1. In its quest to raise funds for the construction of the apartments, Mazembe issued 1 million convertible bond for K200 million on 1 January 2019. The bonds are redeemable for cash or convertible into equity shares on 31 December 2021. Interest is paid annually in arrears at a rate of 6% per annum and bonds without conversion options attract an interest rate of 9% per annum on 1 January 2019. Mazembe incurred issue costs of K2 million. At maturity, all of the bonds were converted into 25 million ordinary shares of K1 each of Mazembe. No bonds could be converted before that date. The impact of the issue costs is to increase the interest rates to 9.38%. If the investor did not convert bond to shares, they could have been redeemed at par. (7 marks)

2. As a way of growing its funds raised from construction of apartments, Mazembe acquired an investment in a debt instrument on 1 January 2019 at its par value of K9 million. Transaction costs relating to the acquisition were K500,000. The investment earns a fixed annual return of 6% which is received in arrears. The principal amount will be paid to Mazembe in four years time at a large premium. Mazembes business model is to hold the investment until redemption date. The investment has an effective interest rate of approximately 7.05%.

On 31 December 2019, Mazembe received its fixed interest. However, it estimated that the probability of default on the bond within the next 12 months would be 0.8%. if default occurs within the next 12 months, Mazembe estimates that no further interest would be received and that only 30% of capital will be repaid on 31 December 2022. (10 marks)

Required:

Discuss in detail, with relevant computations, the required accounting treatment of each of the above transactions for the year ended 31 December 2019. Summarize your discussion on each item in financial statement extracts.