# Essay on Midterm Exam Solutions

2068 Words Apr 24th, 2013 9 Pages
AFM 391 Winter 2011
Intermediate Financial Accounting 2
University of Waterloo
Midterm Exam Solutions
Professor Khim Kelly

Part A

1) B 2) C 3) A 4) D 5) C 6) B

Part B 1) D
\$4,000,000 (IFRS is applicable because Street is listed on TSE, no agreement was in place at year end).

2) C PV of \$8,000,000 at 5% for 15 years. 3) D \$540,000 – \$435,000 = \$105,000 (\$600,000 + \$72,000) – \$540,000 = \$132,000. 4) A

5) C = \$2.70.

6) B
\$4,800 fair value less \$500 recorded cost = \$4,300 gain.

7) B

Part C: Long-Term Bonds (19pts)
On April 1, 2010, BGL Ltd. issued \$600,000, 9% bonds (dated January 1, 2010) for \$645,442, including accrued interest. Interest is payable
Each \$1,000 bond may be converted into 150 common shares. The market rate of interest for non-convertible bonds of similar risk and maturity is 9%. Castle uses IFRS.

Required
1 pt if ALL the dates in the journal entries in parts a.b,c are correct
(a) Record the journal entry for the issuance of the bonds on January 1, 2011. (5.5 points)
Calculate the incremental value of the conversion option
Total issuance proceeds
(1.04*\$2,000,000) 2,080,000
Less
PV of equivalent non-convertible bond discounted @9%
140,000*3.88965 = 544,551
2,000,000*0.64993 = 1,299,860 1,844,411 235,589

Date | Account Name | Debit | Credit | Jan 1, 2011 | Cash – 0.5 pt | 2.080,0001 pt | 2,080,000 | | Bonds payable – 0.5pt | | 1,844,4112 pt | | Contributed surplus – Conversion Rights – 0.5 pt | | 235,5891 pt |

Alternative answer Date | Account Name | Debit | Credit | Jan 1, 2011 | Cash (0.5pt) | 2.080,000(1pt) | 2,080,000 | | Discount on bonds payable (0.25pt) | 155,589(1pt) | | | Bonds payable (0.25pt) | | 2,000,000 (1pt) | | Contributed surplus – Conversion Rights (0.5) | | 235,589 (1pt) |

(b) On January 1, 2012 the company offered \$40,000 to holders of half of the issued bonds to induce an early conversion into common shares. The fair value of the entire bond issue (ignoring the conversion feature) on January 1, 2012 is

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