Question 4 Financial Instruments (14 marks)

On 30 June 2018 Magoo Ltd issued 50 000 convertible notes with a face value of $50 million for a term of five years. Each note was convertible at the option of the holder into one ordinary share on or before maturity. The coupon interest rate is 7% per annum while the market interest rate for comparable non-convertible debt is 8% per annum. Interest is payable annually in arrears on 30 June during the term of the convertible notes.

REQUIRED:

In accordance with the treatment outlined in AASB 132 'Financial Instruments: Presentation' and ensuring compliance with AASB 9 'Financial Instruments'

1. Prepare the accounting entries, including narrations, to record

(i) the issue of convertible notes on 30 June 2018, and

(ii) the interest payment on 30 June 2019.

2. Suppose the holders of the notes elect to convert the notes to ordinary shares on 30 June 2020. Present of the the accounting entries, including narrations, required on 30 June 2020.