16-7

Question 1

Recording the issuance of a convertible Bond

1. IFRS
2. ASPE

Answer 1

1. need to use the residual method (also called incremental method)
2. has an option to allow for the equity portion to be allocated to 0

Question 2

What is the residual method?

Answer 2

residual = whatever is left

Under IFRS, the debt component is measured first, with the residual value assigned to equity since it is a residual item.

Question 3

Using a financial calculator or computer spreadsheet functions, calculate the effective rate (yield rate) for the
bonds

Answer 3

That means I know 4 components

1. PV (take the amount you recorded the Bond after subtracting the part that goes into Contributed Surplus)
2. N
3. FV (put a - for the outflow)
4. PMT (face value x stated rate) - outflow of cash

Question 4

Prepare the journal entry(ies) dated January I, 2015, to correct the bookkeepers recording errors in 2014. Ignore
income tax effects.

Answer 4

1. The mistake in the Interest expense account goes into Retained Earnings:
   - expense overstated = income understated => cr. Retained Earnings
   - expense understated = income overstated => dr. Retained earnings
2. Correct the carrying amount of the bond by subtracting the incorrect amount from the correct amount (use the carrying amount for the appropaite date!)

If it’s higher => Bonds Payble was overstated + dr. Bonds Payable.

If the amount is smaller => Bonds Payable was understated => cr. Bonds Payable

3. Cr Contributed Surplus - Conversion rights for the amount that should have been in that account from the beginning.