Question

Financial Instruments

GP LLC issued 10-year 8% convertible coupon bond (CCB) at par worth 200 million USD with 12% yield. The terms of the convertible bond is that the holder of the bond, on the redemption date, has the option to convert the bond to equity shares at the rate of 100 shares with a nominal value of 20 USD per 1,000 USD debt rather than being repaid in cash. GP LLC accounted for the financial liability arising using amortized cost. The holder of the bond converted the liability into stocks at maturity.

Required: Show relevant calculations/journal entries (initial recognition, subsequent measurement and conversion).

Answer 1

	In the books of GP LLC
On Issue				(in Mn)
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
1	Bank A/c	Dr	200.00
	To 8% Convertible Coupon Bond	Cr		154.80
	To Equity	Cr		45.20
	(Being financial liability and equity component of bond recorded as per IFRS 9)
	Particulars	$ Mn	$ Mn
	Proceeds from issue of bond		200.00
	Present Value of bond at the end of 10 years @ 12%	64.39
	Present Value of interest (16 mn paid annually) @ 12%	90.40
	Total Financial Liability component		154.80
	Residual Equity Component		45.20

Subsequent measurement
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
Year 1 end	Finance Cost A/c	Dr	18.58
	To 8% Convertible Coupon Bond	Cr		18.58
	(Being finance cost recorded)
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
Year 1 end	8% Convertible Coupon Bond	Dr	16.00
	To Bank A/c	Cr		16.00
	(Being finance cost paid)

Every year, same entry shall be repeated till the and at Year 10 end, balance of 8% Convertible Bond shall be $200 mn as per below schedule

Year	Principal (a)	Interest @ 12% (b)	Payment of Interest @ 8% ('c)	Balance (a+b-c)
1	154.80	18.58	16.00	157.37
2	157.37	18.88	16.00	160.26
3	160.26	19.23	16.00	163.49
4	163.49	19.62	16.00	167.11
5	167.11	20.05	16.00	171.16
6	171.16	20.54	16.00	175.70
7	175.70	21.08	16.00	180.79
8	180.79	21.69	16.00	186.48
9	186.48	22.38	16.00	192.86
10	192.86	23.14	16.00	200.00

On Maturity
S No	Particulars	Dr/Cr.	Dr ($)	Cr ($)
Year 10	8% Convertible Coupon Bond	Dr	200.00
	To Equity	Cr		200.00
	(Being bond converted into equity on maturity)