The Manco Corporation has $800,000 of 6 percent bonds outstanding.

There is $40,000 of unamortized discount remaining on these bonds after the July 1, 20x8, semiannual interest payment. The bonds are convertible at the rate of 40 shares of $5 par value common stock for each $2,000 bond. On July 1, 20x8, bondholders presented $600,000 of the bonds for conversion.

1. Is there a gain or loss on conversion, and if so, how much is it?

2. How many shares of common stock are issued in exchange for the bonds?

3. In dollar amounts, how does this transaction affect the total liabilities and the total stockholders’ equity of the company? In your answer, show the effects on four accounts.

Effective Interest Method and Interest Accrual