Question

Izmir A.S. issued convertible bonds at their face value of 114,000 lira on December 31, 2017. The bonds have a 12-year life with interest of 9 percent payable annually. At the date of issue, the prevailing interest rate for similar debt without a conversion option was 11 percent.

Assume that a foreign company using IFRS is owned by a company using U.S. GAAP. Thus, IFRS balances must be converted to U.S. GAAP to prepare consolidated financial statements. Ignore income taxes.

Required:

1. a. Prepare journal entries for this compound financial instrument for the year ending December 31, 2017, under (1) IFRS and (2) U.S. GAAP.
2. b. Prepare the entry(ies) that the U.S. parent would make on the December 31, 2017, conversion worksheet to convert IFRS balances to U.S. GAAP.

Answer 1

Solution-

Part 1 - Under IFRS

Account title	Debit	Credit
Cash	$114,000
Bonds Payable		$99,193
Additional paid in capital - convertible bonds		$14,807

pv value of bonds payable: [114,000*0.2858(pvfactor 11%,12yrs)] + [10,260(114,000*9%)* 6.4924(pv annuity factor 11%,12yrs)] = $32,581 + $66,612= 99,193

Part 2 - Under U.S. GAAP

Account title	Debit	Credit
Cash	$114,000
Bonds payable		$114,000

Answer b.

Conversion from IRFS TO GAAP

Account title	Debit	Credit
Additional paid in capital - convertible bonds	$14,807
Bonds payable		$14,807