Question

cheery Company follows IFRS for its financial reporting. On January 1, 2015 Cheery issued $250 million of 10-year convertible notes that pay interest at 5% annually. Investors pay $250 million for the notes even though the company's credit risk at the time implies a 10% interest rate for traditional debt of similar duration. When the cash flows associated with the debt are discounted at 10%, the resulting value is $175 million.

1. On Cheery's December 31, 2015 income statement how much interest expense will be recorded?
a. $25 million
b. $12.5 million
c. $17.5 million
d. $8.75 million

2. How much cash will Cheery pay for interest during 2015?
a. $25 million
b. $12.5 million
c. $17.5 million
d. $8.75 million

3. When Cheery records interest expense on December 31, 2015 the entry will include a:
a. debit to interest expense for $25 million.
b. credit to convertible notes payable for $12.5 million.
c. debit to convertible notes payable for $17.5 million.
d. credit to convertible notes payables for 5 million.

Answer 1

A

b

c