On January 1, 2020, when the fair value of its common shares was $80 per share, Hammond Corp. issued $10 million of 8% convertible debentures due in 30 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five common shares. The debentures were issued for $10.8 million. The bond payment's present value at the time of issuance was $8.5 million and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2021, the corporation's common shares were split 3 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2022, when the fair value of the corporation's common shares was $135 per share, holders of 25% of the convertible debentures exercised their conversion option. Hammond Corp. applies ASPE, and uses the straight-line method for amortizing any bond discounts or premiums.

Instructions

a. Prepare the entry to record the original issuance of the convertible debentures.

b. Using the book value method, prepare the entry to record the exercise of the conversion option. Show supporting calculations in good form.

c. How many shares were issued as a result of the conversion?