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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

GROUPWORK (Entries for Various Dilutive Securities) The stockholders鈥� equity section of Martino Inc. at the beginning of the current year appears below.

Common stock, \(10 par value, authorized 1,000,000

shares, 300,000 shares issued and outstanding \)3,000,000

Paid-in capital in excess of par鈥攃ommon stock 600,000

Retained earnings 570,000

During the current year, the following transactions occurred.

1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at \(32. The rights were void after 30 days. The market price of the stock at this time was \)34 per share.

2. The company sold to the public a \(200,000, 10% bond issue at 104. The company also issued with each \)100 bond one detachable stock purchase warrant, which provided for the purchase of common stock at \(30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at \)8.

3. All but 5,000 of the rights issued in (1) were exercised in 30 days.

4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were outstanding and in good standing.

5. During the current year, the company granted stock options for 10,000 shares of common stock to company executives.

The company, using a fair value option-pricing model, determines that each option is worth \(10. The option price is \)30.

The options were to expire at year-end and were considered compensation for the current year.

6. All but 1,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

(a) Prepare general journal entries for the current year to record the transactions listed above.

(b) Prepare the stockholders鈥� equity section of the balance sheet at the end of the current year. Assume that retained earnings

at the end of the current year is $750,000.

(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.

EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued \(2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was \)54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.鈥檚 \(100 par value common stock for each \)1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following

dates. (Round to the nearest dollar.)

(a) August 1, 2018. (Assume the book value method is used.)

(b) August 31, 2018.

(c) December 31, 2018, including closing entries for end-of-year.

Pechstein Corporation issued 2,000 shares of \(10 par value common stock upon conversion of 1,000 shares of \)50 par value preferred stock. The preferred stock was originally issued at \(60 per share. The common stock is trading at \)26 per share at the time of conversion. Record the conversion of the preferred stock

Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that instead of options, Barwood granted 2,000 shares of restricted stock.
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