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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

Rockland Corporation earned net income of \(300,000 in 2017 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was \)800,000 of 9% bonds, which are convertible into 16,000 shares of common. Rockland鈥檚 tax rate is 40%. Compute Rockland鈥檚 2017 diluted earnings per share.

CA16-5 (EPS: Preferred Dividends, Options, and Convertible Debt) 鈥淓arnings per share鈥� (EPS) is the most featured, single financial statistic about modern corporations. Daily published quotations of stock prices have recently been expanded to include for many securities a 鈥渢imes earnings鈥� figure that is based on EPS. Stock analysts often focus their discussions on the EPS of the corporations they study.

Instructions

(a) Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.

(b) One of the technical procedures applicable in EPS computations is the 鈥渢reasury-stock method.鈥� Briefly describe the circumstances under which it might be appropriate to apply the treasury stock method.

(c) Convertible debentures are considered potentially dilutive common shares. Explain how convertible debentures are handled for purposes of EPS computations.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company鈥檚 \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.

What type of earnings per share presentation is required in a complex capital structure?

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