On 1 January 20X3, a company sells $200,000 of 6% convertible bonds for $203,000, due in 4 years. When the bonds are issued, the prevailing market interest rate for similar debt without conversion is 10%. Each 1,000 bond is convertible into 40 common shares on any interest date, after the end of the second year. Conversion is at the option of the investor. Assume that the bonds are repaid at the end of 20X5 (prior to maturity) for $198,000. Fair value models indicate that the $195,000 of the amount paid represents the present value of the bonds at the current interest rate (for non-convertible debt), and the remaining $3,000 relates to the equity portion. Required: Prepare the journal entries required in 20X3, 20X4, and 20X5. Use the incremental method to record any gain or loss relating to the early retirement. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Prepare the journal entries required on 1 January 20X3:

Prepare the journal entries required on 31 December 20X3:

Prepare the journal entries required on 31 December 20X4:

Prepare the journal entries required on 31 December 20X5 to record the coupon payment:

Prepare the journal entries required on 31 December 20X6 to record early retirement of the bonds: