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Which of the following statements is correct?

a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

b) Both IFRS and GAAP assume that when there is a choice of settlement of an option for cash or shares, share settlement is assumed.

c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.

d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

Short Answer

Expert verified

Correct option: a. IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

Step by step solution

01

The explanation for the correct option

In the IFRS, all the convertible bonds are separated, which implies a partition into the value part of a bond issue and a debt component. The IFRS additionally states that there should be a different distinguishing liability and equity, and treat them in accordance with the financial statements. Because of the accessibility of a conversion option, convertible bonds carry lower interest rates than an ordinary debt.

02

The explanation for the incorrect options    

Option b: Both the IFRS and the GAAP accept that when there is a decision of repayment of an option for cash or shares, the expectations of a share repayment is an incorrect statement.

Option c: The IFRS does not separate the proceeds of a convertible bond between a debt and an equity based on relative fair values.

Option d: Both the GAAP and the IFRS do not separate the proceeds of convertible bonds between a debt and an equity.

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Most popular questions from this chapter

How is antidilution determined when multiple securities are involved?

CA16-6 WRITING (EPS, Antidilution) Brad Dolan, a stockholder of Rhode Corporation, has asked you, the firmโ€™s accountant, to explain why his stock warrants were not included in diluted EPS. In order to explain this situation, you must briefly explain what dilutive securities are, why they are included in the EPS calculation, and why some securities are antidilutive and thus not included in this calculation.

Rhode Corporation earned \(228,000 during the period, when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)25 per share during the period. Also outstanding were 30,000 warrants that could be exercised to purchase one share of common stock at $30 per warrant.

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Write Mr. Dolan a 1โ€“1.5-page letter explaining why the warrants are not included in the calculation.

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On April 1, 2017, 450,000 shares of common stock were sold for \)10 per share, and on October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.

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Instructions

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