ABC Inc. had issued 7,200 convertible bonds at 121 on January 1, 2016. The $1,000 par value bonds carried an interest rate of 7% and had a 10-year term. Interest was to be paid by the company on June 30 and December 31. Attached with each bond were twenty detachable warrants, also issued.

Each warrant entitled the holder to purchase one share from ABC Inc. at a price of $54. Further, each bond was convertible, at the option of the holder, into 32 common shares. The underwriter informed the company that the bonds alone, excluding warrants and conversion rights, could be issued in the market at a 6.5% premium. Similar warrants were being traded at a market value of $4 each at the date of issue. You have been asked to view this situation on the assumption that the company uses ASPE for its accounts and amortizes the bonds using straight line.

REQUIRED:

1. Prepare the appropriate journal entry to record the issue of these bonds without crediting the full amount received to liability (residual equity method).

2. Prepare an appropriate journal entry to record the interest expense on December 31, 2016.

3. On July 1, 2018, 65% of the warrants outstanding were exercised by the warrant holders. The companys shares were being traded in the market at a price of $62 each on that day. Prepare an appropriate journal entry to record this transaction.

4. On July 1, 2019, 60% of the bondholders submitted their respective bonds for conversion. The companys shares were being traded at $68 on that day. The company had duly recorded and paid off all interest accrued and due on the bonds up to June 30, 2019. Prepare the appropriate journal entry, using the book value method, to record the conversion of the bonds.

5. How many shares would have been issued from the bond conversion of July 1, 2019?