Tranquil Lotus Ltd

4/1/2016

4/1/2016

Accounting 216

Term Project

Accounting 216

Term Project

Daniel Devenz, Calvin Kwong, Yasmine Abbas, Annie Tran-Nguyen

Daniel Devenz, Calvin Kwong, Yasmine Abbas, Annie Tran-Nguyen

MEMORANDUM

To: Roger Smith

From: Daniel Devenz, Calvin Kwong, Yasmine Abbas, Annie Tran-Nguyen

Re: Tranquil Lotus Ltd.

Through careful review of the notes and financial statements we recommend the following changes, outlined below, to improve the accounting treatment of Tranquil Lotus Ltd. and to adjust for mistakes made in the previous fiscal periods:

Item 1 – Recommendations for Accounting Treatments to Adopt, including Adjusting Journal Entries and Adjusted Financial Statements

Long Term Debt

The owners of Tranquil Lotus Ltd. decided to issue two types of long term debt in order to finance their company. The first method was to issue 500, 3 year bonds at par with an interest rate of 3% paid annually. The bonds raised the largest amount of capital, which was $250,00. They also issued a small amount of preferred shares to the angel investors which raised $1000 of capital. In addition to those shares they also issued common shares to themselves raising an additional $50.

Although, the bonds they issued had a convertible option which means Tranquil Lotus Ltd. now has a complex financial structure and must include both the basic and diluted earnings per share on there financial statements. We have calculated the basic earnings per share to be $330.49 and the diluted earnings per share to be $0.87. These calculations can be found on the attached excel spreadsheet.

IFRS 32 states “A convertible bond contains two components. One is a financial liability, namely the issuer’s contractual obligation to pay cash, and the other is an equity instrument, namely the holder’s option to convert into common shares”. [IAS 32.32] This convertible option allows Tranquil’ investors to convert each bond they own into fifty common shares. Furthermore,...