Question

Crane Inc., a publicy accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January 1, 2020. The $1 million of six-year, 10% (payable annually on December 31, start December 31, 2020), convertible bonds were issued at 108. The bonds would have been issued at 98 without a conversion feature, and yielded a higher rate of return. The bonds are convertible at the investor's option The company's bookkeeper recorded the bonds at 108 and, based on the $1,080,000 bond carrying value, recorded interest expense using the effective interest method for 2020. He prepared the following amortization table, believing that the yield was 8%: Cash Interest Effective Interest Premium Carrying Amount Date (10%) (9%) Amortization of Bonds Jan. 1, 2020 $1,080,000 Dec. 31, 2020 $100,000 $86,400 $13,600 1,066,400 You were hired as an accountant to replace the bookkeeper in November 2021. It is now December 31, 2021, the company's year end, and the CEO is concerned that the company's debt covenant may be breached. The debt covenant requires Crane to maintain a maximum debt to equity ratio of 2.3. Based on the current financial statements, the debt to equity ratio would be 2.6. The CEO recalls hearing that convertible bonds should be reported by separating out the liability and equity components, yet he does not see any equity amounts related to the bonds on the current financial statements. He has asked you to look into the bond transactions record and make any necessary adjustments. He would also like you to explain how any adjustments that you make affect the debt to equity ratio. Determine the amount that should have been reported in the equity section of the statement of financial position at January 1, 2020, for the conversion right, considering that the company must comply with IFRS. Amount to be reported Prepare the journal entry that should have been recorded on January 1, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Debit Credit Date Account Titles and Explanation January 1, 2020 SHOW LIST OF ACCOUNTS LINK TO TEXT LINK TO TEXT

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Answer 1

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