Ishmail Co Bpp essential reading

Dear Tutor

Please explain the following example.

Ishmail Co issues $20m of 4% convertible loan notes at par on 1 January 20×7. The loan notes are redeemable for cash or convertible into equity shares on the basis of 20 shares per $100 of debt at the option of the loan note holder on 31 December 2011. Similar but non-convertible loan notes carry an interest rate of 9%.

The present value of $1 receivable at the end of the year based on discount rates of 4% and 9% can be taken as:

End of year
1. 0.96(4%) 0.92(9%)
2. 0.93 0.84
3. 0.89 0.77
Cumulative 2.78 2.53

Show how these loan notes should be accounted for in the financial statements at 31 December 20×7.

Statement of profit or loss
Finance costs (W2) 1,568
Statement of financial position
Equity – option to convert (W1) 2,576
Non-current liabilities
4% convertible loan notes (W2) 18,192

Workings
1. Equity and liability elements
-3 years interest (20,000 × 4% × 2.53) 2,024
-Redemption (20,000 × 0.77) 15,400
-Liability element 17,424
-Equity element (?) 2,576
Proceeds of loan notes 20,000

2.Loan note balance
Liability element (W1) 17,424
Interest for the year at 9% 1,568
Less interest paid (20,000 × 4%) (800)
Carrying value at 31 December 2009 18,192

I don’t understand why do we multiply three years of intrest as the question states to show the loan notes at the end of year of 20×7 and not three years after.

I also dont understand why on redemption we multiply 20.000*0.77 ?

Thank you!