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Chapter 16: Q3IFRS (page 895)

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.

Short Answer

Expert verified
  1. Journal entry under GAAP does not include the equity portion.
  2. Journal entry under IFRS include reflects equity as well as debt portion of the convertible security.
  3. Method used under IFRS is a better accounting approach.

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

Journal entries under GAAP

Date

Accounts and explanation

Debit $

Credit $

1

Cash

$400,000

Bonds payable

$400,000

03

Journal entries under IFRS

Date

Accounts and explanation

Debit $

Credit $

1

Cash

$400,000

Bonds payable

$365,000

Equity option

$35,000

04

Better accounting approach

The accounting approach adopted under IFRS is better compared to GAAP because it reflects the full information relating to convertible debts, i.e., equity and debt portions both are reflected under the IFRS approach. Equity and debt portion are calculated based on fair value and probability of conversion.

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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

CA16-3 WRITING (Stock Warrants鈥擵arious Types) For various reasons a corporation may issue warrants to purchase shares of its common stock at specified prices that, depending on the circumstances, may be less than, equal to, or greater than the current market price. For example, warrants may be issued:

1. To existing stockholders on a pro rata basis.

2. To certain key employees under an incentive stock-option plan.

3. To purchasers of the corporation鈥檚 bonds.

Instructions

For each of the three examples of how stock warrants are used:

(a) Explain why they are used.

(b) Discuss the significance of the price (or prices) at which the warrants are issued (or granted) in relation to (1) the current market price of the company鈥檚 stock, and (2) the length of time over which they can be exercised.

(c) Describe the information that should be disclosed in financial statements, or notes thereto, that are prepared when stock warrants are outstanding in the hands of the three groups listed above

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.

Over what period of time should compensation cost be allocated?

What are the arguments for giving separate accounting recognition to the conversion feature of debentures?
See all solutions

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