Question

Question 2

ABC Inc. had a new plant constructed having 10-year life and zero salvage value. In order to raise the funds required for the project, the company issued 10-year 8% $1,000 bonds in the market with a total face value of $13,560,000. The market rate was 5% and interest was payable on June 30 and December 31. The plant was funded from the proceeds obtained by issuing the bonds. ABC Inc. uses IFRS for financial reporting purposes.

Required: Use this information to answer Questions (i) - (iv) below.

i] Determine the issue price of the bonds. Prepare the journal entries, in proper format, required on January 1, 2016 to record the issue of the bonds. Show your work in detail.

ii] Prepare the journal entries, in proper format, required on December 31, 2018, to record the interest on the bond issue.

Iii] Determine the amounts of the bond payable outstanding on December 31, 2016 and show, in good format, how it will be reported.

Now, assume that on January 1, 2019, ABC Inc. retires 30% of the bonds payable. The bond holders agree to accept, instead of cash, 20 common shares in exchange for each $1,000 bond. The shares of ABC Inc. were being traded on that date at $65 per share. There is no interest due on the bonds as all interest was already recorded/paid on December 31, 2018.

iv] Prepare the journal entry as at January 1, 2019, to record this transaction as per IFRS requirements.

HINT: It would be helpful to prepare a bond amortization table.

Answer 1

i) Issue price of the bonds: semi-annual int. * PVIFA(2.5%,20) + Par value * PVIF(2.5%,20)

=(13560000*4%*15.5892) + (13560000*0.6103)

=16731250

Issued at premium = 16731250-13560000=3171250

Amortisation table:
Date	Cash Int.	Int. exp.	Pre amortised	Carrying Value
1/1/2016				16731250
6/30/2016	542400	418281	124119	16607131
12/31/2016	542400	415178	127222	16479910
6/30/2017	542400	411998	130402	16349507
12/31/2017	542400	408738	133662	16215845
6/30/2018	542400	405396	137004	16078841
12/31/2018	542400	401971	140429	15938412

i & ii) Journal Entries:
Date	Acc Titles	Dr. $	Cr. $
1/1/2016	Cash	16731250
	Bond Payable		13560000
	Premium on Bond Payable		3171250
	(issued bonds on premium)
12/31/2018	Interest expense	401971
	Premium on Bond Payable	140429
	Cash		542400
	(payment of the interest & premium amortised)
iii) Presentation of outstanding Bonds Payable:
Balance Sheet (abstract) at Dec 31,2016:
Liabilities (long term):
Bonds Payable	13560000
Add:Premium on BP	2919910	(16479910-13560000)
Total Bonds Payable	16479910
iv) Journal entry:
Date	Acc Titles	Dr. $	Cr. $
1/1/2019	Bonds Payable	4068000		(13560000*0.3)
	Premium on Bond Payable	713523.6		(15938412-13560000)*0.3
	Loss on conversion into CS	506876.4		(balancing figure)
	Common Shares (no par)		5288400	(4068000*20*65/1000)
	(retirement of 30% of Bonds through conversion
	into 20 common shares @ $65 per share per bond)