I am stuck, can someone please help,

1 October 20X5, Morgan issued £ 30,000 6% convertibel loan stock on following conditions

1. Issue price was at discount of 5%
2. The loan stock in convertible into equity shares at the options of shareholders five years after the date of issue (30 Sep 20Y0) on the bases of 25 shares for each £ 100 of loan stock. Alternatively it will be redeemed at par.

If morgan had issued similar loan stock without conversion rights, it would have to pay an interest rate of 9% on the loan stock.

The present value of £ 1 receivable at the end of each year, based on discount rate of 9% is

Years PV
1 .917
2 .842
3 .772
4 .708
5 .650

Required: Financial Statement Extracts 30 Sep 2006

Dear Iqbal,




Issue Price(i.e Par Value)====>$30,000
Less:Discount Given===========>($1500)=>[30,000*5%]
____________________________________________________
Actual Cash Received==========>$28,500
____________________________________________________



Present Value Of Interest Payments(w1)==>$7001
Present Value Of Redemption(W2)=========>$19,499
____________________________________________________
Fair Value Of Liability=================>$26,500
Less:Issue Price========================>($30,000)
____________________________________________________
Fair Value Of Equity====================>$3,500
____________________________________________________


Jornal Entry At Issuance Date:-

DR:Cash==============>$1,500
DR:Discount==========>$28,500
=======>CR:Liability=====>$26,500
=======>CR:Equity========>$3,500

W1:-

Interest Per Annum====>$30,000*6%===>$1,800

[[1/0.09]-[1/{0.09*(1+0.09)^5}]*1,800]==>$7,001

W2:-

[[1/{(1+0.09)^5}]*30,000]===>$19,499





Now we will break this Convertable loan stock in Equity and Liability Component.

Year===Opening Balance===Effective Interest===Payments===Closing Balance
==========$=============$=9%=========$=6%=======$=====
=1=======26,500==========2,385=========(1,800)======27,085
=2=======27,085==========2,438=========(1,800)======27,732
=3=======27,732==========2,495=========(1,800)======28,427
=4=======28,427==========2,558=========(1,800)======29,185
=5=======29,185==========2,626=========(1,800)======30,011(Approx.$30,000)
________________________________________________________________________
======================To:Income======To:Cash======To:Balance
======================Statement=====Flow Statement===Sheet

At the end of Year these figures will be transferred to their respective accounts as shown above:



Journal Entries At The End Of Year # 1:-

DR:Profit And Loss======$2,385
====CR:Liability===========$585
====CR:Cash=============$1,800



Journal Entries At The End Of Year # 2:-

DR:Profit And Loss======$2,438
====CR:Liability===========$638
====CR:Cash=============$1,800



Journal Entries At The End Of Year # 3:-

DR:Profit And Loss======$2,495
====CR:Liability===========$695
====CR:Cash=============$1,800



Journal Entries At The End Of Year # 4:-

DR:Profit And Loss======$2,558
====CR:Liability===========$758
====CR:Cash=============$1,800



Journal Entries At The End Of Year # 5:-

DR:Profit And Loss======$2,626
====CR:Liability===========$826
====CR:Cash=============$1,800


I hope that helps!

Regards,

Muhammad Amir

super .......... thanks a lot amir

hi

Is loan stock different from Debentures?

No, why did you ask this?

Hi

Thanks....I asked it coz these things realy confuse me...Debenture Interests,Loan Stocks,%Bonds etc..... specialy the bonds thing. Plz If u can plz briefly define the bonds issue?

Loan Stock, Debentures, Bonds are of Debt Nature and they are materially same but a Loan stock or Debenture or Bond that is convertable in to equity is known as Convertable Debt(in this case debt becomes equity i.e. the nature of Debt is lost and it is converted in to equity), another thing that is known by the name of "Options or Warrants" is the option given by the issuer of Debt to Holders of it for example Company 'A' gives its bond holders a right to purchase the shares of 'A' after 5 year at the discount of 50% of the share price at that time, it is different from Convertable in a way that in this case bond holder will not convert his debt in to equity he just enjoy an incentive given by company to him.

Thanks alot....Thats the thought of explanation I was lookin for...