Grommett Ltd issues $10 million of convertible bonds on 1 July 2022. The bonds have a life of four years and a face value of $10.00 each, and they offer interest, payable at the end of each financial year, at a rate of 6 per cent per annum. The bonds are issued at their face value and each bond can be converted into one ordinary share in Grommett Ltd at any time in the next four years. Organisations of a similar risk profile have recently issued debt with similar terms, without the option for conversion, at a rate of 8 per cent per annum. REQUIRED a) Identify the present value of the bonds and, allocating the difference between the present value and the issue price to the equity component, provide the appropriate accounting entries. b) Calculate the stream of interest expenses across the four years of the life of the bonds. c) Provide the accounting entries if the holders of the options elect to convert the options to ordinary shares at the end of the third year of the bonds.
Grommett Ltd issues $10 million of convertible bonds on 1 July 2022. The bonds have a life of four years and a face value of $10.00 each, and they offer interest, payable at the end of each financial year, at a rate of 6 per cent per annum. The bonds are issued at their face value and each bond can be converted into one ordinary share in Grommett Ltd at any time in the next four years. Organisations of a similar risk profile have recently issued debt with similar terms, without the option for conversion, at a rate of 8 per cent per annum. REQUIRED a) Identify the present value of the bonds and, allocating the difference between the present value and the issue price to the equity component, provide the appropriate accounting entries. b) Calculate the stream of interest expenses across the four years of the life of the bonds. c) Provide the accounting entries if the holders of the options elect to convert the options to ordinary shares at the end of the third year of the bonds.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Don't use Ai.
Answer with explanation.
Transcribed Image Text:Grommett
Ltd issues $10 million of convertible bonds on 1
July 2022. The bonds have
a life of four years and a face value of $10.00
each, and they offer interest, payable at
the end of each financial year, at a rate of 6 per
cent per annum.
The bonds are issued at their face value and
each bond can be converted into one
ordinary share in Grommett Ltd at any time in
the next four years.
Organisations of a similar risk profile have
recently issued debt with similar terms,
without the option for conversion, at a rate of 8
per cent per annum.
REQUIRED
a)
Identify the present value of the bonds and,
allocating the difference
between the present value and the issue price to
the equity component,
provide the appropriate accounting entries.
b)
Calculate the stream of interest expenses across
the four years of the life of
the bonds.
c)
Provide the accounting entries if the holders of
the options elect to convert
the options to ordinary shares at the end of the
third year of the bonds.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education