Page 13 - 23. COMPILER QB - IND AS 109_32

Q8 (November 21) – (Similar to Q1.)

On 1st April, 20X1, PS Limited issued 6,000, 9% convertible debentures with a face value of Rs. 100 each
maturing on 31st March, 20X6. The debentures are convertible into equity shares of PS Limited at a
conversion price of Rs. 105 per share. Interest is payable annually in cash. At the date of issue, non-
convertible debt could have been issued by the company at a coupon rate of 13%. On 1st April, 20X4, the

convertible debentures have a fair value of Rs. 6,30,000. PS Limited makes a tender offer to debenture-
holders to repurchase the debentures for Rs. 6,30,000 which the debenture holders accepted. At the date of
repurchase, PS Limited could have issued non-convertible debt with a 2 years term bearing coupon interest
@ 10%.
Show accounting entries in the books of PS Limited for recording of equity and liability component:

(i) At the time of initial recognition
(ii) At the time of repurchase of the convertible debentures
SOLUTION

At the time of initial recognition
Rs.
Liability component

Present value of 5 yearly interest payments of Rs. 54,000,
discounted at 13% annuity (54,000 x 3.517) 1,89,918
Present value of Rs. 6,00,000 due at the end of 5 years,

discounted at 13%, compounded yearly (6,00,000 x 0.543) 3,25,800
5,15,718
Equity component

(Rs. 6,00,000 – Rs. 5,15,718) 84,282
Total proceeds 6,00,000
Note: Since Rs 105 is the conversion price of debentures into equity shares and not the redemption price, the
liability component is calculated @ Rs 100 each only.

Journal Entry
Rs. Rs.
Bank Dr. 6,00,000

To 9% Debentures (Liability component) 5,15,718
To 9% Debentures (Equity component) 84,282
(Being debentures initially recorded at fair value)

At the time of repurchase of convertible debentures
The repurchase price is allocated as follows:
Carrying Value Fair Value Difference
@ 13% @ 10%
Rs. Rs. Rs.

Liability component
Present value of 2 remaining yearly
interest payments of Rs. 54,000,
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