July 2, 2012, 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, 2014, 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.

Required:

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 shareholders' equity, as described in Chapter 6) under each alternative. Assume the company's other liabilities are $2 million and shareholders' equity before the conversion is $3 million.

3. Assume the company uses IFRS and issued the bonds for $487,500 on July 2, 2012. 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.