Problem 3 (Convertible bonds)

On January 2, 2020, Abby Ltd. Offered 1,000 five-year, 8% convertible bonds (par $ 1,000) at 99. Interest is paid annually on the bonds. Each $ 1,000 bond may be converted into 100 common shares, which are currently trading at $ 8 per share. Similar straight bonds (bonds without conversion feature) carried an interest rate (market rate) of 10%.

On January 2, 2022 when the carrying amount of the bonds was $ 950,260, 50% of the bonds were converted.

On January 2, 2023, when the carrying amount of the remaining bonds was $ 482,644 and similar straight bonds were trading at 97, Abby paid $10,000 to induce the conversion of the remaining 50% of the bonds.

Instructions

1. Assume Abby Ltd. follows IFRS and decides to use the residual method and measures the debt first. Calculate the amount to be allocated to the bond and to the option.
2. Prepare the journal entry at the date of issuance of the bonds under IFRS.
3. Prepare the journal entry to record the conversion on January 2, 2022.
4. Prepare the journal entry to record the induced conversion on January 2, 2023.
5. Assume now that Abby follows ASPE and has chosen as an accounting policy to value the equity component at zero. Prepare the journal entry at the date of issuance of the bonds.