Cornwall Inc., a publicly accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January 1, 2017. The $1 million of six-year, 10% (payable annually on December 31, starting December 31, 2017), convertible bonds were issued at 107, yielding 7%. The bonds would have been issued at 97 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 107 and, based on the $1,070,000 bond carrying value, recorded interest expense using the effective interest method for 2017. He prepared the following amortization table:

You were hired as an accountant to replace the bookkeeper in November 2018. It is now December 31, 2018, the company's year end, and the CEO is concerned that the company's debt covenant may be breached. The debt covenant requires Cornwall 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 recorded and make any necessary adjustments. He would also like you to explain how any adjustments that you make affect the debt to equity ratio.
Instructions
(a) Determine the amount that should have been reported in the equity section of the statement of financial position at January 1, 2017 for the conversion right, considering that the company must comply with IFRS. Prepare the journal entry that should have been recorded on January 1, 2017.
(b) Explain whether ASPE offers any alternatives that are not available under IFRS.
(c) Using a financial calculator or computer spreadsheet functions, calculate the effective rate (yield rate) for the bonds. Leave at least four decimal places in your calculation.
(d) Prepare a bond amortization schedule from January 1, 2017 to December 31, 2021, using the effective interest method and the corrected value for the bonds.
(e) Prepare the journal entry(ies) dated January 1, 2018 to correct the bookkeeper's recording errors in 2017. Ignore income tax effects.
(f) Prepare the journal entry at December 31, 2018 for the interest payment on the bonds.
(g) Explain the effect that the error correction prepared in part (e) has on the debt to equity ratio.

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Cash Interest Effective Interest Premium Carrying Amount (10%) Date Jan. 1, 2017 Dec. 31, 2017 (7%) Amortization of Bonds $1,070,000 1,044,900 $100,000 $74,900 $25,100