Cheery Company Follows IFRS for Its Financial Reporting

question 16

Multiple Choice

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.
-When Cheery records interest expense on December 31,2015 the entry will include

• A)A debit to interest expense for €25 million.
• B)A credit to convertible notes payable for €12.5 million.
• C)A debit to convertible notes payable for €17.5 million.
• D)A credit to convertible notes payable for €5 million

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Definitions:

Capital Goods

Large, durable goods used in the production of goods and services, such as machinery, buildings, and equipment.

Future Output

The estimated production or services to be provided by an economy, a sector, or a company in the future, often associated with planning and projections.

Consumption Goods

Goods that are used by consumers for personal or household purposes, intended to satisfy human wants or needs directly.

Time Preference

The tendency of individuals to value goods and experiences in the present more than in the future, influencing savings and investment decisions.