A company issues 5% convertible bonds at their nominal value of $ 6 million. The bonds are convertible at any time up to maturity into 500 ordinary shares. Alternatively thembonds will be redeemed at par after 3 years. Similar nonconvertible bonds would carry an interest rate of 7%.The present value of $1 payable at the end of year, based on rates of 5% and 7% are as follows: 5%, 7%. End of year 1, 0.952, 0.935, 2, 0.873, 0.907, 0.864, 3, 0.816.
Requirement:
1. What amounts will be shown as a financial liability and as equity when the convertible bonds are issued?
2. What amounts will be shown in the income statement and Statement of Financial Position for years 1-3?
