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Deegan. (2016). Financial Accounting . McGraw-Hill Education, Australia

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Q3_Convertible bonds (Convertible notes)_Amortised cost_Effective interest method
Woodie Ltd issues $5 million in convertible bonds on 1 July 2019. They are issued at their face value
and pay an interest rate of 4 per cent. The interest is paid at the end of each year. The bonds may be
converted to ordinary shares in Woodie Ltd at any time in the next three years. Organisations similar to
Woodie Lid have recently issued similar debt instruments but without the option for conversion to
ordinary shares. These instruments issued by the other entities offer interest at a rate of 6 per cent. On
1 July 2020 all the holders of the convertible notes decide to convert the bonds to shares in Woodie Ltd.
Provide the journal entries to:
(a) record the issue of the securities on 1 July 2019
(b) recognise the interest payment on 30 June 2020, and
(c) recognise the conversion of the bonds to ordinary shares on 1 July 2020
(d) Prepare extracts to show how the convertible notes and the finance charge shuold be treated by
Woodie Ltd in its financial statements for the yeare ended 30 June 2020.
Solutions
2019-07-01
Calculate PV of Liability first (6%, 3 years)
V of Principa
4,198,000
V of Interest per year
534,600
Total PV of liability
$
4,732,600
Principal
$
5,000,000
Equity component
267,400
2019-07-01
Or
Cash at bank
5,000,000
Convertible bonds liability
4,732,600
Equity component
267,400

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Subject: Accounting, Business

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