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Financial Instruments – Amortised Cost

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Financial Instruments – Amortised Cost

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • April 30, 2019 at 1:11 pm #514593
    gerdella
    Member
    • Topics: 2
    • Replies: 0
    • ☆

    Dear Tutor,

    I would really appreciate your help.

    The question is GG issues a 3% $200,000 two-year convertible bond. The ERI is 8%. The holder has the option to convert the bond to equity shares at the rate of 10 shares with a nominal value of $1 per $100 debt rather than being repaid in cash. Transaction costs have been ignored and the financial liability will be accounted for using amortised cost.

    I had worked out the compounding whereby;
    The FV debt is $182,098
    The FV of equity is $17,902
    With overall proceeds of $200,000

    I struggled with the amortised cost calculation and therefore looked at the mark scheme but, I still am struggling.

    Opening … Fin Cost… Cash … Closing Bal.
    Year 1 … $182,098 … $14,568 … ($6000) … $190,666
    Year 2 … $190,666 … $15,334 … ($6000) … $200,000

    I don’t understand how the $15,334 was calculated? As 6% of $190,666 is $15,253.

    Also, in the mark scheme it says that the bond holder can have 20,000 $1 ordinary shares at nominal value with a share premium of $180,000. Could you please explain how these figures were found, especially the share premium part?

    Thank you so much.

    April 30, 2019 at 8:47 pm #514639
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7171
    • ☆☆☆☆☆

    Hi,

    I think the finance cost is incorrect, as it should be the $15,253 as you correctly state. We apply the effective rate of interest (8%) to the outstanding liability ($190,666).

    The shares come from $200,000/$100 x 10 shares = 20,000 shares at $1 par, giving $20,000, and as the debt was issued at $200,000 then there would be $180,000 of share premium (200,000 – 20,000).

    Hope that clears it up.

    Thanks

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