ACCT3103 - Intermediate Financial Accounting II

Assignment 1

Question 1 (Issuance of bonds)

Cyber Limited issued $5,000,000 bonds on January 1, 2021 to finance the acquisition of an asset.
Each bond has a par value of $1,000, a stated interest rate 10%, and the bonds' maturity date is
December 31, 2023. The bond pays interest every June 30 and December 31. The effective interest
rate is 8%.

Required:
1. What is the price of the bonds at January 1, 2021? Is the bond issued at a discount or premium?
2. Prepare the journal entry to record the issuance of bonds on January 1, 2021.
3. Prepare the journal entries to record interests on June 30, 2021 and December 31, 2021.
Question 2 (Issuance, conversion and repurchase of convertible bonds)
On January 1, 2020, iTech Inc. issued 15,000 of its 5-year, $1,000 face value, 8% convertible bonds
at an effective interest rate (yield) of 7% with interest payable every December 31. (Hint: A similar
debt instrument without the option feature was issued at 9% yield.) The bonds are convertible at the
investor’s option into iTech’s ordinary shares of 10 shares for each bond.

Required:
1. Prepare the journal entry for iTech on January 1, 2020 regarding the bond issuance. Show
calculations.

2. Interests were paid on December 31, 2020, December 31, 2021 and December 31, 2022. On
January 1, 2023, all outstanding bonds were converted when the market values per unit of the
bonds and ordinary shares were quoted as 106 and $109, respectively. Prepare the journal entry
for iTech on January 1, 2023 when all outstanding bonds were converted. Show calculations.

3. Same as (b) above, but now assume that on January 1, 2023, instead of bond conversion, iTech
repurchased all outstanding bonds from the market when the market interest rate of a similar
bond without the option feature was 8%. Prepare the journal entry for such transaction. Show
calculations.
Question 3 (Troubled debt restructuring)
The Moto Bank has a note receivable of $4,000,000 from the Winner Company that it is carrying at
face value and is due on December 31, 2021. Interest on the note is payable at 8% each December
31. The Winner Company paid the interest due on December 31, 2019. On January 1, 2021, the
company asked the bank to modify the terms of the note because of its financial difficulties. After
negotiation the bank agreed to:
a. Forgive the interest accrued for the year just ended.
b. Reduce the interest rate to 6%.
c. Reduce the unpaid principal amount to $3,000,000 and to be repaid at the end of 2022.

Required:
Prepare the journal entries by the Winner Company necessitated by the restructuring of the debt at
(1) January 1, 2021, (2) December 31, 2021, and (3) December 31, 2022. (Assuming the market
interest rate at the date of restructuring is 6%).