Cantu Excavating issued a convertible bond on July 1, 2017. The $4,000,000 bond pays an annual interest of 8%, each June 30. Each $1,000 bond is convertible into 50 shares of common stock, at the investor's option, on July 1, 2020, up to July 1, 2027, after which each $1,000 bond may be converted into 48.5 shares until bond maturity on June 30, 2033. Market analysts have indicated that, had the bond not been convertible, it would have sold for $2,680,000 (rounded), reflecting a market interest rate of 13% annually. In fact, it was issued for $4,370,000. Please make sure your final answer(s) are accurate to 2 decimal places.

a) Record the journal entry for the initial bond issuance assuming that the company will use a method permitted by IFRS to value the debt and equity components. Enter an appropriate description, and enter the date in the format dd/mm (ie. 15/Jan).

General Journal Page G1DateAccount/Explanation PR Debit Credit

b) Verify the $2,680,000 price of the bond by calculating the present value of the bond.

Present value of bond = $

c) How much interest expense would have been recorded in the first 12 months if the bond was recorded at $2,680,000? Assume straight-line amortization of bond discount or premium.

Cash cost Discount amortization Total expense

d) How much interest expense would have been recorded if the equity component had no value and the cash proceeds above par value of $370,000 was due to a premium? Assume straight-line amortization.

Total expense = $

e) The entry in part d) is:

1. an example of the residual method of valuing the debt and equity components of a convertible bond.
2. an example of the zero-based method of valuing the debt and equity components of a convertible bond.
3. an example of a permitted method by IFRS.
4. an example of a permitted method by either IFRS or ASPE.
5. an example of a permitted method by ASPE.
6. 1 or 3
7. 2 and 4
8. 2 and 5