Convertible Bonds

On January 1, 2020, Charlie Corp. issued $5,000,000 (par value) 8%, 10-year convertible bonds at par. Interest is to be paid annually on December 31. Each $10,000 bond carries the right to purchase 100 Charlie common shares for $20 each during the life of the bond. The current market rate for similar non-convertible bonds is 9%.

Instructions

a. Calculate how much of the bond proceeds to allocate to the bond and how much to the option. Charlie adheres to IFRS.

b. Prepare the journal entry to record the issuance of the bond.