QUESTION FIVE

$(20$ MARKS$)$

a$)$ Mazda limited$,$ issued a $16\%,3$ years, Sh $100,000$ on Jan $1$ st$,2015,$ to finance expansion of head office. The bonds pay interest on yearly basis on $31$st December of each year. The market yield rate was $20\%.$ The company complies with accounting standards related to financial assets and liabilities.

Required.

$($i$)$ Compute the price of the bond at the date of issue

$(3$ marks$)$

$($ii$)$ Prepare the bond amortization schedule

$(4$ marks$)$

$($iii$)$Present extracts of financial statements relating to the issue of bond as of $31$st December $2015$

$(3$ marks$)$

b$)$ A company issues Ksh $200,000$ of $4\%$ convertible loan notes at par on $1^{st}$ Jan $2017.$ The loan notes are redeemable for cash or convertible into equity shares on the basis of $10$ shares per Ksh $50$ of debt at the option of the loan note holder on ${31}^{st}$ December $2019.$ Similar but nonconvertible loan notes carry an interest rate of $9\%.$

Required: Compute the liability and equity value, and show how these loan notes should be accounted for in the FS as at ${31}^{st}$ December $2017$

$(5$ marks$)$