Skip to main content
IFRS Academy

CERTYNEX IFRS ACADEMY

My account — Professional

Search the Academy

Home
My learning path
Exercises & quizzes
Cases
Workpapers
Exams
My progress

Cases

Practical case

Practical caseIAS 32L3 · Advanced

Convertible bond: split into a liability component and an equity component, interest charge, carrying amount and conversion at maturity

4 documents20 tasks≈ 90 min
0 / 23 items completed
Standards
IAS 32 — Financial Instruments: Presentation
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

Tessora SA (fictitious entity) issued a convertible bond on 1 January 20X6 to finance the extension of its plant. You prepare the accounting for the issue, the two following years and the conversion at maturity, on 31 December 20X7.

Your assignment

Justify that the instrument is compound; discount the principal and each coupon separately at the rate of a similar liability without a conversion option; add them to obtain the liability component; determine the residual equity component and check that there is no initial gain or loss; record the issue; compute the interest charge and the closing carrying amount of each year, record the interest and the coupon of 20X6; compute the equity linked to the instrument after conversion and record the conversion; present the effect on the financial statements, place the subsequent measurement and the diluted earnings per share and conclude. One document is not useful.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

4 documents: open each one to read it.

Document 1Memo

Company profile and case conventions

Tessora SA (fictitious entity) closes its accounts on 31 December; its functional currency is the euro. Case conventions: amounts in EUR; the issue proceeds are the fair value of the instrument as a whole; coupons are paid in arrears; case convention (pedagogical assumption, not attributed to IAS 32): all holders convert at maturity and the tax effect is ignored. Treatment of conversion (IAS 32): the carrying amount of the liability is reclassified to equity, here to share capital and premium (accounts: case convention), with no gain or loss, and the original equity component stays in equity.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Issue proceeds€1,000,000.00
Principal repayable€1,000,000.00
Annual coupon€40,000.00
Term of the bond2 years
Due date of the first coupon1 year
Due date of the second coupon2 years
Shares issued on conversion250,000 units
Rate of a similar liability without an option8%
Engineering quotation€135,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort4

  • Company profile and case conventions

  • Terms of issue of the convertible bond

  • Rate of a similar liability without a conversion option

  • Quotation from an engineering firm

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      20 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        Is the bond a compound instrument, and why split it at issue?

      2. Task 2Calculation

        Compute the present value of the principal.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the present value of the principal.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      3. Task 3Calculation

        Compute the present value of the first coupon.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the present value of the first coupon.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      4. Task 4Calculation

        Compute the present value of the second coupon.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the present value of the second coupon.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      5. Task 5Calculation

        Compute the liability component at issue.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the liability component at issue.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      6. Task 6Calculation

        Compute the residual equity component.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the residual equity component.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      7. Task 7Calculation

        Check that there is neither gain nor loss at issue.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Check that there is neither gain nor loss at issue.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      8. Task 8Journal entries

        Record the issue of the convertible bond.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        3. Line 3

        TotalsDebit0Credit0

      9. Task 9Calculation

        Compute the interest charge of 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the interest charge of 20X6.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      10. Task 10Calculation

        Compute the closing carrying amount of the liability at the end of 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the closing carrying amount of the liability at the end of 20X6.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      11. Task 11Journal entries

        Record the interest charge of 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      12. Task 12Journal entries

        Record the payment of the coupon of 20X6.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      13. Task 13Calculation

        Compute the interest charge of 20X7.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the interest charge of 20X7.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      14. Task 14Calculation

        Compute the carrying amount of the liability at the end of 20X7, before conversion.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the carrying amount of the liability at the end of 20X7, before conversion.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      15. Task 15Calculation

        Compute the equity linked to the instrument after conversion.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Compute the equity linked to the instrument after conversion.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      16. Task 16Journal entries

        Record the conversion at maturity.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 1

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      17. Task 17Effects on the financial statements

        What is the effect of the issue and of the year 20X6 on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      18. Task 18Effects on the financial statements

        What is the effect of the conversion on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €

        Checks

        • 0 / 1 step entered
        • Amounts readable

      19. Task 19Analysis

        After issue, which standard measures the liability, and where do diluted earnings per share belong?

      20. Task 20Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 23).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IAS 32 §35