Sampras Ltd issued $20 million of convertible notes on 1 July 2013.The notes have a life of 6 years and a face value of $20 each.Annual interest of 5% is payable at the end of each year.The notes were issued at their face value and can be converted at any time over their lives.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%.What are the appropriate accounting entries to record the issue of the convertible notes and the first payment of interest in accordance with guidance provided in AASB 132?

Question

Quizplus · Accepted Answer

The appropriate accounting entries to record the issue of the convertible notes and the first payment of interest are:

1. On 1 July 2013:
Dr. Cash $20,000,000
Cr. Convertible Notes Payable $20,000,000

2. On 30 June 2014:
Dr. Interest Expense $1,000,000
Cr. Interest Payable $1,000,000

Note: The interest expense is calculated as 5% of the face value of the convertible notes ($20 million x 5% = $1 million).

Option A is incorrect because it does not record the issuance of the convertible notes.
Option C is incorrect because it records the issuance of non-convertible debt rather than convertible notes.
Option D is incorrect because it records the interest expense in the wrong account. The interest expense should be recorded in the income statement, not the balance sheet.

Sampras Ltd Issued $20 Million of Convertible Notes on 1