P9.7 Separation of a convertible bond
On 1 January 20x1, Delphi Company issued 4% convertible bonds with a face value of $10,000,000 at par. The bond matured on 31 December 20x5. The bond was convertible into ordinary shares of Delphi Company at a conversion price of $2.50 per share. Interest on the bond was payable semi-annually in cash on 30 June and 31 December. At the date of issue, Delphi Company could have issued a similar non- convertible bond with a five-year term bearing a coupon interest rate of 8%.
On 1 January 20x3, the convertible debenture had a fair value of $12,500,000. Delphi Company made a tender offer to the holders of the bonds to repurchase the bonds for $12,500,000. The offer was accepted by all bondholders. At the date of repurchase, Delphi Company could have issued a non-convertible debt with a three-year term bearing a coupon interest rate of 6%.
Required:
1. Allocate the carrying amount of the bond at inception to its liability and equity components. 2. Prepare journal entries at the following dates:
(a) 1 January 20x1
(b) 31 December 20x1
(c) 1 January 20x3 (date of repurchase of convertible bond)