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Chapter 16: Q5IFRS (page 895)

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

Short Answer

Expert verified

(a) Issuer has the benefit of lower cash interest cost.

(b) Purchaser of the convertible debt are entitled to receive the face value of debt at maturity or the number of shares by way of conversion, which increases the wealth.

Step by step solution

01

Explanation on convertible bond

A convertible bond is a fixed-income corporate debt security that yields interest instalments, however, can be changed over into a predetermined number of common stock or equity shares.

02

The conversion feature of convertible debt has a value to the issuer:

  1. From the point of view of the issuer, the change element of convertible debt brings about a lower cash interest cost. Furthermore, the issuer in arranging its long-range financing might see the convertible debt for the purpose of raising equity capital over the long term.
03

The conversion feature of convertible debt has a value to the purchaser:

b) The purchaser obtains a choice to get either the face measure of the debt upon maturity or the predefined number of common shares upon conversion.

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Most popular questions from this chapter

What date or event does the profession believe should be used in determining the value of a stock option? What arguments support this position?

Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary shares (par value \(1 per share) at a 20% discount. The purchase price must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on average 80 shares at \)22 per share (market price \(27.50). Under IFRS, Anazazi Co. will record:

(a) no compensation since the plan is used to raise capital, not compensate employees.

(b) compensation expense of \)5,500,000.

(c) compensation expense of \(18,700,000.

(d) compensation expense of \)3,740,000.

(Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2017. The stock has a fair value of \(500,000 on this date. The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with the company until December 31, 2021. The par value of the stock is \)10. At December31, 2017, the fair value of the stock is $450,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On July 25, 2021, Tokar leaves the company. Prepare the journal entry (if any) to account for this forfeiture

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.

(b) Assume the same facts as part (a), except that the warrants had a fair value of \)30. Prepare the entry to record the issuance of the bonds and warrants.

(EPS with Convertible Bonds and Preferred Stock) On January 1, 2017, Crocker Company issued 10-year, \(2,000,000 face value, 6% bonds, at par. Each \)1,000 bond is convertible into 15 shares of Crocker common stock. Crocker鈥檚 net income in 2017 was \(300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

Instructions

(a) Compute diluted earnings per share for 2017.

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that \)1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.
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