Convertible loan

Yes, the coupon rate (the rate shown on the loan note) says that interest will be paid at the rate of 5% on the face value of the loan. In the example you quote, $1,000 is the amount which will be paid each year. In the question from which you quote, that $1,000 is shown in the debit side of the trial balance given in the question.

Still from that example, the convertible loan had the option to convert into equity shares at the end of the loan period and that option is worth value. It’s a compound instrument (or a mixed instrument). We need to find the present value of the payments associated with the loan and then, by deducting that present value from the face value, we arrive at the Equity Option value (in the question, that equity option value is given as $2,000)

So really the loan of $20,000 comprises two elements – the loan element and the equity option element – respectively $18,000 and $2,000

The effective rate of interest is the rate which needs to be applied to determine the finance charge for the year associated with servicing that loan. Again, in the example, it’s 8% of the value of the loan brought forward from the previous year – given in the question trial balance as $18,440. So this year, 8% x $18,440 = 1,475.20 ( forget the 20 cents) $1,475 is the finance charge associated with the servicing of the loan and, of this expense, $1,000 has been paid (5% x face value of $20,000)

That means that $475 has NOT been reflected anywhere and needs to be added to the long term liability so the loan figure on the Statement of Financial Position should now be shown as $18,440 + $475 = $18,915

To arrive at this desired position, the journal entry necessary to leave us correctly reflecting the expanse and the liability is therefore: Dr Finance Charges $475
Cr Loan $475

and the figures then become Statement of Income $1,475 and
Statement of Financial Position $18,915

Is that ok?