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):


  1. Identify the present value of the notes, and allocate the difference between the present value and the issue price to the equity component.
  2. Calculate the stream of interest expenses across the six years of the lift of the notes.
  3. Provide the accounting entries for the transactions from 1 July 2019 until the conversion of the notes into ordinary shares.

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