Question

Jabieb corporation issued 3,000 convertible bonds on January 1, 2018. The bonds have a 3-year life and are issued at par with a face value of $1,000 per bond, giving total proceedings of $3,000,000. Interest is payable annually at 6%. Each bond is convertible into 200 ordinary shares (par value $1). The market rate of interest on similar non-convertible debt is 8%

a) Compute the liability and equity component of the convertible bond on January 1, 2018. (5 marks)

b) Assume the bond is converted on January 1, 2019, compute the carrying value of the bond payable on

January 1 2019. (2 marks)

c) Prepare the journal entry to record the conversion on January 1, 2019. (4 marks).

d) Assume that the bonds were repurchased on January 1, 2019 for $2,900,000 cash instead of being

converted. The net present value of the bonds on January 1, 2019 is $2,850,000. Prepare the journal entry

to show the repurchase on January 1, 2019. (4 marks)

Josh Company had 200,000 ordinary shares outstanding on December 31, 2017. The company issued 20,000 shares on April 1, 2018 and retired 10,000 shares on September 1, 2018. Josh company recorded net income for the year ended December 31, 2018 of $300,000 after a loss on discontinued operations of $35,000 (net of tax). (5 marks)

Answer 1

a) Liability Portion

The Liability portion will be calculated as follows -

Year	Date	Type of Cashflow	Cashflow	Present Value Factor @8%	Present Value
1	31/12/2018	Coupon	180,000	0.9259	166,662
2	31/12/2019	Coupon	180,000	0.8573	154,314
3	31/12/2020	Coupon	180,000	0.7938	142,884
4	31/12/2020	Principal Repayment	3,000,000	0.7938	1,890,432.1
				Total	2,354,292.10

Equity portion

The value of the equity portion will the difference between the total proceeds received from the bonds and the present value (liability portion).

Therefore, the equity portion will be -

Equity portion = Total proceeds- Present Value of Bond

= 3,000,000 - 2,354,292.10

= 645,707.90

b) Now, we will calculate the carrying value of bond

Value of liability at end of year = Value of Liability at the start of year + Effective Interest- Actual Interest

The carrying value as on 01/01/2019 will be $2,362,635.47

Year	Date	Present Value of liability	Interest Calculation	Effective Interest	Actual Interest Payment	Value of Liability at end of year
1	31/12/2018	2,354,292.10	2,354,292.10*.08	1,88,343,37	1,80,000	2,362,635.47

c) The carrying value of liability on date of conversion is $2,362,635.47. Here, the share premium-equity Conversion A/c will need to be reversed

01/01/2019 Convertible Bonds A/c Dr. 2,362,635.47

Share Premium- Equity Conversion A/c Dr. 645,707.90

Equity Share Capital A/c Cr. 3,000,000

Share Premium A/c Cr.    8,343,37

(Being 6,00,000 shares of face value $1 issued against

convertible bonds)

d)The journal entry will be as follows -

01/01/2019 Convertible Bonds A/c Dr. 2,362,635.47

Loss on Repurchase of Bonds A/c Dr.    537,364.53

Share Premium- Equity Conversion Cr. 50,000.00

Cash A/c Cr. 2,850,000.00

(Being shares repurchased @ 2,850,000)