ACCA FR · Chapter 7 · Question 7 of 10
On 1 January Kite Co issued $2,000,000 of 5% convertible loan notes at par. Interest is paid annually in arrears, and the notes are redeemable at par after 3 years or convertible into equity shares. Similar debt without the conversion option would carry interest of 8%. What amount should be recognised in equity for the conversion option on issue? (Use unrounded discount factors and round your final answer to the nearest dollar.)
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $154,626
Explanation
IAS 32 splits a convertible instrument into its liability and equity components. Liability = PV at 8% of the interest ($100,000 a year for 3 years) plus the $2,000,000 redemption = $1,845,374. Equity is the residual: $2,000,000 - $1,845,374 = $154,626. Figures are calculated with unrounded discount factors and then rounded to the nearest dollar.
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