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A company issues $20m of 4% convertible loan notes at par on 1 January 2009. The loan notes are redeemable for cash or convertible into equity shares on the basis of 20 shares per $100 of debt at the option of the loan note holder on 31 December 2011. Similar but non-convertible loan notes carry an interest rate of 9%. Required Show how these loan notes should be accounted for in the financial statements at 31 December 2009.
Answer
$ Statement of profit or loss
Finance costs (W2) 1,568
Statement of financial position
Equity – option to convert (W1) 2,576
Non-current liabilities
4% convertible loan notes (W2) 18,192Workings
1) Equity and liability elements $’0003 years interest (20,000 × 4% × 2.53) 2,024
Redemption (20,000 × 0.77) 15,400
Liability element 17,424
Equity element (?) 2,576
Proceeds of loan notes 20,0002) Loan note balance $’000
Liability element (W1) 17,424
Interest for the year at 9% + 1,568
Less interest paid (20,000 × 4%) ( 800)
Carrying value at 31 December 2009 = 18,192I am unable to grab the working 2 in which loan note balance has been calculated …Sir could you brief me upon the same ?
Prepare a schedule of cash flows relating to the loan notes:
(800,000) December 2009
(800,000) December 2010
(20,800,000) December 2011Discounting those values at 9% for 1, 2 and 3 years respectively gives us:
$ 733,945
$ 673,344 and
$16,061,415That adds up to $17,468,704 ( according to your quoted figures, that is $17,424,000 – the difference is their error due to rounding)
If we have a note issued for $20,000,000 and the debt element is $17,468,704 then the equity element must be the difference of $2,531,296
Is that better?
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