Reference no: EM132766265

Question - Steve Ltd issues $10 million in convertible notes on 1 July 2017. The notes were issued at their face value and pay an interest rate of 2 percent per annum. The interest is payable on 30 June at the end of each financial year. The notes can be converted to ordinary shares in Steve Ltd at any time in the next three years and have a maturity date of 30 June 2020.

Organisations similar to Steve Ltd have recently issued similar debt instruments but without the option for conversion to ordinary shares. The interest rate attached to these instruments was 4 percent per annum.

On 1 July 2018, all the holders of the convertible notes decided to convert the notes to shares in Steve Ltd.

Required - In accordance with AASB 9 Financial Instruments:

a) Calculate the present value of the liability and equity components of the convertible notes.

b) Prepare the journal entries to record the following:

i) the issue of the bonds on 1 July 2017

ii) the interest payment on 30 June 2018; and

iii) the conversion of all the bonds to ordinary shares on 1 July 2018

iv) the journal entry if the notes were redeemed, that is, there was no conversion of the notes at maturity 30 June 2020.