Sampras Ltd issued $1 million of convertible notes on 1 July 2019. The notes have a life of 6 years and a face value of $1 each. They offer interest, payable at the end of each financial year, at a rate of 5 percent per annum. The notes were issued at their face value and each note can be converted into one ordinary share in Sampras Ltd at any time in the next 6 years. Organisations with a similar risk profile to Sampras Ltd have issued debt with similar terms but without the option to convert at the rate of 7%.
The holders of the options elect to convert the options to ordinary shares at the end of the second year of the notes.
Required: (rounded to 2 decimal):
- Identify the present value of the notes, and allocate the difference between the present value and the issue price to the equity component.
- Calculate the stream of interest expenses across the six years of the lift of the notes.
- Provide the accounting entries for the transactions from 1 July 2019 until the conversion of the notes into ordinary shares.
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