1. Liam Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value ordinary shares that had a market price of $40 per share. How should Liam Co. account for the conversion of the bonds into ordinary shares under the book value method? Discuss the rationale for this method.

2. Sylvian Company uses IFRS. The company is considering the issuance of convertible bonds. The bonds mature in 3 years, have a face value of $2,000,000 and pay interest annually at a rate of 6%. The net present value of the liability component is $1,896,912. Mr. Sylvian is curious as to the difference in accounting for these bonds if the company were to use US GAAP.

Instructions

(a) Prepare the entry to record issuance of the bonds at par under IFRS.

(b) Repeat the requirement for part (a), assuming application of US GAAP to the bond issuance.

(c) Which approach provides the better accounting? Explain.