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How entity a should account for the compound instrument

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Reference no: EM133009497

On October 31, 20X5, Entity A issues convertible bonds with a maturity of five years. The issue is for a total of 1,000 convertible bonds. Each bond has a par value of $100,000, a stated interest rate is 5% per year, and is convertible into 5,000 ordinary shares of Entity A. The convertible bonds are issued at par.

  • The per-share price for an Entity A share is $15. Quotes for similar bonds issued by Entity A without a conversion option (i.e., bonds with similar principal and interest cash flows) suggest that they can be sold for $90,000.

Required

Problem (a) Indicate how Entity A should account for the compound instrument on initial recognition.

Problem (b) Determine whether the effective interest rate will be higher, lower, or equal to 5%.

Reference no: EM133009497

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