On January 1, 2013, Garner issued 10-year, $200,000 face value, 6% bonds at par.

Question

On January 1, 2013, Garner issued 10-year, $200,000 face value, 6% bonds at par. Each $1,000 bond is convertible into 30 shares of Garner $2 par value common stock. The company has had 10,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2014. (Ignore all tax effects.)

~~PLEASE ANSWER THE 2 QUESTIONS BELOW COMPLETELY, THANK YOU~~

1 - Show how Garner will report income and EPS for 2014 and 2013. Briefly discuss the importance of GAAP for EPS to analysts evaluating companies based on price-earnings ratios. Consider comparisons for a company over time, as well as comparisons between companies at a point in time.

2 - In order to converge GAAP and IFRS, the FASB is considering whether the equity element of a convertible bond should be reported as equity. Describe how the journal entry you made in part (a) above would differ under IFRS. In terms of the accounting principles discussed in Chapter 2, what does IFRS for convertible debt accomplish that GAAP potentially sacrifices? What does GAAP for convertible debt accomplish that IFRS potentially sacrifices?

Explanation / Answer

1. Income statement

revenue

less: cost

Earning before interest and tax

less:interest on Bond($200000*6%)

Earning before tax

less: tax

Net Profit

EPS = net profit / 10000 share

= earning per share

Note:- Bonds are not converted into shares, that why interest on debt is still charged on income statement

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