Final answer:
Statement a) is incorrect because under IFRS, the bond payable should be recorded at par value, with the premium treated separately. Statement c) is also incorrect as no equity component is recorded for the premium; it is recorded as a liability under both IFRS and US GAAP.
Step-by-step explanation:
The question revolves around the accounting treatment for bond issuance under IFRS and US GAAP, particularly when a premium is paid over the par value. Regarding the statements provided in the question:
- Under IFRS, the company should record a bond payable of $100,000 (the par value), not $103,000. Any premium paid over par (in this case, the $3,000) would be recorded as a separate liability that is amortized over the life of the bond. So, statement a) is incorrect.
- Under US GAAP, the company indeed records the bond payable at the par value ($100,000), and the premium (here, $3,000) is also recorded separately and amortized. Thus, statement b) is correct.
- Statement c) is also incorrect because the premium should be recorded as a liability under both IFRS and US GAAP, not as an equity component. Therefore, there is no $3,000 equity component to record in this situation.
In the market, the price of bonds fluctuates with changes in interest rates. If the bond's coupon rate is less than the market interest rate, the price of the bond will decrease to yield a return that aligns with the market rate. For example, if a bond promises a payment of $1,080 in one year and market interest rates are 12%, investors could find an alternative investment that turns $964 into $1,080 in one year, based on the equation "$964 (1 + 0.12) = $1,080". Therefore, the price paid for the bond would not exceed $964. This illustrates how bond pricing responds to market conditions and investor expectations.