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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 鈥� conversion equity (discount value)

$102,800

Bond payable

$1,897,200

Share capital - ordinary

$500,000

Share premium 鈥� 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 鈥� 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

Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2018. (c) March 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

(EPS: Simple Capital Structure) At January 1, 2017, Langley Company鈥檚 outstanding shares included the following.

280,000 shares of \(50 par value, 7% cumulative preferred stock

900,000 shares of \)1 par value common stock

Net income for 2017 was \(2,530,000. No cash dividends were declared or paid during 2017. On February 15, 2018, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2017.

On April 1, 2017, 450,000 shares of common stock were sold for \)10 per share, and on October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.

Instructions

Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in March 2018.

The information below pertains to Barkley Company for 2018.

Net income for the year \(1,200,000

7% convertible bonds issued at par (\)1,000 per bond); each bond is convertible into

30 shares of common stock 2,000,000

6% convertible, cumulative preferred stock, \(100 par value; each share is convertible

into 3 shares of common stock 4,000,000

Common stock, \)10 par value 6,000,000

Tax rate for 2018 40%

Average market price of common stock \(25 per share

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,000 shares of common stock at \)20 per share.

Instructions

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018
See all solutions

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