On September 1, 2022, when the fair value of its common shares was $90 per share, Vancouver Railway Corp. (VRC) issued $8 million of 5% convertible debentures due in 10 years at par. Interest is payable semi-annually on March 1 and September 1. The conversion option allowed the holder of each $1,000 bond to convert the bond into five common shares. The market vield rate of return for non-convertible debentures of similar risk was 6%. The company follows IFS and the difference between the present value and the amount paid is attributable to the conversion feature.

Four years later, on September 2, 2026, when the carrying amount of the bond was $7,601,840 and fair value of the corporation's common shares was $190 per share, holders of half of the convertible

debentures exercised their conversion right.

Instructions

a.

Prepare the entry to record the original September 1, 2022, issuance of the convertible debentures. Show supporting calculations in good form.

b.

Prepare the December 31, 2022, year-end entry to accrue the interest and discount for the bond.

C.

Using the book value method, prepare the entry on September 2, 2026 to record the exercise of the conversion right.

d. e.

Give one disadvantage to VRC of raising funds with debt.

Give one disadvantage to VRC of raising funds with equity.