On 1 January 2018, Bae Limited issued a convertible bond with apar value of $100,000 for $120,000.
The bonds are convertible into 12,000 ordinary shares ofJan.
The bond has a 5-year life with a stated interest of 10% perannum. Interest
payment is made each year on 31 December, starting from 31December 2018.
The market interest rate on 1 January 2018 for a similarnon-convertible bond is
8% per annum.
On 1 January 2018, the liability component of the bond iscomputed to be $107,986.
On 31 December 2019, after the interest has been recorded, JanLimited
repurchases the bond for $111,000 cash. At that time the fairvalue of the liability component is $108,000.
Date
Cash paid. Interest expense. Premiumamortised Carrying amount of liability
1 January 2018. $107,986
31 December 2018 $10,000 $8,639 $1,361 $106,625
31 December 2019. $10,000. $8,530 $1,470 $105,155
1.Prepare the journal entry to record the issuance of theconvertible bond on 1 January 2018.
2. Calculate the loss on repurchase for the liability componentof the bond on 31 December 2019.
3. Calculate the adjustment on the equity component of the bondon 31 December 2019.
4. Prepare the journal entries to record the repurchase of bondson 31 December 2019.
