Problem 16-7 Blossom Inc., a publicly accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January 1, 2020. The $1 million of six- year, 10% (payable annually on December 31, starting December 31, 2020), convertible bonds were issued at 109. The bonds would have been issued at 97 without a conversion feature, and yielded a higher rate of return. The bonds are convertible at the investor's option. The company's bookkeeper recorded the bonds at 109 and, based on the $1,090,000 bond carrying value, recorded interest expense using the effective interest method for 2020. He prepared the following amortization table, believing that the yield was 9%: Cash Interest Effective Interest (10%) (9%) Premium Amortization Date Jan. 1, 2020 Dec. 31, 2020 Carrying Amount of Bonds $1,090,000 1,088,100 $100,000 $98,100 $1,900 You were hired as an accountant to replace the bookkeeper in November 2021. It is now December 31, 2021, the company's year end, and the CEO is concerned that the company's debt covenant may be breached. The debt covenant requires Blossom to maintain a maximum debt to equity ratio of 2.3. Based on the current financial statements, the debt to equity ratio would be 2.6. 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, 2020, for the conversion right, considering that the company must comply with IFRS. Amount to be reported $ Prepare the journal entry that should have been recorded on January 1, 2020. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit January 1, 2020 Using (1) a financial calculator or (2) Excel functions, calculate the effective rate (yield rate) for the bonds. (Round answer to 5 decimal places, e.g. 2.57000%.) Effective rate % Prepare a bond amortization schedule from January 1, 2020, to December 31, 2024, using the effective interest method and the corrected value for the bonds. (Round answers to 0 decimal places, e.g. 5,275.) Schedule of Bond Discount Amortization Effective Interest Method Effective Discount Interest Amort. Cash Carrying Amount Date Paid Jan. 1, 2020 $ Dec. 31, 2020 $ Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023 Dec. 31, 2024 Dec. 31, 2025 $ Prepare the journal entry dated January 1, 2021, to correct the bookkeeper's recording errors in 2020. Ignore income tax effects. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit January 1, 2021 Prepare the journal entry at December 31, 2021, for the interest payment on the bonds. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. Round answers to 0 decimal places, e.g. 5,275.) Date Account Titles and Explanation Debit Credit December 31, 2021
