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Hi, In BPP kit, Question 39, Note 3 – Retained earnings, Area – Convertible bonds, i really don’t understand why the adjustment made on Glove is (2.3 – 1.8), this mean the “Coupon interest paid” is taken as gain on Glove’ P&L?
I thought “Coupon interest paid” should be treated as Dr Loan Cr Cash –> only hit to B/S not to PLThanks.
Question 39, Note (d).
Glove has issued 30,000 convertible bonds with a three year term repayable at par. The bonds were issued at par with a face value of $1,000 per bond. Interest is payable annually in arrears at a nominal interest rate of 6%. Each bond can be converted at any time up to maturity into 300 shares of Glove. The bonds were issued on 1 June 20X6 when the market interest rate for similar debt without the conversion option was 8% per annum. Glove does not wish to account for the bonds at fair value through profit or loss. The interest has been paid and accounted for in the financial statements. The bonds have been included in non current liabilities at their face value of $30 million and no bonds were converted in the current financial year.Answer from Revision Kit calculate:
Effective interest = 2,276
Coupon interest paid = 1,800However, this also include in “Retained earnings” as below
Convertible bonds (2.276 – 1.800)
Thank you for your help.
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