ABC Company issued 10,000 compulsory cumulative convertible preference shares (CCCPS) as on 1 April 20X1 @150 each. The rate of dividend is 10%…

This is a compound financial instrument with two components – liability representing present value of future cash outflows and balance represents equity component. a. Computation of Liability & Equity Component Date Particulars Cash Flow Discount Factor Net present value 01-Apr-20X1 0 1 0.00 31-Mar-20X2 Dividend 150,000 0.869565 130,434.75 31-Mar-20X3 Dividend 150,000 0.756144 113,421.6 31-Mar-20X4 Dividend 150,000 0.657516 98,627.4 31-Mar-20X5 Dividend 150,000 0.571753 85,762.95 31-Mar-20X6 Dividend 150,000 0.497177 74,576.55 Total Liability Component 502,823.25 Total Proceeds 1,500,000.00 Total Equity Component (Bal fig) 997,176.75 b. Allocation of transaction costs Particulars Amount Allocation Net Amount Liability Component 502,823 10,056 492,767 Equity Component 997,177 19,944 977,233 Total Proceeds 1,500,000 30,000 1,470,000 c. Accounting for liability at amortised cost: Initial accounting = Present value of cash outflows less transaction costsSubsequent accounting = At amortised cost, ie, initial fair value adjusted for interest and repayments of the liability. Opening Financial Liability A Interest B Cash Flow C Closing Financial Liability A+B-C 01-Apr-20X1 492,767 - - 4,92,767 31-Mar-20X2 492,767 78,153 150,000 4,20,920 31-Mar-20X3 420,920 66,758 150,000 3,37,678 31-Mar-20X4 337,678 53,556 150,000 2,41,234 31-Mar-20X5 241,234 38,260 150,000 1,29,494 31-Mar-20X6 129,494 20,506 150,000 - d. Journal Entries to be recorded for entire term of arrangement are as follows: Date Particulars Debit Credit 01-Apr-20X1 Bank A/c Dr. 1,470,000 To Preference Shares Liability A/c 492,767 To Equity Component of Preference shares A/c 977,233 (Being compulsorily convertible preference shares issued. The same are divided into equity component and liability component as per the calculation) 31-Mar-20X2 Preference shares Liability A/c Dr. 150,000 To Bank A/c 150,000 (Being Dividend at the coupon rate of 10% paid to the shareholders) 31-Mar-20X2 Finance cost A/c Dr. 78,153 To Preference Shares Liability A/c 78,153 (Being interest as per EIR method recorded) 31-Mar-20X3 Preference shares Liability A/c Dr. 150,000 To Bank A/c 150,000 (Being Dividend at the coupon rate of 10% paid to the shareholders) 31-Mar-20X3 Finance cost A/c Dr. 66,758 To Preference Shares Liability A/c 66,758 (Being interest as per EIR method recorded) 31-Mar-20X4 Preference shares Liability A/c Dr. 150,000 To Bank A/c 150,000 (Being Dividend at the coupon rate of 10% paid to the shareholders) 31-Mar-20X4 Finance cost A/c Dr. 53,556 To Preference Shares Liability A/c 53,556 (Being interest as per EIR method recorded) 31-Mar-20X5 Preference shares Liability A/c Dr. 150,000 To Bank A/c 150,000 (Being Dividend at the coupon rate of 10% paid to the shareholders) 31-Mar-20X5 Finance cost A/c Dr. 38,260 To Preference Shares Liability A/c 38,260 (Being interest as per EIR method recorded) 31-Mar-20X6 Preference shares Liability A/c Dr. 150,000 To Bank A/c 150,000 (Being Dividend at the coupon rate of 10% paid to the shareholders) 31-Mar-20X6 Finance cost A/c Dr. 20,506 To Preference Shares Liability A/c 20,506 (Being interest as per EIR method recorded) 31-Mar-20X6 Equity Component of Preference shares A/c Dr. 977,233 To Equity Share Capital A/c 50,000 To Securities Premium A/c 927,233 (Being Preference shares converted in equity shares and remaining equity component is recognised as securities premium)