On 1 July 2021, a company issues 2500 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 $2.5 million. The notes pay interest at 1.5% p.a. annually in arrears. The holder of each note is entitled to convert the note into 100 ordinary shares of the company 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 3% p.a. Hence at the date of issue: 

Present Value of the principal: $2,287,854.15 

Present Value of the interest: $106,072.93 

Total contractual Cash Flows $2,393,927.07 

Required: 

1. Use the residual valuation method to determine the amounts of the financial liability and equity components attributable to the issue of convertible notes.

2. Prepare a schedule to determine the amortised cost of the financial liability up until their repurchase. 

3. Prepare the journal entries for the company to account for the convertible notes for each year ending 30 June as follows: 

i. The journal for the issue of the convertible notes. 

ii. The journals for the interest expense and payment for each of the three years. 

iii. The journal for when the holders do not exercise their option and the note is repaid at the end of its term. 

iv. The journal for when the holders exercise their conversion option at the expiration of the contract term. 

Answer rating: 100% (QA)

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