Grommett Ltd issues $10 million of convertible bonds on 1 July 2022. The bonds have a life of four years and a face value of $10.00 each, and they offer interest, payable at the end of each financial year, at a rate of 6 per cent per annum. The bonds are issued at their face value and each bond can be converted into one ordinary share in Grommett Ltd at any time in the next four years. Organisations of a similar risk profile have recently issued debt with similar terms, without the option for conversion, at a rate of 8 per cent per annum. For the purposes of this question, this required market rate for these financial instruments is assumed to remain at 8 per cent throughout the life of the bonds.

Therefore, at the date of issue:

Present value of bonds at the market rate of debt

Present value of principal to be received in four years discounted at 8 per cent

$10000000 0.735 03 = $ 7350300

Present value of interest stream discounted at 8 per cent

$600000 3.312113 = $ 1987268 Total present value $ 9337568

Equity component $ 662432

Total face value of convertible bonds $10000000

Required Prepare the journal entries of Grommett Ltd to account for the convertible notes for each year ending 30 June under the following circumstances. 1. The holders exercise their conversion option at the expiration of the contract term (i.e. the option is converted to ordinary shares).