Higgins Corporation issues $1 million of 20-year, $1,000 face value, 10% semiannual coupon bonds at par on January 2, 2013. Each $1,000 bond is convertible into 40 shares of $1 par value common stock. Assume that Higgins Corporation’s credit rating is such that it could issue 15% semiannual, nonconvertible bonds at par. On January 2, 2017, holders convert their bonds into common stock. The common stock has a market price of $45 per share on January 2, 2017.
Present the journal entries made under U.S. GAAP on January 2, 2013, and January 2, 2017, to record the issue and conversion of these bonds. Use the carrying value method to record the conversion.