@Monir GAAP gives no recognition to the equity portion of a convertible bond, while IFRS does. The discount or premium on a convertible bond under IFRS is the equity portion of the security. Just think of it this way, I want to sell you a bond for 1,000,000. The bond is only worth 950,000 today, so I add a convertible feature to make it more attractive. So because we know the present value of the bond by itself is 950,000, the convertible feature must make up the difference. Journal entry below on issuance of bond:
Cash Dr. 1,000,000
Bonds Payable Cr. 1,000,000
Discount on bonds Dr. 50,000
Additional paid in capital Cr. 50,000
Does detachable bonds, these are different in that they can be separated. You have to use the relative market value method for this. Just like we learned in the inventory section. There was a similar way to determine costs of inventory when you buy items together with no individual price for each item. Anyway, we need the market value of the bond and the warrant or just one. so we issue bonds with detachable warrants for 1,000,000. The market value of the warrant is 50,000 and the market value of the bond is 950,000. 950,000+50,000=1,000,000 . The bond (950,000/1,000,000) is 95% of the combined market value, while the warrant makes up the 5% difference. Just multiply the percentages * the issuance price. In this case, it's very simple and no math needs to be done. 1,000,000*95%=950,000 1,000,000*5%=50,000
Entry below:
Cash – Dr. 1,000,000
Bond Payable Cr. 1,000,000
Discount on bonds Dr. 50,000
Additional paid in capital Cr. 50,000
Made some changes to the entry, either way it's the same result.
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AUD - 99!!!!!! CPA exam complete.
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