Barclays issued £2,500,000 of bond at par on 1st January 2020. The nominal annual interest rate of 4%. Interest is payable in on 31 December each year and the bond has a three-year term. Each £3,000 loan stock can be converted at any time up to maturity for 1500 of £1 ordinary shares. If the conversion option is not taken up, they will be redeemed at par. The prevailing market interest rate for similar debt without conversion options is 7%. The company prepares financial statement to 31 December each year. Required: i. Calculate the separate components of the financial instrument on initial recognition; ii. Prepare an amortised cost table for the life of the financial liability; iii. Prepare the ledger account for the financial liability; iv. Prepare the relevant financial statement extracts for the years 2020, and 2021; v. Prepare the accounting entries on redemption if (a) the conversion is taken up; (b) the conversion option is not taken up.
Barclays issued £2,500,000 of bond at par on 1st January 2020. The nominal annual interest rate of 4%. Interest is payable in on 31 December each year and the bond has a three-year term. Each £3,000 loan stock can be converted at any time up to maturity for 1500 of £1 ordinary shares. If the conversion option is not taken up, they will be redeemed at par. The prevailing market interest rate for similar debt without conversion options is 7%. The company prepares financial statement to 31 December each year. Required: i. Calculate the separate components of the financial instrument on initial recognition; ii. Prepare an amortised cost table for the life of the financial liability; iii. Prepare the ledger account for the financial liability; iv. Prepare the relevant financial statement extracts for the years 2020, and 2021; v. Prepare the accounting entries on redemption if (a) the conversion is taken up; (b) the conversion option is not taken up.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
Question
Barclays issued £2,500,000 of bond at par on 1st January 2020. The nominal annual interest rate of 4%. Interest is payable in on 31 December each year and the bond has a three-year term. Each £3,000 loan stock can be converted at any time up to maturity for 1500 of £1 ordinary shares. If the conversion option is not taken up, they will be redeemed at par. The prevailing market interest rate for similar debt without conversion options is 7%. The company prepares financial statement to 31 December each year.
Required:
i. Calculate the separate components of the financial instrument on initial recognition;
ii. Prepare an amortised cost table for the life of the financial liability;
iii. Prepare the ledger account for the financial liability;
iv. Prepare the relevant financial statement extracts for the years 2020, and 2021;
v. Prepare the accounting entries on redemption if (a) the conversion is taken up; (b) the conversion option is not taken up.
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Step 1: Define Financial Liability
VIEWStep 2: Components of the financial instrument on initial recognition
VIEWStep 3: Amortised cost table
VIEWStep 4: Ledger account for the financial liability
VIEWStep 5: Financial statement extracts for the years 2020, and 2021
VIEWStep 6: Accounting entries on redemption
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