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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Convertible debts
Dear Sir,
I have a question in ACCA Study Hub
On 1 January 20X2 LMN issued $2m 8% convertible debt at par. The debt is repayable, or convertible, at a premium of 20% four years after issue. The effective interest rate for the debt is 12%.
What is the finance charge to LMN’s profit or loss (to the nearest $000) for the year ended 31 December 20X3? (Answer to nearest $000 in the Answer box)
The answer is: 250000. The working is:
Year Opening balance Effective interest (at 12%) Interest paid (at 8%) Closing balance
$000 $000 $000 $000
20X2 2,000 240 (160) 2,080
20X3 2,080 250 (160) 2,170
I want to ask why the answer do not separate the equity and liability component since the debt is “convertible”?
Thank you Sir!
Hi,
Yes, we should be using split accounting first before treating the liability component at amortised cost.
Thanks