MARCH/JUNE 2018 - SAMPLE QUESTIONS

CChris7y ago

Please, i have gone through where i made some mistakes but could you assist me as to where the convertible option figure become 424k. The answer says As the full amount of $8m has been taken to liabilities , adjustment required is; Dr Liability $424k Cr Equity $424k.

P2-D2Tutor7y ago#1

Hi, For convertible debt we use split accounting, so recognise both debt and equity on initial recognition. As the full amount of $8m has been recognised as debt, which is incorrect, then the $424k needs to be removed from liabilities and correctly shown as equity. Thanks

CChris7y ago#2

Exactly but how did they arrive at $424k ? I am trying to figure it out but i could not . could you please assist?

P2-D2Tutor7y ago#3

The amount recognised in equity is the difference between the proceeds and the amount recognised as a liability, which is the present value of the cash flows, discounted at the rate of interest assuming that it was a 100% loan. Thanks

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