Question

On January 1, 2020, Sro Company issued ten convertible bonds with a par value of $8,000 per bond in market for $82,000 in total. Each bond is convertible into 800 ordinary shares of $3 per ordinary share par value. The bonds have a four-year life and a stated interest rate of 8% payable annually. The market interest rate for similar non-convertible bonds on January 1, 2020, is 9%.

c. Assume that the bond matured on December 31, 2023 and Sro repurchased the bond. Prepare the journal entry to record the transaction.                                                   

Answer 1

Date	Particulars	Cash Flow	Discount Factor (9%)	Present Value
		($)		($)
12/31/2020	Interest	6,400	0.91743	5,871.55
12/31/2021	Interest	6,400	0.84168	5,386.75
12/31/2022	Interest	6,400	0.77218	4,941.95
12/31/2023	Interest	6,400	0.70843	4,533.95
12/31/2023	Principal	80,000	0.70843	56,674.40
Total Liability component	$77,408.60
Total Proceeds	$82,000
Total Equity Component (82,000 - 77,408.60)	$4,591.40

Journal Entry (if the bonds are not converted at the time of maturity)

Date	Account Titles & Explanations	Debit	Credit
12/31/2023	8% Convertible Bonds (liability)	$80,000
	Cash		$80,000
	(being maturity proceeds paid to convertible bondholders at the time of maturity)
12/31/2023	8% Convertible Bonds (equity )	$4,591.40
	General Reserve		$4,591.40
	(being equity component transferred to General Reserve at the time of maturity)