Use the following information for questions 36-37.
On January 2, 2020, Perseus Corp. issued 10-year convertible bonds at 105. During 2021, all the bonds were converted into common shares having a total value equal to the total face amount of the bonds. At conversion, the market price of Perseus's common shares was 50% above its average carrying value. Perseus adheres to IFRS.
-On conversion, Perseus would credit the Common Shares account with
A) the par value of the bonds plus the balance in the Contributed Surplus account.
B) the carrying value of the bonds plus the balance in the Contributed Surplus account.
C) the carrying value of the bonds minus the balance in the Contributed Surplus account.
D) the market value of the bonds plus the balance in the Contributed Surplus account.

Question

Quizplus · Accepted Answer

When convertible bonds are converted into equity, no cash is exchanged. Instead, the bond liability and any unamortized discount or premium associated with the bond must be removed from the balance sheet and replaced with the corresponding equity account.

Perseus Corp. issued the bonds at a premium (105), so it means that the carrying value of the debt is less than the face amount of the bond. This means that when the bonds are converted into equity, the carrying value of the bonds will be lower than the face amount of the bonds.

The balance in the Contributed Surplus account represents the amount by which the proceeds from the sale of convertible bonds exceeded the par value. Therefore, Contributed Surplus is a component of equity and needs to be credited when the bonds are converted into equity.

As per the information given in the question, the market price of Perseus's common shares was 50% above its average carrying value. It means that the fair value of the shares at the conversion date was higher (50%) than the carrying value of the shares. Therefore, the common share account should be credited with the carrying value of the bonds plus the balance in the Contributed Surplus account.

Use the Following Information for Questions 36-37