Laufer Corp. received $1,000,000 in cash proceeds from the issue of $1,000,000 of 4% 20- year convertible bonds on January 1, 2020. Interest is payable annually on December 31, and any discount/premium is amortized using effective interest amortization. The convertible debt contains an agreement with the lenders that the issuer may settle the entire obligation with any combination of stock or cash equivalent to the conversion value. The market rate of interest for similar credit-quality non-convertible debt is 8%.

On January 1, 2026, the investors decide to convert. Laufer decides to pay cash equal to the conversion value (which is the value of the bonds or the stock they could convert into-they should be equal if the investors want to convert .. that is, if the stock price is shooting up, making the investors want to convert, then the bond price (which has the conversion element in it, recall) would be shooting up dollar for dollar too). Assume this conversion value is $1,400,000.

1. Prepare the entry for the issuance of the convertible bonds on 1/1/2020. 2. Prepare the entry to record interest expense at 12/31/2020 and 12/31/2021. 3. Prepare the entry to record conversion on 1/1/2026.