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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

Briefly explain the accounting requirement for stock compensation plans under GAAP.

Which of the following statements is correct?

a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

b) Both IFRS and GAAP assume that when there is a choice of settlement of an option for cash or shares, share settlement is assumed.

c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.

d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

(EPS with Options, Various Situations) Venzuela Company’s net income for 2017 is \(50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016, each exercisable for one share at \)6. None has been exercised, and 10,000 shares of common were outstanding during 2017. The average market price of Venzuela’s stock during 2017 was \(20.

Instructions

(a) Compute diluted earnings per share. (Round to nearest cent.)

(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was \)20.

Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share.

IFRS16-3 Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of \(400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of \)35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS.

(a) Prepare the entry to record issuance of the bonds at par under GAAP.

(b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance.

(c) Which approach provides the better accounting? Explain.
See all solutions

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