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Hi, this question is part of a question in section C which i am getting confused with..
In the SFP for YE 30 June X8 the converible shares stand at 5m.
Duggan Co issued $5m 6% convertible loan notes on 1 July 20X7. Interest is payable annually in arrears. These bonds can be converted into one share for every $2 on 30 June 20X9. Similar loan notes, without conversion rights, incur interest at 8%. Duggan Co recorded the full amount in liabilities and has recorded the annual payment made on 30 June 20X8 of $0·3m in finance costs.
Relevant discount rates are as follows:
Present value of $1 in: 6% 8%
1 year 0·943 0·926
2 years 0·890 0·857My answer.. (end the YE June x8)
Interest (5m x 6% x 0.926) = 277,800
Liability element (5m x 0.926) = 4,630,000
Equity (Balancing Figure) = 92,200
Proceeds of loan notes = 5,000,000The books answer..
Year ended 30 June 20X8 300 0·926 278
Year ended 30 June 20X9 5,300 0·857 4,542
Liability element 4,820
The equity element is therefore $180,000, to be shown in the statement of changes in equity.
Interest needs to be applied to the liability element. $4,820 x 8% = $386,000. As $300,000 has been recorded, an
adjustment of $86,000 is required.Can you please tell me where i am going wrong? sorry.
Hi,
Yes, you have only discounted one year of interest and not the two, and also your liability has been discounted by the wrong discount factor. You have used the one year one at 0.926 and not the two year one at 0.857.
Try making the changes and see if you get the same answer, you should do.
Thanks
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