Question

Andrew’s Comics issues 10-year semiannual, convertible 5.5% bonds with a face value of €1,250,000. The bonds were issued at 96. Comparable bonds without a conversion feature would have required 8.75%.

1. What is the market rate of interest on the bonds?

2. Determine how much of the proceeds would be allocated to debt and how much to equity.

3. Give the journal entry to record the issuance under IFRS and the journal entries for the first and second interest payments. You may use the chart below to calculate the amounts.

Interest periods	Interest to be paid	Interest expense	Amortization	Unamortized portion	Bond carrying amount
Issue
1
2

Issuance

First Interest Payment

Second Interest Payment

Answer 1

Requirement-1: # of sem ¡annuals left to maturity, NPER Semiannual coupon Payment, PMT Bond's current selling price, PV Bond's maturity value at the end, FV Semiannual compounding type, TYPE Bond's Semiannual YTMM Number of semiannuals in a year Market rate of interest on the bonds 20 [10 years x 2 20; as there are 2 semiannuals in a year] € 34,375 [Euro 1,250,000 x 5.5% / 2; as coupons are payable two times a year] € 1,200,000 [Euro 1,250,000 x 96%) 1,250,000 [Terminal (last) cash flow --> Face value at Maturity] 00 if coupons paid at the end of each semiannual; 1 if coupons paid at the beginning of each semiannual 3.019% [Ref: NOTE] 2 6.0496 [3.019% x 2-6.04%) NOTE: Bond's Semiannual Yield to Maturity or Call is calculated using EXCEL FUNCTION RATE(nper,pmt,pv.fv,type) where nper-20, pmt_-34375; pv=1200000; fv--1250000Here, value for pmt & fv are negativeas they denote cash inflows; pv is positive because it denotes cash outflow; type-0 as coupon are paid at the end of each semiannual only. | | # of semiannuals left to maturity, NPER 2 Semiannual coupon Payment, PMT 3 Bond's current selling price, PV 4 Bond's maturity value at the end, FV S Semiannual compounding type, TYPE 6 Bond's Semiannual YTM 7 Number of semiannuals in a year 8 Market rate of interest on the bonds 10 2 [10 years x 2-20; as there are 2 semiannuals in a year] -84*5.5%/2 [Euro 1,250,000 x 5.5% / 2; as coupons are payable two times a year] -84*96% [Euro 1,250,000 x 96%) € 1,250,000 [Terminal (last) cash flow-> Par at Maturity or $1,000 x 110.5%-$1,105 at Call] 0-. 0 if coupons paid at the end of each semiannual; 1 if coupons paid at the beginning of each semiannual -RATE(81,-82, B3,-B4,B5) [Ref: NOTE] -86" B7 [ 3.01996 x 2-6.0496]

Requirement-2: Face value of the bonds Bond issue rate Bond's Issue Price today 1,250,000 96% € 1,200,000 [Euro 1,250,000 x 96%) Bond Amortization Table (Effective interest rate method) Interest to be paid (1,250,000 x 5.5%/2) Interest Bond's Carrying value Expense Discount Unamortized Discount (4)-(4)-(3) Interest 3.019% on Beg. Bond bal. amortized (3)-(2)-(1) Period (5 Issue Date 1) 2) 50,000 1,200,000 1,857 48,1431,201,857 1,91346,230 1,203,770 36,232 36,288 34,375 34,375 NOTES: Unamortized discount Euro 1,250,000 Euro 1,000,000 Euro 50,000 Interest expense for Period 1-1,200,000 x 3.019%-36,232; Interest expense for Period 2-1,218,125 x 3.019%-36,288

Period Issue Date Cash ACCOUNT TITLES AND EXPLANATION CREDIT DEBIT 1,200,000 50,000 Discount on bonds payable Bonds Payable 1,250,000 To record bonds issued at discount) 1) Interest Expense 36,232 1,857 34,375 Discount on bonds payable Cash (To record first interest payment on bonds payable) 36,288 2) Interest Expense 1,913 34,375 Discount on bonds payable Cash To record second interest payment on bonds payable)