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 15-percent semiannual, nonconvertible bonds at par. On January 2, Year 5, holders convert their bonds into common stock. The com- mon 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 January 2. Year 5, to record the issue and conversion of these bonds. Use the book value method to record the conversion.

b. Assume for this part that the firm allocates a portion of the issue price on January 2. Year 1, to the conversion option (GAAP do not allow this treatment). Give the journal enti\ on January 2. Year 1