Question

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

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.

#### Homework Answers

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- Best effort have been made to answer the question correctly, in case of any discrepencies kindly comment and i will try to resolve it as soon as possible. Please provide positive feedback.
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