1. Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time the market price of the debentures is 104, and the common stock is selling at $14 per share (par value $10). The company records the conversion as follows.
Bonds Payable 1,000,000
Discount on Bonds Payable 40,000
Common Stock 800,000
Paid-in Capital in Excess of Par 160,000
Discuss the propriety of this accounting treatment.