Required:

1. In accordance with NZ IAS 32, explain to Daenerys Tara what are convertible notes, and how should Game of Academy Ltd initially recognise the notes in its financial statements?

(3 marks)

2. In accordance with NZ IAS 32, show the journal entry to record the issue of the convertible notes (assume no transaction costs associated with the issue). Show all workings.

(3 marks)

(c) In accordance with NZ IAS 32, provide journal entries to account for the interest expense and the interest payment at the end of each year for the next three years. Show all workings.

(5 marks)

4. At the end of the third year, the balance in the Liability account will be $1,000,000.

1. Assume at that stage the share price is sufficiently high, so that all noteholders choose to convert their notes into shares. Show the journal entry (or entries) on conversion.
2. Assume at that stage the share price is quite low, so that all noteholders choose NOT to convert their notes into shares, but choose to redeem their notes at face value instead. Show the journal entry (or entries) on redemption.

(4 marks)

Game of Academy Ltd is about to issue some convertible notes. The arrangement of the notes is that the noteholder has the option to convert one note into one ordinary share on the expiry of the notes, which is in three years' time. Daenerys Tara, the chief financial officer, wants you to confirm with her the correct accounting treatment of the convertible notes. Below is the detailed information about the issue of the convertible notes: Face (or nominal) value of each note $1.00 Issue price of each note $1.50 Number of notes issued 1,000,000 Coupon rate 8% per annum Coupon/interest payable At the end of each year You are also advised that if these were "pure debt" instruments, an investor would require a 10% rate of return. Present value factors are shown in the table immediately below. Present value Factors Year (End) PV at 10% PV at 8% 0.9091 0.9259 0.8264 0.8573 3 0.7513 0.7938