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


Question Description:

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This case illustrates the accounting for issued convertible debt instruments. Facts 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 (a) Indicate how Entity A should account for the compound instrument on initial recognition. (b) Determine whether the effective interest rate will be higher, lower, or equal to 5%.

Answer

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