Delta Ltd issues $15 million of convertible notes on 1 July 2020. The notes have a maturity date of 30 June 2024. They are issued at their face value and pay an interest rate of 4 percent per annum. The interest is paid at the end of each financial year (30 June).

The notes may be converted to ordinary shares in Delta Ltd at any time in the next four years.

Organisations of a similar risk profile have recently issued debt with similar terms, without the option for conversion, at a rate of 6 percent per annum.

 
Requirement

   a)        Determine the amount for the liability and equity components of the convertible notes. Use the present value tables in the appendix for your calculations.

   b)        Complete a schedule to determine the amortised cost of the convertible note up until their maturity.

    c)        Prepare the journal entries for Delta Ltd to record the following transactions:

i)        the issue of the convertible notes on 1 July 2020;
ii)        the interest payment and subsequent measurement of convertible notes on 30 June 2021; and
iii)        the redemption of convertible notes assuming there is no conversion at maturity (30 June 2024).

Answer rating: 100% (QA)

a To determine the amount for the liability and equity components of the convertible notes we need to compare the interest rate of the convertible not... View the full answer