On January 1, 2012, when its $30 par-value common stock was selling for $80 per share, Gierach Corporation issued $10 million of 4% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the company’s $30 par-value common stock. Cash settlement upon conversion is not permitted. The debentures were issued for $10 million. Without the conversion feature, the bonds would have been issued for $8.5 million. On January 1, 2017, the company’s $30 par-value common stock was split three for one. On January 1, 2018, when the company’s $10 par-value common stock was selling for $90 per share, holders of 40% of the convertible debentures exercised their conversion options.

Required:

Following U. S. GAAP, prepare a journal entry to record the original issuance of the convertible debentures.
How much interest expense would the company recognize on the convertible debentures in 2015?
Prepare a journal entry to record the exercise of the conversion option using the book value method.
Prepare the entry to record the exercise of the conversion option using the market-value method.