Question
On January 1, 2026 Tessford Biomedical issued $500,000 of 3-year, 4% convertible bonds at par. Interest is paid annually on December 31. At maturity each bond can be converted into ordinary shares instead of being repaid. Similar bonds without the conversion option would have required a market rate of 7%.
| Present-value factor at 7%, 3 periods | Factor |
|---|
| Present value of 1 | 0.816298 |
| Present value of an ordinary annuity of 1 | 2.624316 |
Tessford accounts for the bonds under IAS 32 as a compound financial instrument. Round to the nearest dollar.
Required:
- Liability Component — the amount of the bonds recognised as a financial liability.
- Equity Component — the amount recognised in equity for the conversion option.
- Journal Entries — the issue on January 1 and the interest payment on December 31, 2026. Use Cash, Convertible Bonds Payable, Equity Component of Convertible Bonds and Interest Expense.
Statements in this challenge
- Liability ComponentNumeric Answer
- Equity ComponentNumeric Answer
- Journal EntriesJournal Entry
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
How to approach this
IAS 1 — Presentation of Financial Statements
A composite challenge links several statements built from one set of data, so figures flow between them: profit reaches retained earnings, and the closing balances feed the position statement. Complete them in the order the statements depend on each other rather than the order of the tabs.
Common mistakes
- Preparing each statement independently, so the linking figures disagree.
- Carrying a figure forward before finishing the adjustments that change it.
- Reworking a linked figure in one statement without updating it in the others.
Further readingIAS 1: what goes where in a full set of statements