An entity issues 3,000 convertible bonds at the start of year 1 at par. They have a three year term and a face value of $1,000 per bond. Interest is payable annually in arrears at 7% per annum. Each bond is convertible at any time up to maturity into 250 common shares. When the bonds are issued the prevailing market interest rate for similar debt without conversion options is 9%. The relevant discount factors are shown below. Discount factors Year 1Year 2Year 37% 9% 0.993 0.914 0.871 0.837 0.813 0.766 How is this initially recorded between the debt and equity elements? Question 2:An entity issues 3,000 convertible bonds at the start of year 1 at par. They have a three year term and aface value of $1,000 per bond. Interest is payable annually in arrears at 7% per annum. Each bond isconvertible at any time up to maturity into 250 common shares. When the bonds are issued theprevailing market interest rate for similar debt without conversion options is 9%. The relevant discountfactors are shown below.Discount factors7%9%Year 10.9930.914Year 20.8710.837Year 30.8130.766How is this initially recorded between the debt and equity elements?

solution : given : this is a compound financial instrument The convertible bond has to be divided…

Answered: An entity issues 3,000 convertible…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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An entity issues 3,000 convertible bonds at the start of year 1 at par. They have a three year term and a face value of $1,000 per bond. Interest is payable annually in arrears at 7% per annum. Each bond is convertible at any time up to maturity into 250 common shares. When the bonds are issued the prevailing market interest rate for similar debt without conversion options is 9%. The relevant discount factors are shown below. Discount factors Year 1 Year 2 Year 3 7% 9% 0.993 0.914 0.871 0.837 0.813 0.766 How is this initially recorded between the debt and equity elements?