On January 1, 2020, Pizza Gnomes issued 12%, convertible bonds with a par value of $15,000,000 due in 10 years for $17,887,945.97. Each $1,000 bond is convertible into ten shares of $5.00 par value common stock. On January 1, 2022, when the stock was selling for $70.00 per share, holders of 20% of the convertible bonds exercised their conversion options. Straight-line amortization is used for bond discounts or premiums.

Instructions

(1) Record the necessary journal entry based on the information provided.

(2) The financial manager is suggesting paying the remaining bondholders $50,000 cash to convert their bonds. Briefly explain how this will affect the accounting treatment and financial statements if this suggestion is put into effect.

(3) Pizza Gnomes just hired a new intern. This intern does not quite understand the purpose of a diluted earnings per share figure. Briefly explain in your own words to the intern what a diluted earnings per share is and more importantly how it is important for investors in terms of their decision making.