Question: Coronado Limited issued 10-year, 7% debentures with a face value of $2.18 million on January 1, 2010. The proceeds received were $1.90 million. The discount was amortized on the straight-line basis over the 10-year term. The terms of the debenture stated that the debentures could be redeemed in full at any point before the maturity date, at a price of 105 of the principal. There was no requirement for a sinking fund.
On January 1, 2017, Coronado issued a mortgage at 101 with a principal of $3.3 million secured by land and building. The mortgage had a 25-year amortization period, with interest payable at 8%. Upon issuance of the mortgage, Coronado used the proceeds to redeem the 7% debentures. Coronado prepares financial statements in accordance with ASPE.
Additional Information for ASPE: ASPE-CPA Canada Handbook, Part II, Sections 1510, 1521, and 3856
There is specific guidance on measuring related party transactions.
Subsequent to initial recognition, liabilities are generally measured at amortized cost using the effective interest or other method (unless measured at fair value under the fair value option or because it is a derivative).
Where the fair value option is used, credit risk is incorporated into the measurement and resulting gains/losses are booked through net income.
Normally the balance sheet is segregated into current/non-current; however, this may not be appropriate for certain industries.
Refinanced long-term debt may be classified as long-term where refinanced by date of issue of financial statements.
1. Prepare the journal entry to record the issuance of the 8% mortgage January 1, 2017.
2. Prepare the journal entry to record the retirement of the 7% debentures on January 1, 2017.
3. Indicate the income statement treatment of the gain or loss on redemption of debentures. Assume that 2017 income before taxes and before any gain or loss on redemption of debentures is $1.90 million, the income tax rate is 19%, and the weighted average number of common shares outstanding is 1.30 million.
4. Calculate earnings per share.