Problem - On January 1, Year 1, Acorn Financial Corp. issued 800 convertible bonds. Each $1,000 face value bond is convertible into five shares of common stock. The bonds have a 10-year term to maturity and pay interest semiannually. Acorn's common stock has a par value of $20.00 per share. The bonds have a stated interest rate of 4% and pay interest semiannually. The convertible bonds were sold for $875,500. Bond issue costs of $50,000 will be subtracted from the bond sale proceeds to be received by Acorn. The bonds were sold to yield a market interest rate of 3%. Acorn will use the effective interest method to amortize the bond discount or premium. Round all amounts to the nearest dollar.
Required:
1. Record the journal entry for the issuance of the convertible bonds on January 1, Year 1.
2. Record the journal entries on June 30, Year 1 to recognize interest expense and the amortization of the bond issue cost for the first six months of Year 1.