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A Limited issued five-year, 5% bonds for their par value of $860,000 on 1 January 2001. Interest is paid annually.

The bonds are convertible to common shares at a rate of 50 common shares for every $1,000 bond.


Required:

1. Assume that the bonds were convertible at the investor's option and that the conversion option was valued at $70,520.

 

a. journal entry on issuance.


b. Calculate interest expense for each year of the bond's five-year life. Use an interest rate of 7% for this requirement.


c. journal entry to record maturity of the bond assuming shareholders convert their bonds to common shares.


d. Assume instead that the bonds were repaid for $906,700 after interest was paid in Year 3. Provide the journal entry for retirement, assuming $69,520 of the payment related to the option and the rest related to the bond.



2. Assume that the bonds were mandatory convertible at maturity.


a. Calculate the portion of the original proceeds relating to interest and the equity portion. Use a discount rate of 6%.


b. journal entry on issuance.

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