Fa3 Ass2

2

LESSON 2

Assignment

Question 1 (33 marks)

Canadian Scientific Ltd. issued €600,000 of convertible bonds on July 1, 20X2. The bonds mature on June 30, 20X9, and bear an interest rate of 7%, paid each June 30. The bonds are convertible at the rate of 100 ordinary shares for every €1,000 bond.

Required

Answer each of the following two parts independently.

Part (a) (3 marks)

The bonds are convertible at the option of Canadian Scientific Ltd. The market interest rate on the day of issuance was 7%.

Calculate the portion of the bond proceeds allocated to debt versus equity.

Part (b) (30 marks: 6 marks each for Requirements 1, 2, 3, 4, and 5)

All terms are the same as Part (a), except the bonds are convertible at the investor’s option. The financial instrument was issued for total proceeds of €680,000. The bond alone was valued at €539,602. No value can be separately calculated to value the option.

1. Calculate the portion of the bond proceeds allocated to debt versus equity.

2. What interest rate is implicit in the bond valuation?

3. Prepare a table showing the interest expense and the net bond liability over the life of the bond.

4. What would appear on the statement of financial position (indicate category), income statement, and statement of cash flows for the year ended June 30, 20X6? Do not separate the current portion of long-term debt. On the statement of cash flows, the direct method is used to disclose operating activities.

5. Prepare a journal entry to reflect the following independent events:

a. Conversion of the bond to ordinary shares on June 30, 20X9.

b. Repayment of the bond with cash on June 30, 20X9, and the lapse of rights.

Procedure

Part (a)

1. Open the file FA3L4Q1, which contains the worksheets L4Q1A and L4Q1B. You will use worksheet L4Q1A to complete Part A, requirements 1.

2. To complete the calculation for Requirement 1, enter PV functions in cells B21 and B22 to determine the PV...