Question 01 A company issues 5% convertible bonds at their nominal value of $ 6 million.
The bonds are convertible at any time up to maturity into 500 ordinary shares. Alternatively the
bonds will be redeemed at par after 3 years.
Similar nonconvertible bonds would carry an interest rate of 7%.
The present value of $1 payable at the end of year, based on rates of 5% and 7% are as follows:
End of year
5%
7%
1
0.935
0.952
0.907
2.
0.873
3
0.864
0.816
Requirement:
1. What amounts will be shown as a financial liability and as equity when the convertible bonds ar
issued?
2. What amounts will be shown in the income statement and Statement of Financial Position for
years 1-3?

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