Question

On January 1, 2018, Gless Textiles issued $13.5 million of 8%, 10-year convertible bonds at 102. The bonds pay interest on June 30 and December 31. Each $1,000 bond is convertible into 50 shares of Gless’s no par common stock. Bonds that are similar in all respects, except that they are nonconvertible, currently are selling at 98 (that is, 98% of face amount). Century Services purchased 9% of the issue as an investment.

Required:
Assume Gless Textiles prepares its financial statements according to International Financial Reporting Standards. Prepare the journal entry for the issuance of the bonds by Gless using the net method

Answer 1

Solution:- Journal Entries

Date	Particulars	Amount	Amount
	Cash	$13,770,000
	Convertible bonds payable		$13,230,000
	Equity Conversion option		$540,000

Calculation :-

Under IFRS, convertible debt is mainly divided into two major categories they are liabilities and equity investments. Separation is mainly achieved by measuring fair value of similar liability which does not have an associated equity equipment.

In the given question, we are aware that the bonds are similar in all respects, except the fact that these bonds are non-convertible bonds, the selling price of the bond is $98, so the first separation gives rise to the below mentioned entry:-

Cash (102% × $1,35,00,000) = $13,770,000

Convertible bonds payable (98% × 1,350,000) = $13,230,000

Equity Conversion option (Balancing figure) = $540,000 ($13,770,000 - $13,230,000)

Please note that we are calculating as per Net method, therefore the discount on the bond $13,500,000 - (98% × $13,500,000) = $270,000 is combined with the face valready for the bond and the net amount recorded result in bonds payable.