Cavaliers Drilling Inc., which follows IFRS, offers ten-year, 6% convertible bonds with par value of

$1,000,000. Interest is paid annually on the bonds. Each $ 1,000 bond may be converted into 50 common

shares, which are currently trading at $ 17 per share. Similar straight bonds carry an interest rate of 8%. The bonds are issued at 91.

Instructions

a)Assume Cavaliers Drilling Ltd. decides to use the residual method and measures the debt first.Calculate

the amount to be allocated to the bond and to the option. (5 marks)

b)Prepare the journal entry at date of issuance of the bonds under IFRS. (3 marks)

c)Assume that after six years, when the carrying amount of the bonds was $933,757, the holders of the convertible debt decided to convert their convertible bonds before the bond maturity date.Prepare the journal entry to record the conversion. (3 marks)

d)How many shares were issued at the conversion? (1 mark)