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On 1 July 2020, Mackay Ltd issues 3000 convertible notes. The notes have a three-year term and are issued at par with a face value of $1000 per note, giving total proceeds at the date of issue of $3 million. The notes pay interest at 4% p.a. annually in arrears. The holder of each note is entitled to convert the note into 150 ordinary shares of Mackay Ltd at contract maturity. When the notes are issued, the prevailing market interest rate for similar debt (similar term, similar credit status of issuer and similar cash flows) without conversion options is 6% p.a. Hence at the date of issue: Present Value of the principal: $2,518,857.85 Present Value of the interest: $320,761.43 Total contractual Cash Flows $2,839,619.28
Required
Question 1. Use the residual valuation method to determine the amounts of the financial liability and equity components attributable to the issue of convertible notes.
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