On January 1, 2010 Horrible Inc. issued $1,000,000 of 8% convertible

    1. (3 pts)On January 1,
    2010 Horrible Inc. issued $1,000,000 of 8% convertible debentures. The bonds pay interest annually on December
    31st for 10 years. The market
    rate of interest for similar debt is 10%.
    The bonds are convertible at the option of the holder into common stock
    at a conversion ratio of 5 shares per $1,000 bond. The common stock has a $1 par value.

    On January 1, 2011 one half of the holders of the
    convertible debentures exercise their conversion option. Prepare the journal entry by Horrible Inc. at
    the date of the conversion.

    2. (3 pts)Horrible Inc.
    issues 10,000, $100 face value, 8% debt with detachable warrants that permit
    the holder to purchase one share of stock for $18 per share. The bonds were
    issued at 102. Immediately after issue
    the bonds were selling for 98 without the warrants and the warrants have a
    market value of $8.

    Prepare the initial entry to record the issuance using the
    proportional method:
    5. (4 pts) DCL Industries purchased a supply of
    mechanical components from E Corporation on November 1, 2009. In payment for
    the $48,000 purchase, DCL issued a 1-year installment note to be paid in equal
    monthly payments at the end of each month. The payments include interest at the
    rate of 12%. The cost of the inventory
    to E Corporation was $43,000.

    Borrower:
    Prepare
    the journal entry for DCL’s (Borrower) purchase of the components on November
    1, 2009.

    Prepare
    the journal entry for the first installment payment on November 30, 2009 by DCL
    (Borrower).

    Prepare
    the journal entry for the second installment payment on December 31, 2009 by
    DCL (Borrower).

    Lender:
    Prepare
    the journal entry for E Corporation’s (Lender) sale of the components on
    November 1, 2009.

    Prepare
    the journal entry for the first installment payment on November 30, 2009 by E
    Corporation (Lender).

    Prepare
    the journal entry for the second installment payment on December 31, 2009 by E
    Corporation (Lender).

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