (preferred stock + additional paid in capital) minus the \$20,000 of common stock (\$80,000 – \$20,000).