Section B: Application $(30$ marks$)$

$5.$ A company issues $$20$ million of $4\%$ convertible loan notes at par on $1$ January $2009.$ The loan notes are redeemable for cash or convertible into equity shares on the basis of $20$ shares per $$100$ of debt at the option of the loan note holder on $31$ December $2011.$ Similar but non$-$convertible loan notes carry an interest rate of $9\%.$

a$.$ Calculate the initial recognition of the liability component of the loan note using the information provided.

$(10$ marks$)$

b$.$ Determine the equity component of the loan note at initial recognition.

$(5$ marks$)$

$6.$ The carrying value of the loan note at $31$ December $2009$ is to be determined.

a$.$ Calculate the carrying value of the liability at $31$ December $2009.$ Show all workings.

$(10$ marks$)$

b$.$ Discuss the impact on the financial statements if the loan notes are incorrectly classified as equity instead of a financial liability.

$(5$ marks