Question: Company A issues 2000 convertible notes on 1 July 2015. The notes have a three-year term and are issued at par with a face value of $1 000 per note, giving total proceeds at the date of issue of $2 000 000. The notes pay interest at 6% annually in arrears. The holder of each note is entitled to convert the note into 250 ordinary shares of Company A at any time up to maturity. When the notes are issued, the prevailing market interest rate for similar debt (similar term, credit status of issuer and cash flows) without conversion option is 9%. This rate is higher than the convertible note's rate because the holder of the convertible note is prepared to accept a lower interest rate given the implicit value of its conversion option. Note: To answer, use either the following formulas or the appropriate rates given below: Present Value: 1/(1+ k)n Annuity Value: 1-1/(1+ k)n k Present value of $1 at 6% and 3-year period is 0.8396191; at 9% and 3-year period is 0.7721832. Present value of an annuity of $1 at 6% and 3-year period is 2.6730150; at 9% and 3-year period is 2.5312977. Required: Prepare journal entries for each of the following - (a) Recording the issue of the securities on 1 July 2015. (b) Recognise the interest payment for 3 years. (3 marks) (12 marks)
Question: Company A issues 2000 convertible notes on 1 July 2015. The notes have a three-year term and are issued at par with a face value of $1 000 per note, giving total proceeds at the date of issue of $2 000 000. The notes pay interest at 6% annually in arrears. The holder of each note is entitled to convert the note into 250 ordinary shares of Company A at any time up to maturity. When the notes are issued, the prevailing market interest rate for similar debt (similar term, credit status of issuer and cash flows) without conversion option is 9%. This rate is higher than the convertible note's rate because the holder of the convertible note is prepared to accept a lower interest rate given the implicit value of its conversion option. Note: To answer, use either the following formulas or the appropriate rates given below: Present Value: 1/(1+ k)n Annuity Value: 1-1/(1+ k)n k Present value of $1 at 6% and 3-year period is 0.8396191; at 9% and 3-year period is 0.7721832. Present value of an annuity of $1 at 6% and 3-year period is 2.6730150; at 9% and 3-year period is 2.5312977. Required: Prepare journal entries for each of the following - (a) Recording the issue of the securities on 1 July 2015. (b) Recognise the interest payment for 3 years. (3 marks) (12 marks)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Question:
Company A issues 2000 convertible notes on 1 July 2015. The notes have a three-year term
and are issued at par with a face value of $1 000 per note, giving total proceeds at the date of
issue of $2 000 000. The notes pay interest at 6% annually in arrears. The holder of each note
is entitled to convert the note into 250 ordinary shares of Company A at any time up to maturity.
When the notes are issued, the prevailing market interest rate for similar debt (similar term,
credit status of issuer and cash flows) without conversion option is 9%. This rate is higher than
the convertible note's rate because the holder of the convertible note is prepared to accept a
lower interest rate given the implicit value of its conversion option.
Note: To answer, use either the following formulas or the appropriate rates given below:
Present Value:
1/(1+ k)n
Annuity Value: 1-1/(1+ k)n
k
Present value of $1 at 6% and 3-year period is 0.8396191; at 9% and 3-year period is
0.7721832. Present value of an annuity of $1 at 6% and 3-year period is 2.6730150; at
9% and 3-year period is 2.5312977.
Required:
Prepare journal entries for each of the following -
(a) Recording the issue of the securities on 1 July 2015.
(b) Recognise the interest payment for 3 years.
(3 marks)
(12 marks)
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