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Current value of redeemable convertible notes = $1 * 100000= $100,000

Interest on notes payable = 5%

With the market rate of 7% (Wystup, 2007)

Proceeds from the bond issue (A)     $100,000

After issue, the issuer will amortise the bond discount according to the following table:

(p)                   (q)                   (r)                                (s)                    (t)

            Interest                                   Total               Amortization               Bond             Net

            Expense                    Interest             of bond discount        Discount         Liability

                                                 7%*e             (q-r)                            (s-r)                 (150,000-s)

Year 1                                                                                            79501            29,501

Year 2 5,000               6542                           1542                           77959            27,959

Year 3 5,000               12656                         7656                           71845             21,845

Year 4 5,000               23711                         18711                         60790             10790

Year 5 5,000               28074                         23074                         56,427             6427

Year 6 5,000               33377                         28 377                        51124              (1124)

Present value of principal of $100,000 at 7per cent

$100,000/(1.07)^5 = $71, 296 (Ramirez, 2011)

Present value of the interest annuity of $5,000 (= $100,000 × 5per cent) payable at the end of each of five years

PV = C/i × [1 - (1/(1+i)^n)]

Therefore, the present value of the $5,000 interest payments is

($5,000/.07) × [1 – [(1/1.07)^5] = $59,072 (A Guide through International Financial Reporting Standards, 2008)

Present value of interest payment at year 1 = 5,000/1.07     4,673

Present value of interest payment at year 2= 5,000/1.07^2  4,367

Present value of interest payment at year 3= 5,000/1.07^3  4,081

Present value of interest payment at year 4= 5,000/1.07^4  3,814

Present value of interest payment at year 5= 5,000/1.07^5  3,564

Total                                                                                      20499

IAS 32 gives guidance to ascertain whether a financial instrument is a financial equity or liability. Therefore, the financial instrument has to meet one out of the four requirements. Indeed, the convertible bond above is a financial equity because it has the cash flows that are determinable through calculation up to the 5 years on the maturity date (International Accounting Standards Board, 2010). IAS 39 recognises that on issuing convertible financial instruments contains both a liability and an equity component (Butler, 2009). As a result, it is essential to distribute the amount of money from the notes payable between liability and equity component as done below.  The amount of the liability component is $20499, while the share of equity is $79501.  More so, the equity value is the residual amount after maturity (International Accounting Standards Board, 2009).  Even though, the above calculations lack transaction costs it should be allocated equally between the debt component and the equity component under relative fair values.

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