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eg. A co issues 2000 convertible bonds at the start of 20×2. The bonds have 3 year term. And are issued at par with face value $1000 per bond , giving total proceeds of $2,000,000. Interest is payable annually in arrears at a nominal annual interest rate of 6%. Each bond is convertible at any time up to maturity into 250 common shares.
When bonds are issued, the prevailing market interest rate for similar debt without conversion options is 9%. At the issue date, the market price of one common share is $3.
Debt 9%discount
120*0.917+120*0.842+2120*0.772= 1848. Equity= 2000-1848=152
On issue: Dr bank 2000
Cr NCL 1848
Cr Equity- option reserve 152( I understand,but can’t understand the following)
what happen to option( after 3 years)
1. if share price is $3. Redeem the debt. not convert
Dr convertible debt 2000
Cr Bank 2000
Dr option reserve 152
Cr Acc profit 1522. if share price is $5 , convert
Dr convertible debt 2000
Dr option 152
Cr Share capital 2152Can you help me to understand this two options’ double entry?
I mean, if not convert, all paid in cash. why still have dr option reserve, cr acc profit?
if convert, all debt part 1848 also convert to shares?Thank you.
Because we can recognize the maturity of the option reserve by recycling into accumulated profits
Yes, all debt converted into shares
Is that enough for you?
1. why option 2 is not
Dr convertible debt1848
Dr option reserve 152
CR share capital 2000?
why CR share capital 2152
2. and why option 1 not
Dr convertible debt 1848
Dr option reserve 152
CR bank 2000?Because we have unrolled the discounted payments attributable to the bond – we are now showing an obligation of $2,000 and an option reserve of $152, all of which is converted into shares
Again, because in the process of unwinding discount, the obligation is being carried at $2,000
Ok?
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