Question 5.

On 1 January 2021 Corgi Ltd issued a 5m convertible bond at nominal value. There were no issue costs. The bond is redeemable at par on 1 January 2024 or bond holders can convert their bond into ordinary shares, with a nominal value of 1. The terms of the conversion are 2 shares for every 100 of bond.

The coupon rate on the bond is 10%, payable annually in arrears. Bonds issued by similar entities without the conversion rights bear interest at 15%.

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Required

a) Explain, including calculations, how the issue of the bond would be accounted for by Corgi at 1 January 2021. You should also state the journal entry at this date. 12 marks

b) Explain why the bond will be remeasured to amortised cost at 31 December 2021, rather than to fair value, 4 marks

c) Show the journal entries for the year end remeasurement, stating clearly the

position of each entry in the appropriate financial statement.

d) Explain simply what an expected credit loss is, how it is measured and why an expected credit loss adjustment is not required at 31 December 2021.

Note: Provide answers to the nearest

Total 25 marks