Estimate interest rate and analysis market interest, Accounting Basics

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Woodie Limited issues $5 million in convertible bonds on 1 July 2012. They are issued at the fair value and pay an interest rate of 4 percent. The interest is paid at the end of each year. The bonds may be converted to ordinary shares in Woodie Limited at any time in the next three years. Firms similar to Woodie Limited have recently issued similar debt instruments but without the option for conversion to ordinary shares. These instruments issued by the other entities provide a market interest of 6 percent.

On 1 July 2013 all the holders of the convertible notes decide to convert the bonds to shares in Woodie Limited.

Required

a)   Provide journal entries to:

I.    record the issue of the securities on 1 July 2012.

II.   recognise the interest payment on 30 June 2013.

III.  recognise the conversion of the bonds to ordinary shares on 1 July 2013.

 

 


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