OGOYA Ltd is a fast-growing company in need of new financing to fund its expansi
ID: 2531627 • Letter: O
Question
OGOYA Ltd is a fast-growing company in need of new financing to fund its expansion plans. It is hoping to raise $10 million dollars from a debt issuance. It is considering the following options:
A Issue 2-year 8% debentures at par on January 1, 2019. Interest payments are made annually at the end of each year. The debenture matures on December 31, 2020.
B Issue 2-year 4% convertible debentures at par on January 1, 2019. The debentures can be converted into 10 million $1 shares at maturity on December 31, 2020. Interest payments are made annually at the end of each year. Without the conversion feature, the debenture would be priced the same as option A.
Question show the journal entries for A and B from 1 January 2019 to 31 December 2020 the face value 10 million
Explanation / Answer
Solution:
Journal Entry related to Option A
Date
General Journal
Debit
Credit
Jan.1, 2019
Cash
$10,000,000
Bonds Payable
$10,000,000
(Bonds issued at par)
Dec.31, 2019
Interest Expense (10,000,000*8%)
$800,000
Cash or Interest Payable
$800,000
(Interest recorded)
Dec.31, 2020
Interest Expense (10,000,000*8%)
$64,000
Cash or Interest Payable
$64,000
(Interest recorded)
Dec.31, 2020
Bonds Payable
$10,000,000
Cash
$10,000,000
(Repaid on maturity)
Journal Entry related to Option B
Date
General Journal
Debit
Credit
Jan.1, 2019
Cash (Total Proceeds)
$10,000,000
Liability
$9,286,694
Share Options (Equity) (Bal fig)
$713,306
Dec.31, 2019
Interest Expense (Refer working below)
$742,936
Liability (bal. fig)
$342,936
Interest Payable or Cash (10,000,000*8%)
$400,000
(Interest recorded)
Dec.31, 2020
Interest Expense (Refer working below)
$770,370
Liability (bal. fig)
$370,370
Interest Payable or Cash (10,000,000*8%)
$400,000
(Interest recorded)
Dec.31, 2020
Liability
$10,000,000
Share Options (Equity)
$713,306
Common Stock
$10,000,000
Additional Paid in Capital in excess of par - common stock
$713,306
Working:
Without the conversion feature, the debenture would be priced the same as option A. It means the interest rate without the conversion feature is 8%.
Present Value of Future Interest payments and principal using 8%
Year
1
$400,000 Interest
x
[1 / 1.08]
=
$370,370
2
$400,000 Interest
x
[1 / 1.08^2]
=
$342,936
2
$10,000,000 (Principal)
x
[1 / 1.08^2]
=
$8,573,388
TOTAL
$9,286,694
Interest will be charged using 8%. The different between interest paid and interest charged will be added to the liability component as follows:
Year
Interest Expense
$
Liability
$
1
[9,286,694*8%]
$742,936
[9286,694 + 742,936 - 400,000*]
$9,629,630
2
[9,629,630*8%]
$770,370
[9629,630 + 770,370 - 400,000]
$10,000,000
*$400,000 Coupon Interest at 4% of $10,000,000
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Date
General Journal
Debit
Credit
Jan.1, 2019
Cash
$10,000,000
Bonds Payable
$10,000,000
(Bonds issued at par)
Dec.31, 2019
Interest Expense (10,000,000*8%)
$800,000
Cash or Interest Payable
$800,000
(Interest recorded)
Dec.31, 2020
Interest Expense (10,000,000*8%)
$64,000
Cash or Interest Payable
$64,000
(Interest recorded)
Dec.31, 2020
Bonds Payable
$10,000,000
Cash
$10,000,000
(Repaid on maturity)
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