Journal entries for convertible bonds. Higgins Corporation issues \(\$ 1\) million of 20 year, \(\$ 1,000\) face value, 10 -percent semiannual coupon bonds at par on January 2, Year 1. 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 15percent semiannual, nonconvertible bonds at par. On January 2, Year 5, holders convert their bonds into common stock. The common stock has a market price of \(\$ 45\) per share on January 2, Year 5.

a. Present the journal entries made under GAAP on January 2, Year 1 and Year 5, to record the issue and conversion of these bonds. Use the book value method to record the conversion.

b. Repeat part a but record the issuance of the bonds in a manner that allocates a portion of the issue price on January 2, Year 1, to the conversion option. (GAAP do not allow this treatment.)