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On December 31, Year 1, Action Corporation, a public company, issues ten-year convertible bonds with a face value of $2,000,000 and a stated rate of 8%, paid semiannually on June 30 and December 31. The bonds mature on December 31, Year 11.
The bonds are issued to provide an effective yield of 7%. If these bonds did not have a conversion feature, the company would have to issue the bonds to yield 9% to attract investors. On December 31, Year 5, 60% of the bonds are converted to common shares.
Required:
Problem (a) Prepare the journal entry(ies) to record the issuance of the bonds.
Problem (b) Prepare the journal entry(ies) to record the conversion of the bond, December 31, Year 5.
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