Crane Inc., a publicly accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January $1,2017.$ The $$1$ million of six$-$year, $10\%($payable annually on December $31,$ starting December $31,2017),$ convertible bonds were issued at $108.$ The bonds would have been issued at $94$ without a conversion feature, and yielding a higher rate of return. The bonds are convertible at the investor$$s option.

The company$$s bookkeeper recorded the bonds at $108$ and, based on the $$1,080,000$ bond carrying value, recorded interest expense using the effective interest method for $2017.$ He prepared the following amortization table, beleiving that the yield was $8\%$:

Cash Interest Effective Interest Premium Carrying Amount

Date $(10\%)(8\%)$ Amortization of Bonds

Jan. $1,2017$ $$1,080,000$

Dec. $31,2017$ $$100,000$ $$86,400$ $$13,6001,066,400$

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 Crane to maintain a maximum debt to equity ratio of $2\mathrm{.}3.$ Based on the current financial statements, the debt$-$to$-$equity ratio would be $2\mathrm{.}6.$ 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.

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 $1,2017$

Using a financial calculator or computer spreadsheet functions, calculate the effective rate $($yield rate$)$ for the bonds.

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. $($Round answers to $0$ decimal places, e$.$g$.5,275.)$

Prepare the journal entry dated January $1,2018$ to correct the bookkeeper$$s recording errors in $2017.$ Ignore income tax effects.

Prepare the journal entry at December $31,2018$ for the interest payment on the bonds.