[Anonymous]

Below is a question I got on the Wiley Test Bank:

PVB-0065

Simms Corporation reports under IFRS. Simms issued 2,000 $1,000 convertible bonds at par, with an annual interest rate of 5% when the market was 8%. The bonds are due in 5 years and each $1,000 bond is convertible into 3 shares of common stock. At what amount would Simms record teh liability component of the bond?

a. 239,569

b. 2,006,000

c. 2,000,000

d. 1,760,431

I selected D because I knew it had to be at a discount because of the coupon rate v. market rate even thought I didn’t know how to calculate the answer.

Wiley Explanation:

This answer is correct. Under IFRS, convertible debt must be separated into its debt and equity components. To do this, discount the bond at market interest rates as in US GAAP. The liability component is the discounted amount and the equity component is the residual of the cash received less the discounted amount. Calculations are as follows:

Face amount of the bonds: 2,000 × $1,000 = $2,000,000

Present value of $1 for the principal ($2,000,000 × 0.68058) = $ 1,361,160

Present value of an ordinary annuity for the interest ($100,000 × 3.99271) = $ 399,271

Value of the liability = $ 1,760,431

Value of the equity ($2,000,000 – $1,760,431) = $ 239,569

Journal entry at issuance:

Cash $2,000,000

Bonds Payable $1,760,431

Equity – conversion option $239,569

My concern is how in the world would I calculate the actual amount with out the present value multipliers given to me? I would hate to thing this is an actual possibility on the exam. Especially if the answer choices were closer together in value.

[stoleway]

This is so helpful, now I know how to come up with my own PV table. Thanks so much @raymondsfamily

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Liss, Master of Coin]

@stoleway inspired me to try and to see if I could figure out the PV of $1 and PV of ordinary annuity of $1 using what @raymondsfamily said.

It took awhile, but I did it!!!!!! YES!!!!!

So PV of $1, for 8%

1 year = 1/1.08 = .926

2 years = 1/(1.08*1.08) = .857

3 years = 1/(1.08*1.08*1.08) = .794

4 years = 1/(1.08*1.08*1.08*1.08) = .735

5 years = 1/(1.08*1.08*1.08*1.08*1.08) = .680

PV Ordinary Annuity of $1, 8% for 5 years = .926+.857+.794+.735+.680 = 3.992

SO COOL! I just hope I remember this on exam day. YES!!!!

CPA (MA, Non-Reporting)

The difference in winning & losing is most often, not quitting - Walt Disney

B - 33, 71, 79!
A - 32, 61, 70, 83!
R - 33, 58, 73, 69, 81!
F - 47, 78! 🙂
After 3 long years, I'm finally DONE!
I could not have done it without NINJA MCQs.

Used: Roger for his Videos, WTB, and NINJA Audio, Notes and Test Bank.

[Liss, Master of Coin]

@stoleway inspired me to try and to see if I could figure out the PV of $1 and PV of ordinary annuity of $1 using what @raymondsfamily said.

It took awhile, but I did it!!!!!! YES!!!!!

So PV of $1, for 8%

1 year = 1/1.08 = .926

2 years = 1/(1.08*1.08) = .857

3 years = 1/(1.08*1.08*1.08) = .794

4 years = 1/(1.08*1.08*1.08*1.08) = .735

5 years = 1/(1.08*1.08*1.08*1.08*1.08) = .680

PV Ordinary Annuity of $1, 8% for 5 years = .926+.857+.794+.735+.680 = 3.992

SO COOL! I just hope I remember this on exam day. YES!!!!

CPA (MA, Non-Reporting)

The difference in winning & losing is most often, not quitting - Walt Disney

B - 33, 71, 79!
A - 32, 61, 70, 83!
R - 33, 58, 73, 69, 81!
F - 47, 78! 🙂
After 3 long years, I'm finally DONE!
I could not have done it without NINJA MCQs.

Used: Roger for his Videos, WTB, and NINJA Audio, Notes and Test Bank.

[stoleway]

@liss_ will_be_a_CA_CPA

Yes, its pretty simple. I never thought we could do our own table

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

@liss_ will_be_a_CA_CPA

Yes, its pretty simple. I never thought we could do our own table

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Anonymous]

You may have to do your own table. That's why I mentioned it. They are a pain but totally worth knowing how to do if you get a question with no PV table. Good Luck! Sounds like you got this!

[Anonymous]

You may have to do your own table. That's why I mentioned it. They are a pain but totally worth knowing how to do if you get a question with no PV table. Good Luck! Sounds like you got this!

[Author]

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