On January 1, 2018, CT Ltd issued $20 million convertible bonds. The bonds have a life...

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On January 1, 2018, CT Ltd issued $20 million convertible bonds.The bonds have a life of three years and are issued at 21 millionwith a face value of $100 per bond. The bonds pay an interest of 6%annually in arrears. The holder of each bond is entitled to convertthe bond into 25 ordinary shares of CT Ltd at any time up tomaturity.
Companies of a similar risk profile have recently issued debtwith similar terms, but without the option of conversion, and themarket required a rate of return of 10% per annum on suchsecurities. It is considered that investors in CT Ltd’s convertiblebonds are preparing to take a lower return as a result of thefacility to convert the bonds to shares.
On January 1, 2020, $5,000,000 of the convertible bonds areconverted to ordinary shares of CT Ltd. The remaining bonds areredeemed on the maturity date.
Instead of issuing new shares upon conversion, CT Ltd satisfiesthe requirement for equity shares to be delivered to thebondholders through the use of treasury shares. On December 312018, CT Ltd. reacquired 2,000,000 of its ordinary shares at aprice of $4 per share.
Required:
1.     Discuss the classifications of theconvertible bonds issued on January 1, 2018.
Give reasons for your answer.
2.     Provide the journal entries toaccount for:
        (a) The issue of theabove securities;
        (b) The payment ofthe first year’s interest;
        (c) The reacquiringof the treasury shares;
(d) The conversion of the securitiesto ordinary shares. Rather than issuing new ordinary shares, CTwill deliver to bondholders of its own shares that it hadpreviously repurchased and held as treasury shares;
        (e) The interestpayment and redemption of the bonds at the end of 2020; and
(f) The remaining treasury shareswhich were reacquired on December 31, 2018 were reissued at a priceof $6 per share at December 31, 2020.

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4.0 Ratings (471 Votes)

		Amount in $
	Journal Entries
01-01-18	Bank A/c Dr	20000000
	To 6% Convertible bonds A/c		20000000
	(Being Bonds Issued)

31-12-18	Treasury Stock A/c Dr	8000000
	To Bank A/c		8000000
	(Being Treasury shares purchased)

31-12-18	Interest A/c Dr	1260000
	To Bank A/c		1200000
	(Being interest paid on Bonds @6%)

31-12-19	Interest A/c Dr	720000
	To Bank A/c		720000
	(Being interest paid on Bonds @6%)

01-01-20	6% Convertible bonds A/c Dr	5000000
	To Equity Share Capital A/c		5000000
	(Being bonds converted into 2 Lakhs Equity shares of $25each)

31-12-20	Interest A/c Dr	420000
	To Bank A/c		420000
	(Being interest paid on Bonds @6%)

31-12-20	Bank A/c Dr	12000000
	To Treasury Stock A/c		8000000
	To profit on reissue of treasury shares		4000000
	(Being Profit received on sale of treasury shares)

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Transcribed Image Text

On January 1, 2018, CT Ltd issued $20 million convertible bonds.The bonds have a life of three years and are issued at 21 millionwith a face value of $100 per bond. The bonds pay an interest of 6%annually in arrears. The holder of each bond is entitled to convertthe bond into 25 ordinary shares of CT Ltd at any time up tomaturity.Companies of a similar risk profile have recently issued debtwith similar terms, but without the option of conversion, and themarket required a rate of return of 10% per annum on suchsecurities. It is considered that investors in CT Ltd’s convertiblebonds are preparing to take a lower return as a result of thefacility to convert the bonds to shares.On January 1, 2020, $5,000,000 of the convertible bonds areconverted to ordinary shares of CT Ltd. The remaining bonds areredeemed on the maturity date.Instead of issuing new shares upon conversion, CT Ltd satisfiesthe requirement for equity shares to be delivered to thebondholders through the use of treasury shares. On December 312018, CT Ltd. reacquired 2,000,000 of its ordinary shares at aprice of $4 per share.Required:1. Discuss the classifications of theconvertible bonds issued on January 1, 2018.Give reasons for your answer. 2. Provide the journal entries toaccount for: (a) The issue of theabove securities; (b) The payment ofthe first year’s interest; (c) The reacquiringof the treasury shares;(d) The conversion of the securitiesto ordinary shares. Rather than issuing new ordinary shares, CTwill deliver to bondholders of its own shares that it hadpreviously repurchased and held as treasury shares; (e) The interestpayment and redemption of the bonds at the end of 2020; and (f) The remaining treasury shareswhich were reacquired on December 31, 2018 were reissued at a priceof $6 per share at December 31, 2020.