Question - On January 1, Year 1, Acorn Financial Corp. issued 825 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.
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.