On 1 January 2011, Childy Bhd issues 5,000,000 redeemable preference shares to Daddy Bhd for a...

 

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On 1 January 2011, Childy Bhd issues 5,000,000 redeemable preference shares to Daddy Bhd for a cash consideration of RM5,000,000 inclusive of transaction costs. The preference shares carry no fixed dividend payment and are redeemable at par value on 1 January 2016. Based on Childy BHd's credit rating, its current interest cost at the time of issue is 8% per annum. On 31 December 2011, it declares a pays a special preference dividend of RM2 per share. Required: Explain how Childy Bhd shall account for: a) b) c) d) its issue of redeemable preference shares, the dividend expense during the tenure of the instrument, the payment of dividend in 2011 and the redemption on maturity. Question 2 At the beginning of year 1, Ebite-L Bhd issued RM10,000,000 convertible unsecured loan stocks (CULS) of RM 1,000 per unit at its nominal value. The loan stocks carry a coupon interest rate of 3% per annum and have a term of five years. Each unit of loan stock is convertible at any time up to maturity into 250 ordinary shares of RM1 each. Loan stocks not converted by that date will be redeemed in cash at their nominal value. On the date of the issue, the prevailing market interest rate for similar risk class loan stocks without the conversion option was 10%. Transaction cost amount to RM500,000. Required: a) Show how the proceeds of the loan stocks shall be allocated to the liability component and the equity component. The effective interest rate is 11.22%. b) Assume that all the loan stocks are converted into ordinary shares at maturity, show the journal entry: required on conversion of the loan stocks at maturity required if the loan stocks are not converted but redeemed at maturity i) ii) On 1 January 2011, Childy Bhd issues 5,000,000 redeemable preference shares to Daddy Bhd for a cash consideration of RM5,000,000 inclusive of transaction costs. The preference shares carry no fixed dividend payment and are redeemable at par value on 1 January 2016. Based on Childy BHd's credit rating, its current interest cost at the time of issue is 8% per annum. On 31 December 2011, it declares a pays a special preference dividend of RM2 per share. Required: Explain how Childy Bhd shall account for: a) b) c) d) its issue of redeemable preference shares, the dividend expense during the tenure of the instrument, the payment of dividend in 2011 and the redemption on maturity. Question 2 At the beginning of year 1, Ebite-L Bhd issued RM10,000,000 convertible unsecured loan stocks (CULS) of RM 1,000 per unit at its nominal value. The loan stocks carry a coupon interest rate of 3% per annum and have a term of five years. Each unit of loan stock is convertible at any time up to maturity into 250 ordinary shares of RM1 each. Loan stocks not converted by that date will be redeemed in cash at their nominal value. On the date of the issue, the prevailing market interest rate for similar risk class loan stocks without the conversion option was 10%. Transaction cost amount to RM500,000. Required: a) Show how the proceeds of the loan stocks shall be allocated to the liability component and the equity component. The effective interest rate is 11.22%. b) Assume that all the loan stocks are converted into ordinary shares at maturity, show the journal entry: required on conversion of the loan stocks at maturity required if the loan stocks are not converted but redeemed at maturity i) ii)

Answer rating: 100% (QA)

For question 1 a the issue of redeemable preference shares Childy Bhd should recognize the preference shares as a liability in the balance sheet and t... View the full answer