Aubrey Inc. issued $6.8 million of 9-year, 9 percent, convertible bonds on June 1, 2011, at 98 plus accrued interest. The bonds were dated 1st April, 2011, with interest payable April 1 and 1st October. Bond discount is amortized semi-annually on a straight-line basis. Bonds without conversion privileges would have sold at 97 plus accrued interest.
On 1st April, 2012, $1.70 million of these bonds were converted into 42,500 common shares. Accrued interest was paid in cash at time of conversion but only to the bondholders whose bonds were being converted. Suppose that the company follows IFRS.
Instructions
(a) Prepare the entry to record issuance of the convertible bonds on 1st June, 2011.
(b) Prepare the entry to record interest expense at October 1, 2011. Suppose that accrued interest payable was credited when bonds were issued.
(c) Prepare the entries to record the conversion on April 1, 2012. (The book value method is used.) Suppose that the entry to record amortization of the bond discount using the straight-line method and interest payment has been made.
(d) What do you believe was the likely market value of the common shares as of the date of the conversion of 1st April, 2012?