Question

In: Accounting

Sampras Ltd issues $20 million of convertible notes on 1 July 2020. The notes have a...

Sampras Ltd issues $20 million of convertible notes on 1 July 2020. The notes have a life of 6 yrs and a face value of $20 each. Annual interest of 5% is payable at the end of each year. The notes were issued at their face value and each note can be converter into one ordinary shares in Sampras Ltd at any time over their lives. Organisations with similar risk profile to Sampras Ltd have issued debt with similar terms but without the option to convert at the rate of 7% per annume

Required

Identify the present value of the notes and calculate the equity component of the convertible notes

Provide Journal entries

a) issue of the convertible notes

b) the first payment of interest

c) the conversion of convertible notes into shares on 30 June 2021

Solutions

Expert Solution

A)Annual Interest= 20,000,000 *5% = 1,000,000

Present value Of Note = [PVA7%,6*Annual interest ]+ [PVF7%,6*Face value]

=[4.76654*1000000]+ [.66634*20,000,000]

= 4766540+ 13326800

= 18,093,340

Equity Component = Issue price - present value of convertible note

               = 20,000,000 - 18,093,340

                = 1,906,660

Date Account title Debit credit
1 July 2020 Cash 20,000,000
Convertible Note Payable 18,093,340
Share premium-Equity conversion 1,906,660
b)30 June 2021 Interest expense (18,093,340*7%) 1,266,534
Convertible Note payable 266,534
Cash 1,000,000
c)30 June 2021 Convertible Note payable 18,359,874
Share premium-Equity conversion 1,906,660
Common stock 20,000,000
Additional paid in capital 266,534

#Interest expense = 18093340*7%=1266533.8   (rounded to 1266534)

#C)Value of Note payable as on 30 June 2021= Issue price + amortization at time of first payment

                            = 18,093,340 +266,534

                            = 18,359,874


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