Etsy, Inc., provides a technology platform aimed at allowing sellers to turn their creative passions into economic opportunities. Presented below are excerpts from its December 31, 2018 Form 10-K.

Sources of Liquidity

In March 2018, we issued $345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The initial conversion price of the Notes represented a premium of approximately 37.5% over the price of Etsy’s common stock. The net proceeds from the sale of the Notes were $335.0 million after deducting initial purchasers’ discount and offering expenses. As of December 31, 2018, we had not received any conversion notices, and, as such, the Notes are not currently redeemable for cash and are therefore classified as long-term debt.

For more information on the Notes, see “Note 13—Debt” in the Notes to Consolidated Financial Statements.

Note 13—Debt

Convertible Debt

In March 2018, the Company issued $345.0 million aggregate principal amount of 0% Convertible Senior Notes due 2023 (the “Notes”) in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the sale of the Notes were $335.0 million after deducting the initial purchasers’ discount and offering expenses.

The Notes are convertible based upon an initial conversion rate of 27.5691 shares of the Company’s common stock per $1,000 principal amount of Notes (equivalent to an initial conversion price of approximately $36.27 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s common stock. The Company will settle any conversions of the Notes in cash, shares of the Company’s common stock, or a combination thereof, with the form of consideration determined at the Company’s election.

In accounting for the issuance of the Notes, the Company separated the Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, representing the conversion option, which does not meet the criteria for separate accounting as a derivative as it is indexed to the Company’s own stock, was determined by deducting the fair value of the liability component from the par value of the Notes. The difference between the principal amount of the Notes and the liability component represents the debt discount, which is recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. The equity component of the Notes of approximately $72.8 million is included in additional paid-in capital in the Consolidated Balance Sheet and is not remeasured as long as it continues to meet the conditions for equity classification. Transaction costs were allocated to the liability and equity components in the same proportion as the allocation of the proceeds. Transaction costs attributable to the liability component were recorded as a direct deduction from the related debt liability in the Consolidated Balance Sheet and are amortized to interest expense using the effective interest method over the term of the Notes, and transaction costs attributable to the equity component were netted with the equity component in stockholders’ equity.

For all required questions, assume that the notes were issued on March 1, 2018, and that they compound interest annually.

Required:

1. Prepare the journal entry that Etsy, Inc., would have made on March 1, 2018.

2. Compute the effective interest rate that Etsy, Inc., would use for the notes.

3. Prepare the journal entry that Etsy, Inc., would make on December 31, 2018, to record interest expense associated with the notes.