Question

On January 1, 2014, Poundstone Inc. issued $1,000,000, 5%, 10-year convertible debentures. Issues of

Poundstone’s risk class are typically traded at 6%. Each $1,000 bond is convertible into 20 shares of

Poundstone’s $1 par value common stock. The stock was trading at $45 on the day the bonds were issued.

A. Record the journal entry for the convertible bond issue under both IFRS and US GAAP.

B. If the stock price were trading at $70 on the day the bonds were issued, provide any alterations to

your journal entries in A.

C. If 30% of the bonds exercised their conversion option on January 1, 2015, record the conversion

of securities assuming Poundstone uses the i) book value method or ii) market value method.

Assume Poundstone’s common stock was trading at $40 a share on 1/1/15. Use US GAAP.

Answer 1

Year	Date	Type of cashflow	Cashflow	Present Value Factor Calculation	Present value factor	Present Value
1	31st Dec 2014	Coupon	50000	(1/1.06^1)	0.943396226	47,169.81
2	31st Dec 2015	Coupon	50000	(1/1.06^2)	0.88999644	44,499.82
3	31st Dec 2016	Coupon	50000	(1/1.06^3)	0.839619283	41,980.96
4	31st Dec 2017	Coupon	50000	(1/1.06^4)	0.792093663	39,604.68
5	31st Dec 2018	Coupon	50000	(1/1.06^5)	0.747258173	37,362.91
6	31st Dec 2019	Coupon	50000	(1/1.06^6)	0.70496054	35,248.03
7	31st Dec 2020	Coupon	50000	(1/1.06^7)	0.665057114	33,252.86
8	31st Dec 2021	Coupon	50000	(1/1.06^8)	0.627412371	31,370.62
9	31st Dec 2022	Coupon	50000	(1/1.06^9)	0.591898464	29,594.92
10	31st Dec 2023	Coupon	50000	(1/1.06^10)	0.558394777	27,919.74
10	31st Dec 2023	Principle Repayment	1000000	(1/1.06^10)	0.558394777	5,58,394.78
						9,26,399.13
Cashflow per year for Coupon Payment= 1000000*5%	50000
Total Proceeds=	1000000
Present Value of Bond=	926399.1295
Equity Portion =	Total Proceeds- Present Value of Bond
	=1000000-926399.13
	73600.87
(A)
1st Jan,2014
As Per IFRS	Debit	Credit
Cash/Bank A/c	1000000
5%- 10Years Convertible Bonds		926399.13
Share Premium-Equity Portion		73600.87
(being 5% convertible Bond issued with 10Years Maturity)
As per US-GAAP
Cash/Bank	1000000
5%- 10Years Convertible Bonds		900000
Share Premium-Equity Portion		100000
(being 5% convertible Bond issued with 10Years Maturity)
5%- 10Years Convertible Bonds=	=Number of shares issued* Market value of share
	=(1000000/1000*20)*45
	900000
(B) If the stock Price is trading at $70 then the entries will be as follows.
1st Jan,2014
As Per IFRS	Debit	Credit
Cash/Bank A/c	1000000
5%- 10Years Convertible Bonds		926399.13
Share Premium-Equity Portion		73600.87
(being 5% convertible Bond issued with 10Years Maturity)
As per US-GAAP
Cash/Bank	1000000
Share Discount-Liability Portion	400000
5%- 10Years Convertible Bonds		1400000
(being 5% convertible Bond issued with 10Years Maturity)
5%- 10Years Convertible Bonds=	=Number of shares issued* Market value of share
	=(1000000/1000*20)*70
	1400000
(C) If 30% of the bond Exercised there conversion on 1 jan,2015.( AS Per US GAAP)
(i) Book Value Method
5%- 10Years Convertible Bonds	300000
Equity Share Capital		6000
Share Premium Account		294000
(Being share issued to bond holders at Par)
(ii) Market Value Method
5%- 10Years Convertible Bonds	300000
Equity Share Capital		240000
Share Premium Account		60000
(Being share issued to bond holders at Market Value)
Market Value of the stock on 1 jan,2015=	$40
Equity share issued=	=(1000000/1000*20*30%)*40
	240000
Note-
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