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Wildhorse Inc., a publicly accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January 1, 2023. The $1 million of six-year, 10% (payable annually on December 31, starting December 31, 2023), convertible bonds were issued at 109. The bonds would have been issued at 98 without a conversion feature and yielded a higher rate of return. The bonds are convertible at the investor's option.

Wildhorse Inc., a publicly accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January 1, 2023. The $1 million of six-year, 10% (payable annually on December 31, starting December 31, 2023), convertible bonds were issued at 109. The bonds would have been issued at 98 without a conversion feature and yielded a higher rate of return. The bonds are convertible at the investor's option.

Intermediate Accounting: Reporting And Analysis
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter14: Financing Liabilities: Bonds And Long-term Notes Payable
Section: Chapter Questions
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Wildhorse Inc., a publicly accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January 1, 2023. The $1 million of six-year, 10% (payable annually on December 31, starting December 31, 2023), convertible bonds were issued at 109. The bonds would have been issued at 98 without a conversion feature and yielded a higher rate of return. The bonds are convertible at the investor's option. The company's bookkeeper recorded the bonds at 109 and, based on the $1,090,000 bond carrying value, recorded interest expense using the effective interest method for 2023. He prepared the following amortization table, believing that the yield was 9%: Date Jan. 1, 2023 Dec. 31, 2023 Cash Interest (10%) $100,000 Effective Interest Your answer is partially correct. (9%) Amount to be reported $ $98,100 Premium Amortization $1,900 You were hired as an accountant to replace the bookkeeper in November 2024. It is now December 31, 2024, the company's year end, and the CEO is concerned that the company's debt covenant may be breached. The debt covenant requires Wildhorse to maintain a maximum debt to equity ratio of 2.3. Based on the current financial statements, the debt to equity ratio is 2.6. The CEO recalls hearing that convertible bonds should be reported by separating out the liability and equity components, yet he does not see any equity amounts related to the bonds on the current financial statements. He has asked you to look into the bond transactions recorded and make any necessary adjustments. He would also like you to explain how any adjustments that you make affect the debt to equity ratio. 1090000 Carrying Amount of Bonds $1,090,000 1,088,100 Determine the amount that should have been reported in the equity section of the statement of financial position at January 1, 2023, for the conversion right, considering that the company must comply with IFRS.
Transcribed Image Text:Wildhorse Inc., a publicly accountable enterprise that reports in accordance with IFRS, issued convertible bonds for the first time on January 1, 2023. The $1 million of six-year, 10% (payable annually on December 31, starting December 31, 2023), convertible bonds were issued at 109. The bonds would have been issued at 98 without a conversion feature and yielded a higher rate of return. The bonds are convertible at the investor's option. The company's bookkeeper recorded the bonds at 109 and, based on the $1,090,000 bond carrying value, recorded interest expense using the effective interest method for 2023. He prepared the following amortization table, believing that the yield was 9%: Date Jan. 1, 2023 Dec. 31, 2023 Cash Interest (10%) $100,000 Effective Interest Your answer is partially correct. (9%) Amount to be reported $ $98,100 Premium Amortization $1,900 You were hired as an accountant to replace the bookkeeper in November 2024. It is now December 31, 2024, the company's year end, and the CEO is concerned that the company's debt covenant may be breached. The debt covenant requires Wildhorse to maintain a maximum debt to equity ratio of 2.3. Based on the current financial statements, the debt to equity ratio is 2.6. The CEO recalls hearing that convertible bonds should be reported by separating out the liability and equity components, yet he does not see any equity amounts related to the bonds on the current financial statements. He has asked you to look into the bond transactions recorded and make any necessary adjustments. He would also like you to explain how any adjustments that you make affect the debt to equity ratio. 1090000 Carrying Amount of Bonds $1,090,000 1,088,100 Determine the amount that should have been reported in the equity section of the statement of financial position at January 1, 2023, for the conversion right, considering that the company must comply with IFRS.
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