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Hastings Limited issued 350 000 debentures on 1 January 2017 at their face value of R17 each which was their fair value on issue date
Hastings Limited issued 350 000 debentures on 1 January 2017 at their face value of R17 each which was their fair value on issue date. The debentures offered interest based on a coupon rate of 10% - The debenture holder has the option to convert the debentures on 31 December 2019 into 1 000 ordinary shares. If they are not converted, they will be redeemed on this date at R17 each. The market interest rate for similar debt but without the option to convert is 15%. The debentures are not held for trading. Required: 3.1 Prepare the journal reflecting the issue of debentures on the 1 January 2017 in Hastings Limited's books.
Expert Solution
Here the debetntures are having an option of conversion at maturity.This is the reason they carry a lower coupon rate of 10% as compared to market rate of 15% on debentures without the conversion option.This mandates to seperate the Liability and Equity components while recording the Debenture issue.
Liability Component = PV of outflows from issue
Equity Component = Total Proceeds - PV of outflows from issue
Total Debenture proceeds = 350000 * 17 = 5950000
Coupon Interest = 350000 * 17 * 10% = 595000
Liability Component = 5270741
Equity Component = 5950000 - 5270741 = 679259
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