Question 1 - Compound Instruments (10 Marks)

Transformational Airlines issued several convertible bonds with a face value of $1,000 each on January 1, 2021. Each bond is convertible into a specified number of common shares. The bonds pay interest on January 1 and July 1 of each year. On July 2, 2022, some of the bondholders decided to exercise the conversion privilege. Other information regarding the bonds follows:

Par value of convertible bonds issued $ 5,181,000

Price at which convertible bonds issued 102

Bond coupon rate 5%

Similar bonds without the conversion privilege would

have been issued at the following price: 97

Number of bondholders who converted their

bonds to common shares on July 2, 2022: 1295

Unamortized bond discount on July 2, 2022, 51,810

The market price of convertible bonds on July 2, 2022, 103

No other bondholders converted their bonds to common shares prior to July 2, 2022. Transformational Airlines follows IFRS.

Required:

1. the journal entry for the issuance of the bonds on January 1, 2021. (2.5 marks)

2. the journal entry for the conversion of the bonds on July 2, 2022. (5.5 marks)

3. . Assume that Transformational Airlines follows ASPE. Identify the 2 methods that can be used to account for the issuance of the bonds on January 1, 2021, and prepare the journal entry required for each method. (2 marks)