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Chapter 16: Q12IFRS (page 896)

IFRS16-12 Assume the same information in IFRS16-11, except that Angela Corporation converts its convertible bonds on January 1, 2017.

Instructions

(a) Compute the carrying value of the bond payable on January 1, 2017.

(b) Prepare the journal entry to record the conversion on January 1, 2017.

(c) Assume that the bonds were repurchased on January 1, 2017, for \(1,940,000 cash instead of being converted. The net present value of the liability component of the convertible bonds on January 1, 2017, is \)1,900,000. Prepare the journal entry to record the repurchase on January 1, 2017.

Short Answer

Expert verified
  1. Carrying value of the bond is $1,928,976 on 1 January 2017.
  2. Both sides of the journal totals $2,000,000.
  3. Business entity generates a gain of$28,976 on the repurchase of convertible bonds.

Step by step solution

01

Definition of Convertible Securities

The debt securities issued by the business that be converted into a specified number of equity securities after a specific period of time are known as convertible securities.

02

Carrying value of the bond

Date

Cash paid

Interest expenses

Discount amortized

Unamortized discount

Carrying amount of bond payable

1 Jan 2016

$102,800

$1,897,200

31 Dec 2016

$120,000

$151,776

$31,776

$71,024

$1,928,976

Calculation of present value:

Particular

Amount $

Fair value of principal $2,000,000 (PVF:0.7938) (8% for 3 years)

$1,587,600

Fair value of interest payments $120,000 (PVAF: 2.58) (8% for 3 years)

309,600

Present value of the bond payable

$1,897,200

03

Journal entry to record conversion

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Share premium – conversion equity (discount value)

$102,800

Bond payable

$1,897,200

Share capital - ordinary

$500,000

Share premium – ordinary

$1,500,000

$2,000,000

$2,000,000

04

Journal entry to record repurchase

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Bond payable

$1,928,976

Share premium – conversion equity

$40,000

Cash

$1,940,000

Gain on repurchase

$28,976

Calculation of loss on repurchase:

Particular

Amount $

Present value of the liability component

$1,900,000

Less: Carrying value of the liability component

($1,928,976)

Gain

$28,976

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Most popular questions from this chapter

EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued \(2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was \)54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.’s \(100 par value common stock for each \)1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following

dates. (Round to the nearest dollar.)

(a) August 1, 2018. (Assume the book value method is used.)

(b) August 31, 2018.

(c) December 31, 2018, including closing entries for end-of-year.

Question: Archer Company issued \(4,000,000 par value, 7% convertible bonds at 99 for cash. The net present value of the debt without the conversion feature is \)3,800,000. Prepare the journal entry to record the issuance of the convertible bonds.

What is meant by a dilutive security?

(EPS with Convertible Bonds and Preferred Stock) The Simon Corporation issued 10-year, \(5,000,000 par, 7% callable convertible subordinated debentures on January 2, 2017. The bonds have a par value of \)1,000, with interest payable annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Simon’s effective tax was 35%. Net income in 2017 was $9,500,000, and the company had 2,000,000 shares outstanding during the entire year.

Instructions

(a) Prepare a schedule to compute both basic and diluted earnings per share.

(b) Discuss how the schedule would differ if the security was convertible preferred stock

Question: . Mae Jong Corp. issues \(1,000,000 of 10% bonds payable which may be converted into 10,000 shares of \)2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will:

(a) first assign a value to the equity component, then determine the liability component.

(b) assign no value to the equity component since the conversion privilege is not separable from the bond.

(c) first assign a value to the liability component based on the face amount of the bond.

(d) use the “with-and-without” method to value the compound instrument.
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