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Evaluate the situation below, determine the journal entries (if any) that need to be booked as a result. This might require judgment on your part as to what method to use; there is no right or wrong answer as long as you provide valid reasons for your choice.

General information about your company:

Incremental borrowing rate 4.3%

Number of common shares authorized 530,000

Number of common shares issued and outstanding as of the end of last year 53,000

Par value of common stock $0.05

Tax rate 20%

1. At the start of the year, ABC company received a loan from a bank in the form of a note payable for $58,000 with the principal due in 5 years, annual interest payments (first payment due on January 1 of next year), and a stated rate equal to your incremental borrowing rate. The note also gives the bank an option to convert the note into 500 shares of your company's common stock.

Because of this conversion feature, the bank gave you cash based on a market yield a half percent below the stated rate. ABC company didn't know what to do with this extra cash, so they decided not to recognize it and simply recognized the note at its face value and the same amount of cash in the general ledger (they just set the extra cash aside until they figured out what to do with it).

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