[Iggy1985]

I just had a Wiley question where the present value factors were needed but not given. Is this done on the exam? If so I guess I will have to learn the formula instead of tables like I have always done… :/

Simms Corporation reports under IFRS. Simms issued 2,000 $1,000 convertible bonds, with an annual interest rate of 5% when the market was 8%. The bonds are due in 5 years and each $1,000 bond is convertible into 3 shares of common stock. At what amount would Simms record the liability component of the bond?

$ 1,760,431

This answer is correct. Under IFRS, convertible debt must be separated into its debt and equity components. To do this, discount the bond at market interest rates as in US GAAP. The liability component is the discounted amount and the equity component is the residual of the cash received less the discounted amount. Calculations are as follows:

Face amount of the bonds: 2,000 × $1,000 = $2,000,000

Present value of $1 for the principal ($2,000,000 × 0.68058) = $ 1,361,160

Present value of an ordinary annuity for the interest ($100,000 × 3.99271) = $ 399,271

Value of the liability = $ 1,760,431

Value of the equity ($2,000,000 – $1,760,431) = $ 239,569

FAR - 89 (8/19/14) Wiley TB, Wiley Book, Books from School, Ninja Audio/Notes
AUD - 92 (10/14/14) Wiley TB, Wiley Book, Ninja Audio
BEC - 82 (5/8/15) Mostly Ninja MCQ, sprinkles of Becker lectures and Ninja Audio
REG - (8/14/15)

[M.O.D.]

There is a quick way to do this using the calculator:

PV for each year 1 though 5

1/1.08 = .926

/1.08 = .857

/1.08 = .794

/1.08 = .735

/1.08 = .681

Then add the 5 years of factors for 3.993, which is the PV annuity factor for ordinary annuity.

For annuity due

add 1 first and shorten the length:

1 + .926 + .857 + .794 + .735 = 4.312

To calculate FV,

1 x 1.08 instead of dividing

the addition is the same for annuity due:

1.08 + 1.166 + 1.26 + 1.36 + 1.47 = 6.336

For ordinary annuity:

1 + 1.08 + 1.166 + 1.26 + 1.36 = 5.886

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Sarah1421]

Iggy – although there's no way to know for certain what you'll see on your exam, I wouldn't spend any time learning the formula. I would concentrate on knowing which present value/future value factor to use (when several options are given to you) and how to quickly navigate the table.

I'd put money on it. 🙂

FAR - 90
AUD - 91
BEC - 86
REG - 87

[floacct]

I agree with Sara for the most part but you definitely could get a question like that. It's actually not that tough of a formula to memorize if u have the time. 1/1.i to the year (year = power)

[Kimboroni]

I saw these calcs before FAR and decided to prioritize dedicating my memory elsewhere. It worked out okay. I'll look at that again for BEC, though.

AUD 84 (1/9/14-Wiley books/TB + free materials)
FAR 83 (5/21/14-the above + NINJA 10 Pt Combo Lite)
REG 84 (7/9/14-Wiley books/TB + NINJA Audio/FC/Notes)
BEC 76 (10/5/14-Wiley books/TB + NINJA Audio/FC)

Disclaimer: My ninja avatar is not meant to imply that I have any affiliation with this site other than being a forum member. That's a pic of a T-shirt that my daughter gave me for my birthday. 🙂

[Author]

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