Chapter 14, Problem 14.11P

Convertible Bonds, Bond Issue Costs, Conversion. On January 1, 2018, Mesa Machinery Corporation issued 75 of 12-year, 12% convertible bonds at par. Each bond had a par value of $1,000 and pays interest annually on December 31. Because the bonds were issued at par, the yield on the bond is also equal to 12%. Each $1,000 bond converts into 25 shares of $1 par value common stock at the option of the bondholder beginning 2 years after the date of issue. Bond issue costs are $480. The market price of the common stock on the issue date was equal to $60 per share. Any discount is amortized using the effective interest rate method.

Required

1. a. Prepare the journal entry to record the bond issuance.
2. b. Find the effective rate of interest after considering bond issue costs. Prepare the amortization table using the new effective rate of interest and the effective interest rate method.
3. c. Prepare the journal entries to record the interest payment for the first 3 years.
4. d. Prepare the entry to record the bond conversion assuming that all bonds convert at the end of the third year.