Reference no: EM133176149

Question 1 - Deep Drilling & Boring Inc., which follows IFRS, offers ten-year, 6% convertible bonds (par $1,000). Interest is paid annually on the bonds. Each $1,000 bond may be converted into 50 common shares, which are currently trading at $17 per share. Similar straight bonds carry an interest rate of 8%. One thousand bonds are issued at 91.

Required -

1. Assume Deep Drilling & Boring Inc. decides to use the residual method and measures the debt first. Calculate the amount to be allocated to the bond and to the option.

2. Prepare the journal entry at date of issuance of the bonds under IFRS.

3. Assume that after six years, when the carrying amount of the bonds was $933,757, the holders of the convertible debt decided to convert their convertible bonds before the bond maturity date. Prepare the journal entry to record the conversion.

4. How many shares were issued at the conversion?

Question 2 - On November 15, 2020, Evergreen Inc. purchased a trading investment for $150,000. Evergreen also enters into a put option to sell the shares for $150,000. At December 31, 2020, the investment is valued at $155,000.

Required - Record any adjusting entries required at December 31, 2020 in connection with the above transactions.

Question 3 - On December 1, 2020, Progressive Corp. issued $5,000,000 (par value), 12%, 5-year convertible bonds for $5,026,000 plus accrued interest. The bonds were dated April 1, 2020 with interest payable April 1 and October 1. If the bonds had NOT been convertible, they would have sold for $5,006,000. The bond premium/discount is amortized each interest period on a straight-line basis. Progressive does NOT value the equity component at zero. Progressive's fiscal year end is September 30.

On October 1, 2021, half of these bonds were converted into 35,000 no par common shares. Accrued interest was paid in cash at the time of conversion.

Required -

1. Prepare the entry to record the interest expense at April 1, 2021. Assume that interest payable was credited when the bonds were issued (round to nearest dollar).

2. Prepare the entry to record the conversion on October 1, 2021. Use the book value method. Assume that the entry to record amortization of the bond premium/discount and interest payment has been made.

Question 4 - Prepare the necessary entries from January 1, 2020 to February 1, 2022 for the following events. If no entry is needed, write "No entry necessary."

1. On January 1, 2020, the shareholders of Explore Inc. adopted a stock option plan for its top executives, where each could receive rights to purchase up to 3,000 common shares at $ 40 per share. At this date, the shares were trading for $ 32 per share.

2. On February 1, 2020, options were granted to five executives to purchase 3,000 shares each. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on February 1, 2022. It is assumed that the options were for services performed equally in 2020 and 2021. The Black-Scholes option pricing model determined total compensation expense to be $ 390,000.

3. On February 1, 2022, four executives exercised their options. The fifth executive chose not to exercise her options, which therefore were forfeited.

Question 5 - Hard Wood Builders Ltd. uses fir 2x6 lumber as its framing material. On November 15, 2020, Hard Wood Builders enters into a forward contract for 1,500,000 board feet of lumber at $0.25 per board foot for March 2021 delivery. At December 31, 2020, the market price for March delivery is $0.26. On March 5, 2021, Hard Wood Builders took delivery of 1,500,000 board feet for $0.25 and settled the forward contract. The market rate on this date was $0.28 per board foot.

Required - Record any required entries related to this contract.