Question

world Alcom issued 1 million convertible bonds on 1 June x6. The bonds ad a term of three years and were issued with a total fair value of RM200 million which is also the par value. Interest was paid annually in arrears a rate of 6 % per annum . Bonds without the conversion option , attracted an interest rate of 9 % per annum on 1 June x6 . The company incurred issue costs of RM2 million. If the investor did not convert the shares they would have been redeemed at par. At maturity, all the bonds were converted into 50 million ordinary shares of RM1 of World Alcom. No bonds could be converted before that date.

The directors are uncertain how the bonds should have been accounted for up to the date of the conversion on 31 May x9 and have been told that the impact of the issue costs is to increase the effective interest rate of 9.38 % .

Required: Discuss, with relevant computations, how the above should be accounted for in the financial statements for the year ended 31 May x9

Answer 1

In the books of World Alcom
Journal
DATE	PARTICULARS	L.F.	DR. (RM)	CR (RM)
01/06/XX6	Bank A/c ----------DR		200,000,000.00	-
	To Convertible Bonds A/c		-	200,000,000.00
	(Being 1million,6% convertible Bonds issued.)
01/06/XX6	Bond issue Epenses A/c -------Dr		2,000,000.00	-
	To Bank A/c		-	2,000,000.00
	(Being bonds issue expenses are incrred)
31/05/XX7	Interest On Bonds A/C-----------Dr.		12,000,000.00	-
	To Bond holders A/c		-	12,000,000.00
	(Being interest accrued)
31/05/XX8	Interest On Bonds A/C-----------Dr.		12,000,000.00	-
	To Bond holders A/c		-	12,000,000.00
	(Being interest accrued)
31/05/XX9	Interest On Bonds A/C-----------Dr.		12,000,000.00	-
	To Bond holders A/c		-	12,000,000.00
	(Being interest accrued)
31/05/XX9	Convertible Bonds A/c -----------Dr		200,000,000.00	-
	To Bond holders A/c		-	200,000,000.00
	(Being Bond transferred to Debentureholders A/c)
31/05/XX9	Bond holders A/c ----------------Dr		236,000,000.00	-
	To Equity Shares A/c		-	50,000,000.00
	To Premium On Shares A/c		-	186,000,000.00
	(Being Bonds Converted into 50 millon ordinary shares of Rm 1 each)
Note: shares have been converted into 50 million shares of RM 1