Q1) On January 1, 2007, Brewster Company issued 2,000 of its 5-year $1000 face value, 11% bonds dated January 1 at effective annual interest rate (yield) of 9%. Interest is payable each December 31. Brewster uses effective-interest method of amortization. On December 31, 2008, 2000 bonds were extinguished early through acquisition in open market by Brewster for $1,980,000 plus accrued interest.
On July 1, 2007 Brewster issued 5,000 of its 6-year $1000 face value= 10% convertible bonds dated July 1 at effective annual interest rate (yield) of= 12%. Interest is payable every June 30 and December 31. Bonds are convertible at investors option into Brewster's common stock at ratio of 10 shares of common stock for each bond. On July 1. 2008 an investor in Brewsters convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewster's common stock, that had fair market value of $105 and par value of $1 at the date of conversion.
1. Create all essential journal entries for inssuer and investor to record issuance of both the 11% and the 10% bonds. Ignore any potential impact of year to year market value changes on investor accounting for bond.
2. Prepare all essential journal entries to record early extinguishment of both debt instruments assuming:
a. Brewster considered conversion to be important culminating event, and investors considered their investment in convertible bonds to be debt rather than equity.
b. Brewster considered conversion to be a nonculminating event, and investors considered their investment in convertible bonds to be equity rather than debt.