On July 2, 2009, the McGraw Corporation issued $500,000 of convertible bonds. Each $1,000 bond could be converted into 20 shares of the company's $5 par value stock. On July 3, 2011, when the bonds had an unamortized discount of $7,400, and the market value of the McGraw shares was $52 per share, all the bonds were converted into common stock.
Requirement:
1. Prepare the journal entry to record the conversion of the bonds under
(a) the book value method, and
(b) the market value method.
2. Compute the company's debt to equity ratio (total liabilities divided by total stockholders equity, as mentioned in Chapter 6) under each alternative. Assume the company's other liabilities are $2 million and stockholders equity before the conversion is $3 million.
3. Assume the company uses IFRS and issued the bonds for $487,500 on July 2, 2009. On this date, it determined that the fair value of each bond was $930 and the fair value of the conversion option was $45 per bond. Prepare the journal entry to record the issuance of the bonds.