On 1 January 2022, Way Company issued 2,000 convertible bonds. The maturity date of the bonds is 1 January 2025. The bonds were issued at par with a face value of $1,500 per bond. The stated rate of interest is 7%. Interest is payable on 1 January of each year over the term. (Hint: the first interest payment was on 1 January 2023.)The market rate of interest of similar non-convertible bond is 11%. Each bond is convertible into 150 ordinary shares with a par value of $2.

Requirement

(a)Calculate the present value of the liability component and fair value of equity component on the date of issuance. Show workings. (3 marks)

(b)Assume that all the bonds were converted into ordinary shares on 1 January 2025, prepare all the necessary journal entries for the years 2022 to 2025. (8 marks)

(c)Explain the accounting implication on the Financial Statements for the year 2025 of Way Company if the bonds were redeemed instead of being converted into ordinary shares on 1 January 2025. (4 marks)

(d)Explain the accounting implication on the Financial Statements for the years from 2022 to 2025 of Way Company, if the market rate of interest is higher than 11%, (all other things remain the same) (9 marks)