A company issues 2% convertible bonds at their nominal value of $36,000
The bonds are convertible at any time to maturity into 120 ordinary shares for each $100 of bond. Alternatively the bonds will be redeemed at par after 3 years.
Similar non-convertible bonds would carry an interest rate of 9%.
The present value of $1 payable at the end of each year based on rates of 2% and 9% are as follows :
Discount Factors at :
?Year? 2%? 9%
1?0.98?0.92
2?0.96?0.84
1 ??0.94?0.77
i) What amounts will be shown as the financial liability and as equity when the convertible bonds are issued ?
ii) What amounts will be shown in the income statement and Statement of Financial Position for years 1-3.