Reference no: EM132764963

On 1 July 2020, SQL Ltd issued 4500 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 $4.5 million.

The notes pay interest at 3% p.a. annually in arrears. The holder of each note is entitled to convert the note into 250 ordinary shares of Resolute 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 5.5% p.a. Hence at the date of issue:

Present Value of the principal: $3,832,261

Present Value of the interest: $364,221

Total contractual Cash Flows $4,196,482

Required:

Problem 1. Use the residual valuation method to determine the amounts of the financial liability and equity components attributable to the issue of convertible notes.

Problem 2. Prepare schedule to determine the amortised cost of the financial liability up until their repurchase.

Problem 3. Prepare all (inclusive of issue, interest payment and maturity) the journal entries of Resolute Ltd to account for the convertible notes for each year ending 30 June under the following circumstances:

i. The holders do not exercise their option and the note is repaid at the end of its term.

Problem 4. What is the single journal required should holders exercise their conversion option at the expiration of the contract term.