C is corrent. Under IFRS, convertible debt must be separated into its debt and equity components. To do this, discount the bond at market interest rates as in US GAAP. The liability component is the discounted amount and the equity component is the residual of the cash received less the discounted amount. Calculations are as follows: Face amount of the bonds: 2,000 × $1,000 = $2,000,000 | Present value of $1 for the
principal ($2,000,000 × 0.68058) | = | $ 1,361,160 | | Present value of an
ordinary annuity for the interest ($100,000 × 3.99271) | = | $ 399,271 | | | Value of the liability | = | $ 1,760,431 | | | Value of the equity ($2,000,000 –
$1,760,431) | = | $ 239,569 |
Journal entry at issuance: | Cash | $2,000,000 | | | | Bonds Payable | | $1,760,431 | | | Equity – conversion option | | $239,569 |
A is incorrect. Under IFRS, convertible debt must be separated into its debt and equity components. To do this, discount the bond at market interest rates as in US GAAP. The liability component is the discounted amount and the equity component is the residual of the cash received less the discounted amount. Calculations are as follows: Face amount of the bonds: 2,000 × $1,000 = $2,000,000 | Present value of $1 for the
principal ($2,000,000 × 0.68058) | = | $ 1,361,160 | | Present value of an
ordinary annuity for the interest ($100,000 × 3.99271) | = | $ 399,271 | | | Value of the liability | = | $ 1,760,431 | | | Value of the equity ($2,000,000 –
$1,760,431) | = | $ 239,569 |
Journal entry at issuance: | Cash | $2,000,000 | | | | Bonds Payable | | $1,760,431 | | | Equity – conversion option | | $239,569 |
B is incorrect because bond 1,760, 431 represents the bond liability component. D is incorrect because the face value of the bond is not equivalent to the bond equity component. |
