Question

On January 1, 2020, Sheridan Ltd. issued 980 5-year, 10% convertible bonds at par of $1,000, with interest payable each December 31. Each bond is convertible into 100 common shares, and the current fair value of each common share is $6. Similar straight bonds carry an interest rate of 12%.

QUESTION:

A) Calculate the PV of the debt component by itself. Calculate using any of the following methods: (1) factor tables, (2) a financial calculator, or (3) Excel function PV. (For calculation purposes, use 5 decimal places as displayed in the factor table provided. Round answers to 0 decimal places, e.g. 5,275.)

B) How should Sheridan record the issuance if it follows IFRS? Use the amount you arrived at in part (a) using a financial calculator or Excel. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal places, e.g. 5,275.)

C) How should Sheridan record the issuance if it follows ASPE? ( If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

a. On January 1, 2020, Sheridan Ltd. issued 980 5-year, 10% convertible bonds at par of $1,000, with interest payable each December 31.Similar straight bonds carry an interest rate of 12%.

The present value of bonds will be present value of interest payments at 10% and principal repayment discounted at 12% which is presented in below table

Total value of bonds issued=980*1000=980,000

Particulars	A	B	C	(A+B)*C
Interest @10%	Principal repayment	Present value factor @12%	Present value
Dec-20	98000		0.89	87,500
Dec-21	98000		0.80	78,125
Dec-22	98000		0.71	69,754
Dec-23	98000		0.64	62,281
Nov-24	98000	980000	0.57	611,686
			Total	909,346

b) If the entity was following IFRS the entry will be as follows

Bank Dr 980,000 (assuming proceeds received in bank)

To 10% convertible debt -debt component cr 909,346

To other equity cr    70,654 (differential between debt compenent and proceeds received)

c) If sheridan was ASPE it can

1)record the entire proceeds as debt or

2)it can follow treatment in point b