Free Corporate Accounting Essay Sample
Current value of redeemable convertible notes = $1 * 100000= $100,000
Interest on notes payable = 5%
With the market rate of 7%
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
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. IAS 39 recognises that on issuing convertible financial instruments contains both a liability and an equity component. 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. 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.