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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