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Chapter 16: Q11IFRS (page 896)

Angela Corporation issues 2,000 convertible bonds at January 1, 2016. The bonds have a 3-year life, and are issued at par with a face value of \(1,000 per bond, giving total proceeds of \)2,000,000. Interest is payable annually at 6%. Each bond is convertible into 250 ordinary shares (par value of $1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 8%.

Instructions

(a) Compute the liability and equity component of the convertible bond on January 1, 2016.

(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2016.

(c) Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2019, its maturity date.

Short Answer

Expert verified

(a) Present value of liability component is $1,896,912 and Present value of equity component is $103,088.

(b) Cash will be debited by $2,000,000 and bonds payable will be credited by $1,896,912 and share premium-conversion equity will be credited by $103,088.

(c) Bonds payable will be debited and cash will be credited by $2,000,000.

Step by step solution

01

(a) Calculation of liability and equity component

Present value of principal ($200,000 x 0.79383)

$1,587,660

Present value of interest payment ($120,000 x 2.57710)

$309,252

Present value of liability component

$1,896,912

Fair value of convertible debt

$2,000,000

Less: Present value of liability component

$1,896,912

Present value of equity component

$103,088

02

(b) Journal entry

Date

Transaction

Debit

Credit

Cash

$2,000,000

Bonds payable

$1,896,912

Share premium- Conversion equity

$103,088

Being bonds issued

03

(c) Journal entry

Date

Transaction

Debit

Credit

Bonds payable

$2,000,000

Cash

$2,000,000


Being bonds repurchased

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Most popular questions from this chapter

Discuss why options and warrants may be considered potentially dilutive common shares for the computation of diluted earnings per share.

Question: (Issuance of Bonds with Stock Warrants) On May 1, 2017, Friendly Company issued 2,000 \(1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value of the warrants cannot be determined.

Instructions

(a) Prepare the entry to record the issuance of the bonds and warrants.

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