Question

IFRS16-3 Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of \(400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of \)35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS.

(a) Prepare the entry to record issuance of the bonds at par under GAAP.

(b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance.

(c) Which approach provides the better accounting? Explain.

Short answer

1. Journal entry under GAAP does not include the equity portion.
2. Journal entry under IFRS include reflects equity as well as debt portion of the convertible security.
3. Method used under IFRS is a better accounting approach.

Step-by-step solution

Definition of Convertible Securities

The debt securities issued by the business that be converted into a specified number of equity securities after a specific period of time are known as convertible securities.

Journal entries under GAAP

Date	Accounts and explanation	Debit $	Credit $
1	Cash	$400,000
	Bonds payable		$400,000

Journal entries under IFRS

Date	Accounts and explanation	Debit $	Credit $
1	Cash	$400,000
	Bonds payable		$365,000
	Equity option		$35,000

Better accounting approach

The accounting approach adopted under IFRS is better compared to GAAP because it reflects the full information relating to convertible debts, i.e., equity and debt portions both are reflected under the IFRS approach. Equity and debt portion are calculated based on fair value and probability of conversion.