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In an attempt to raise extra finance, Phoenix Stone issued the following financial instruments during the year ended 31 December 20X1:
On 1 January 20X1, it issued a debt instrument with a nominal value of $1m and a coupon rate of interest of 2% for $950,000. This will be redeemed on 31 December 20X2 at a premium of 10.75% above nominal value. The effective rate of interest is 10%.
*Would you debit the interest effected in the p/l and the debt within the statment of financial position? bearing in mind you have to account for the months. And as the question is asking for year ending December 20×1- will you only do the 12 months from jan to december or would you take into account the 10.75% redemption in december 20×2 also?
On 31 December 20X1, it issued 100,000 $10 6% convertible bonds at par. Interest is paid annually in arrears. These bonds will be redeemed at par for cash on 31 December 20X4, or are convertible into 50,000 ordinary shares. The interest rate on similar debt without a conversion option is 10%
‘I am really confused to how you will account for the above as it takes into account 20×4 also?
Question: ‘ Discuss how the above financial issues should be accounted for in the financial statements of Phoenix Stone for the year ended 31 December 20X1.’
Is this a past exam question? If so, please give me a reference.
The second one is a mixed instrument and we need to calculate the present value of the debt element.
Then, by deduction, we can find the equity element
The first one is a common situation (in exams)
Calculate the true interest expense, compare that value with the interest paid and take the excess of one over the other to dr finance charges and cr the debt
Ok?
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