Convertible Note - Conversion to Preferred Stock at Priced Round
Recording the conversion of convertible note principal and accrued interest to Series A preferred stock — extinguishing the debt and accrued interest liabilities and issuing preferred equity.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Convertible Note Payable (Principal Extinguished) | Liability (-) | 250,000.00 | - |
| Accrued Interest Payable (Converted) | Liability (-) | 18,500.00 | - |
| Preferred Stock - Par Value (Shares Issued) | Equity (+) | - | 268.50 |
| Additional Paid-In Capital (APIC) | Equity (+) | - | 268,231.50 |
💡 Accountant's Note
At conversion, both the note principal ($250,000) and accumulated interest ($18,500 after 18 months) convert to preferred shares. Using a 20% discount on a $1.00/share Series A: conversion price = $0.80/share. Total converting: $268,500 / $0.80 = 335,625 preferred shares. The debt and accrued interest liabilities are eliminated; preferred stock at par ($0.001 × 335,625 = $335.63) and APIC ($268,500 − $335.63 = $268,164.37) are recorded. If the note had warrant coverage, the warrants remain outstanding as separate equity instruments after conversion.
Practitioner & Systems Framework
💻 ERP Architecture
Verify the conversion calculation with the note agreement: does accrued interest convert? (Most YC-model notes yes, but read the agreement.) Does the conversion apply the cap or discount to the total including interest? Run the conversion calculation individually for each note. Update Carta/Pulley immediately after conversion closes. Send updated cap table to all investors.
⚠️ Audit Flags
Auditors reconcile: (1) note payable + accrued interest eliminated = total consideration for shares, (2) shares issued = total consideration / conversion price, (3) par value + APIC = total consideration. Any beneficial conversion feature (BCF) from the discount — where the conversion price is below the fair value of preferred shares at conversion — may require recognition under legacy ASC 470-20 (for notes issued before adoption of ASU 2020-06). Post-ASU 2020-06, BCF accounting is eliminated for most instruments.
📄 Required Documentation
Convertible note agreement, Series A closing documents, conversion calculation workpaper (principal + interest / conversion price = shares), updated cap table, preferred stock certificates, board resolutions authorizing the conversion.
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