On 1 July 2021, a company issues 2500 convertible notes. The notes have a three-year term and are issued at par with a face value of $1000 per note, giving total proceeds at the date of issue of $2.5 million. The notes pay interest at 1.5% p.a. annually in arrears. The holder of each note is entitled to convert the note into 100 ordinary shares of the company at contract maturity. When the notes are issued, the prevailing market interest rate for similar debt (similar term, similar credit status of issuer and similar cash flows) without conversion options is 3% p.a. Hence at the date of issue: Present Value of the principal: $2,287,854.15 Present Value of the interest: $106,072.93 Total contractual Cash Flows $2,393,927.07 Required: Prepare the journal entries for the company to account for the convertible notes for each year ending 30 June as follows: The journal for when the holders exercise their conversion option at the expiration of the contract term. The journals for the interest expense and payment for each of the three years. The journal for when the holders do not exercise their option and the note is repaid at the end of its term.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
On 1 July 2021, a company issues 2500 convertible notes. The notes have a three-year term and are issued at par with a face value of $1000 per note, giving total proceeds at the date of issue of $2.5 million.
The notes pay interest at 1.5% p.a. annually in arrears. The holder of each note is entitled to convert the note into 100 ordinary shares of the company at contract maturity.
When the notes are issued, the prevailing market interest rate for similar debt (similar term, similar credit status of issuer and similar
|
Present Value of the principal: |
$2,287,854.15 |
|
Present Value of the interest: |
$106,072.93 |
|
Total contractual Cash Flows |
$2,393,927.07 |
Required:
Prepare the
- The journal for when the holders exercise their conversion option at the expiration of the contract term.
- The journals for the interest expense and payment for each of the three years.
- The journal for when the holders do not exercise their option and the note is repaid at the end of its term.
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