Question

How should I record the journal entries for convertible bonds at time of issuance? Specifically that separation of debt and equity accounts

Answer 1

Sometimes a company issued bond to the inventor in which it gives an option to them to get the bond converted into equity

the instruments total proceeds will be divided into 2 parts:

a)liability component

b)equity component

the liability component which is the bond is to be valued first.it is the fair value of future cash outflows.the equity component is the option premium is the balancing figure

let us look at one example:

suppose A ltd issues 3000000 6% convertible bonds face value $100. duration 4 years

these are to be redeemed at a premium of 10% or converted into equity shares at the option of bondholders

the interest for equivalent non convertible bonds is 10%

so we have
present value of principal payable after 4 years	2244000
(3000000*1.1*0.68(PV factor at 10%))
present value of interest	570600
(3000000*6%*3.17 (PVAIF i=10%,n=4)
value of debt component	2814600
proceeds of the issue	3000000
value of equity component	185400

Journal entry will be

Cash	3000000
convertible bonds payable		2814600
Equity-conversion option		185400