On January 1, 2012, when its $30 par value common stock was selling for $80 per share, Gierach Corporation issued $10 million of 4 convertible debentures due in 10 years The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the companys $30 par value common stock Cash settlement upon conversion is not permitted The debentures were issued for $10 million Without the conversion feature, the bonds would have been issued for $8 5 million On January 1, 2014, the companys $30 par value common stock was split three for one On January 1, 2015, when the companys $10 par value common stock was selling for $90 per share, holders of 40 of the convertible debentures exercised their conversion options Required 1 Following U S GAAP, prepare a journal entry to record the original issuance of the convertible debentures 2 How much interest expense would the company recognize on the convertible debentures in 2012 3 Prepare a journal entry to record the exercise of the conversion option 4 Why do many companies use the book value method to record debt conversions

Question: On January 1, 2012, when its $30 par-value common stock was selling for $80 per share, Gierach Corporation issued $10 million of 4% convertible debentures

On January 1, 2012, when its $30 par-value was selling for $80 per share, Gierach issued $10 million of 4% convertible due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the company’s $30 par-value . Cash settlement upon conversion is not permitted. The were issued for $10 million. Without the conversion feature, the bonds would have been issued for $8.5 million.
On January 1, 2014, the company’s $30 par-value was split three for one.
On January 1, 2015, when the company’s $10 par-value was selling for $90 per share, holders of 40% of the convertible exercised their conversion options.

Required:
1. Following U.S. GAAP, prepare a journal entry to record the original issuance of the convertible .
2. How much interest expense would the company recognize on the convertible in 2012?
3. Prepare a journal entry to record the exercise of the conversion option.
4. Why do many companies use the book value method to record debt conversions?

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