FCA Course co-ordinator WIRC coaching c
2525 Points
Joined October 2009
Just consider the situation that the entity has issued debentures without conversion option. In that case it would have issued the debentures at 9% per annum interest. It is because of conversion option the the debentureholders agree to take 6% interest. It means debt instrument covers value of equity also. In that case its pv would have been as under :
Step I
Year end interest/principal repayment Disc value @ 9% PV
1 1,20,000 0.9174 110092
2 1,20,000 0.8417 101002
3 1,20,000 0.7722 92662
20,00,000 0.7722 1544367
Fair value of debentures 1848123
It means had there been no option of conversion, the debentureholders would have given Rs. 18,48,123 to get the same benefits mentioned above.
Bal as on beginning of year Interest @ 9% total payable interest paid o/s at year end
1st year 1848123 166331 2014454 120000 1894454
2nd year 1894454 170501 2064955 120000 1944955
3rd year 1944955 175046 2120000 120000 2000000
Bal repayment 2000000 nil
Step II :Ascertaining equity component :
Amonut received Rs. 20,00,000
(-) Fair value of debt Rs. 18,48,123
Fair value of equity component Rs. 1,51,877
This calculation clearly shows that debentureholders have given only Rs. 18,48,123 for debentures and bal has been paid for equity.
Step III :
That is why the entity is required to split the amount received into equity component and debt component by passing the following entry :
Bank A/c Dr. 20,00,000
To Equity - Reserve 1,51,877
To debentures A/c 18,48,123
As I said in my previous answer, cash flow will get affected at the time of receipt and not at the time of conversion. If u have any further doubt, revert back to me.
Regards, CA Shakuntala Chhangani