Question

On January 1, 2015, Ginseng Corp. issues $1,000 of 5% bonds which may be converted into total 1,000 shares of $1 par value ordinary shares. The market rate of interest is 7%. Interest is payable annually on December 31, and the bonds were issued at par. The maturity date is December 31, 2019.

Please answer the following questions.

(1) Prepare the journal entry on January 1, 2015, based on US GAAP and IFRS, respectively.

Answer 1

(1)

Journal entries under U.S GAAP:

Assets	=	Liabilities	+	Total Shareholder’s equity
Cash $1000	=	Convertible Bonds $1000

Date	Accounts Title	Debit($)	Credit($)
Jan 01,2015	Cash	1000
	Convertible Bonds		1000
	(Being issue of convertible bonds.)

Journal entries under IFRS:

Face Value = 1000

Annual coupon amount = 1000*5% = 50

Market rate of interest = 7%

Maturity period of bond = 5 years (From 1^st January, 2015 to December 31, 2019)

Present value of bond issued = Coupon amount*Present value annuity factor (r, n) + Face value*Present value interest factor (r, n)

= 50*Present value annuity factor (7%, 5) + 1000*present value interest factor (7%, 5)

= 50*4.1001 + 1000*0.713 = 205.005 + 713 = 918.005 i.e. 918

Equity portion = 1000 – 918 = 82

Journal entry:

Date	Accounts Title	Debit($)	Credit($)
Jan 01,2015	Cash	1000
	5% Convertible Bonds		918
	Share Premium – Equity        Conversion Account		82
	(Being issue of convertible bonds.)