HSBC issued 5,000,000 of loan stock at par on 1st January 2019. The nominal annual interest rate

Fantastic news! We've Found the answer you've been seeking!

Question:

HSBC issued £5,000,000 of loan stock at par on 1st January 2019. The nominal annual interest rate of 6%. Interest is payable in on 31 December each year and the loan stock has a three-year term. Each £4,000 loan stock can be converted at any time up to maturity for 1200 of £1 ordinary shares. If the conversion option is not taken up, they will be redeemed at par. The prevailing market interest rate for similar debt without conversion options is 9%. The company prepares financial statement to 31 December each year.

Required:
i. Calculate the separate components of the financial instrument on initial recognition;
ii. Prepare an amortised cost table for the life of the financial liability;
iii. Prepare the ledger account for the financial liability;
iv. Prepare the relevant financial statement extracts for years 2019, and 2020;
v. Prepare the accounting entries on redemption if (a) the conversion is taken up; (b) the conversion option is not taken up.