Question

Problem 11-19 (LO 11-9)

Izmir A.S. issued convertible bonds at their face value of 139,000 lira on December 31, 2017. The bonds have a 10-year life with interest of 10 percent payable annually. At the date of issue, the prevailing interest rate for similar debt without a conversion option was 12 percent.

Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes.

Required:

1. a. Prepare journal entries for this compound financial instrument for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP.
2. b. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017, conversion worksheet to convert IFRS balances to U.S. GAAP.

Answer 1

a. Prepare journal entries for this compound financial instrument for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP.

b. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017, conversion worksheet to convert IFRS balances to U.S. GAAP.

Refer to the below images for the above mentioned questions, in a detailed way of solution with explanation.

: Solution under IFRS Convertible bonds are a compound financial inostrument that most be split into Separate debt and earuity components based upon their fair volues. The fair value of the debt component is easual to the present value of a similar bond without a conversion feature such bonds pay interest rat. Thus, Izmir's bond must be discounted at 12.1. to determine the fair value of the debt component. present value of 139000 10-year bonds, 12% discount rate: pov- of face value of bonds [139000 x 0.3219730] = 44754 pr-of annuity of annual interest payments = 78538 (139000104- 13900) [13900 X 5.6502230] fair value of the debt component of the - 123292 Convertible bonds Fair value of bonds (in total) (selling price) 139000 Fair value of debt component (above) (123292) Fair value of equity component (residual) ay 15708 IFRS : 12/31/17 cast All Dr 139000 To Bonds payable ate To Additional paid-in- Capital -Convertible bonds 123292 15708

Under U.S. GAAP debt as evoity bonds are not components but are split into separate treated solely as debt- U.S. GAAP : 12/3017 Cash ale Dr To Bonds payable Ale 139000 139 000 To convert from IFRS to US GAAP on 12/31/17, the equity component of the convertible bonds must be reclassified as debt. Conversion entry : 12/31/17 Additional paid -in capital - convertible bonds alc Dr Istos To Bonds payable Alc 15708 -

The 12/31117 partial Summarizes the above Conversion entry results reported in the u.s. conversion Worksheet below entries, and shows that the in the correct amounts bang CHAP column. partial conversion woric Sheet 12/31/17 Camounts in lira) Convex son entir Debit Credit U.S. GAAP 139000 139000 A clounts IFRS Cash 139000 Total Assets 139000 139000 Bonds payable (123292) Total liabilities (123292) Additional paid-in capital (15708) Total trebitries , eaquity (139000) 15708 (139000) (139000) 15708 -0- (139000) 15708 15768 Note: parentheses reflect credit balances. * 2018: be also would The same conversion entry made on 12/31117 made on 12/31/18, and every year after the bonds are repaid. also woolo that ontit