Reference no: EM132885235

Question - On January 1, 2020, the CFO of REO Engine Works, Inc. was reviewing for one last time, the idea of issuing convertible bonds that would mature in 10 years on January 1, 2030. After a great deal of thought during recent months, it was decided that the bonds should be issued instead of raising additional cash from issuing common stock.

Therefore, the company issued $5,000,000 of convertible bonds at 98 on January 1, 2020. The bonds had a stated interest rate of 6% with a maturity date of January 1, 2030. Interest is payable on January 1st and July 1st each year. Discount is amortized using straight-line amortization.

Although the CFO of REO Engine Works, Inc. had originally thought issuing the bonds instead of common stock seemed like a good idea at first, every time an interest payment check was prepared and sent out, the CFO's original idea continued to lose its appeal.

Exactly 4 years later on January 1, 2024, after paying the interest expense due on that day, all of the bonds were converted into the company's $35 par value common stock that was currently selling at $74.10 per share on the day of the conversion. The conversion clause of the bonds stated that for every $1,000 of bonds being converted, 11 shares of $35 par value common stock would be issued.

The company's year-end is December 31st

Required -

1. Prepare the adjusting entry on December 31, 2023 to accrue the semi-annual interest and to amortize the bond discount.

2. Prepare the journal entry on January 1, 2024 to record the payment of the semiannual interest.

3. Prepare the journal entry on January 1, 2024 to record the conversion of bonds into common stock.