Question

OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans. It is hoping to raise $10 million dollars from a debt issuance. It is considering the following options:

A. Issue 2-year 8% debentures at par on January 1, 2019. Interest payments are made annually at the end of each year. The debenture matures on December 31, 2020.

B. Issue 2-year 4% convertible debentures at par on January 1, 2019. The debentures can be converted into 10 million $1 shares at maturity on December 31, 2020. Interest payments are made annually at the end of each year. Without the conversion feature, the debenture would be priced the same as option A.

Please Show Journal entries and working for option A and B

Answer 1

Part A...

1 Jan 2019 Bank A/c Dr 10000000

8% Debentures A/c Cr 10000000

31 Dec 2019 Interest A/c Dr. 800000

Bank A/c Cr. 800000

31 Dec 2020 Interest A/c Dr. 800000

Bank A/c Cr. 800000

31 Dec 2020 8% Debentures A/c Dr 10000000

Bank A/c Cr 10000000

Part B...

1 Jan 2019 Bank A/c Dr 10000000

4% Convertible Debentures A/c Cr 9286694

Equity Share Premium Cr. 713306

31 Dec 2019 Interest A/c Dr. 742936

4% Convertible Debentures A/c Cr 342936

Bank A/c Cr. 400000

31 Dec 2020 Interest A/c Dr. 770370

4% Convertible Debentures A/c Cr 370370

Bank A/c Cr. 400000

31 Dec 2020 4% Convertible Debentures A/c Dr 10000000

Share Capital A/c Cr 10000000

Working Note 1:

Payout PV Factor PV

400000 0.9259259259 370370.3704

400000 0.8573388203 342935.5281

10000000 0.8573388203 8573388.203

9286694.102

Working Note 2:

PV Effective Interest Actual Payment Balance Interest Year End Balance

9286694 742935.52 400000 342935.52 9629629.52

9629629.52 770370.3616 400000 370370.3616 9999999.882