Question: On 1 July 2020, David Ltd issues 2,000 convertible notes. The notes have a three-year term and are issued at par with a face value

On 1 July 2020, David Ltd issues 2,000 convertible notes. The notes have a three-year term and are issued at par with a face value of $1,000 per note, giving total proceeds at the date of issue of $2 million. The notes pay interest at 5% p.a. annually in arrears. The holder of each note is entitled to convert the note into 300 ordinary shares of David Ltd at contract maturity. When the notes are issued, the prevailing market interest rate for similar debt (similar term, similar credit status of issuer and similar cash flows) without conversion options is 8% per annum.

Required

a) Prepare an effective interest schedule and distinguish between the allocation of interest payments and interest expense for each reporting period during the term of the note issue. (4 marks)

b) Prepare the journal entries of David Ltd to account for the convertible notes for each year ending 30 June under the following circumstances. (7 marks)

The holders exercise their conversion option at the expiration of the contract term.

Present value of $1 annuity over 3 years at 8% per annum	2.577097
Present value of $1 lump sum in 3 years at 8% per annum	0.793832

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

On 1 July 2021 Kellogs Ltd issued 2 000 convertible notes. The notes were issued at a fair value of $1 000 per note resulting in total proceeds at the date of issue of $2 million. The convertible...

On 1 July 2020, Sundae Ltd issues 5,000 convertible notes. The notes have a three- year term and are issued at par with a face value of $1,000 per note, giving total proceeds at the date of issue of...

1. On 1 July 2020, Drake Ltd issues 4,000 convertible notes. The notes have a three-year term and are issued at par with a face value of $1,000 per note, giving total proceeds at the date of issue of...

1.During the year ended 30 June 2020 the Badani Mining Company acquired two areas Wyong and Mulgrave and has spent the past year undertaking exploration and evaluation activities in these three areas...

1.During the year ended 30 June 2020 the Badani Mining Company acquired two areas Wyong and Mulgrave and has spent the past year undertaking exploration and evaluation activities in these three...

On 1 July 2020, Sundae Ltd issues 5,000 convertible notes. The notes have a three-year term and are issued at par with a face value of $1,000 per note, giving total proceeds at the date of issue of...

On 1 July 2020, Royal Ltd issues 3000 convertible notes. The notes have a three-year term and are issued at par with a face value of $1000 per note, giving total proceeds at the date of issue of $3...

On 1 July 2020, Kitshoff Ltd issues 5,000 convertible notes. The notes have a three-year term and are issued at par with a face value of $4,000 per note, giving total proceeds at the date of issue of...

On 1 July 2020, Decker Ltd issues 3,000 convertible notes. The notes have a three-year term and are issued at par with a face value of $1,000 per note, giving total proceeds at the date of issue of...

In the late 1800s "wildcat banks," which were easy to charter and largely unregulated, sprang up across the American West. Some new banks chose to operate out of simple and inexpensive wooden...

Your observations of the bond market have highlighted the following bond prices, as shown in the table below. All the bonds have $1000 face value, pay coupons annually and all have the same calendar...

Provide an example of when a rollover of a QRP to an IRA would be a good idea and also when it would be detrimental?

The first scenario will be a Verbal Judo scenario in which your scenario follows the standard Verbal Judo interaction: You need to ask somebody to modify their behavior either to do something or to...

understand the issues relating to equality of opportunity in the workplace

explain the practical implications of the equality legislation with regard to recruitment and selection.

4. What are the pros and cons for zero hours contracts for employees? Do you agree with certain commentators who believe they should be made illegal?