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Chapter 16: Q3ISTQ (page 895)

Question: Under IFRS, convertible bonds:

(a) are separated into the bond component and the expense component.

(b) are separated into debt and equity components.

(c) are separated into their components based on relative fair values.

(d) All of the above.

Short Answer

Expert verified

Answer

Correct option: b.are separated into debt and equity components.

Step by step solution

01

The explanation for the correct option

Since the convertible bonds have the elements of both liabilities (debt) and equities, it appears to be legit to represent a liability portion and an equity portion independently.

02

The explanation for the incorrect options

Option a: Bonds have 3 significant parts: a face value also known as a par value, a coupon rate, and a stated maturity date. An expense component implies the absolute costs and pay charges for a yearly period owing to a specific component or classification.

Option c: A relative value is a strategy for deciding a resource merit that considers the worth of comparative assets. This, conversely, with an absolute value, takes a granter at an asset's intrinsic value and doesn't contrast it with different assets.

Option d: The convertible bonds are neither separated into a bond component or an expense component, nor are separated into their components based on relative fair values of the option.

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Most popular questions from this chapter

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

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(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

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(Weighted-Average Number of Shares) Newton Inc. uses a calendar year for financial reporting. The company is authorized to issue 9,000,000 shares of $10 par common stock. At no time has Newton issued any potentially dilutive securities. Listed below is a summary of Newton鈥檚 common stock activities.

1. Number of common shares issued and outstanding at December 31, 2015 2,000,000

2. Shares issued as a result of a 10% stock dividend on September 30, 2016 200,000

3. Shares issued for cash on March 31, 2017 2,000,000Number of common shares issued and outstanding at December 31, 2017 4,200,000

4. A 2-for-1 stock split of Newton鈥檚 common stock took place on March 31, 2018

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(a) Compute the weighted-average number of common shares used in computing earnings per common share for 2016 on the 2017 comparative income statement.

(b) Compute the weighted-average number of common shares used in computing earnings per common share for 2017 on the 2017 comparative income statement.

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(d) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2018 on the 2018 comparative income statement

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.

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

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EPS: Simple Capital Structure) On January 1, 2018, Wilke Corp. had 480,000 shares of common stock outstanding. During 2018, it had the following transactions that affected the common stock account.

February 1 Issued 120,000 shares

March 1 Issued a 10% stock dividend

May 1 Acquired 100,000 shares of treasury stock

June 1 Issued a 3-for-1 stock split

October 1 Reissued 60,000 shares of treasury stock

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(a) Determine the weighted-average number of shares outstanding as of December 31, 2018.

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(c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2018.

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