On 1 st April, 2021, Galaxy Limited issued 15,000, 8% Convertible Debentures with a face value of 100 each maturing on 31 st March, 2026. The…

CA Final · Financial Reporting · PYQS · September 2025
On 1 st April, 2021, Galaxy Limited issued 15,000, 8% Convertible Debentures with a face value of 100 each maturing on 31 st March, 2026. The debentures are convertible into equity shares of Galaxy Limited at the option of the holder at a conversion price of 105 per share or are redeemable at face value of 100 each. Interest is payable annually in cash. At the date of issue, Galaxy Limited could have issued non-convertible debt with a 5 years term bearing a coupon interest rate of 12%. On 1 st April, 2024, the convertible debentures have a fair value of 15,75,000. Galaxy Limited made a tender offer to debenture holders to repurchase the debentures for 15,75,000, which the holders accepted. At the date of repurchase, Galaxy Limited could have issued non-convertible debt with a 2 years term bearing a coupon interest rate of 9%. You are required to: (i) Provide the appropriate accounting entries for initial recognition as per the relevant Ind AS in the books of Galaxy Limited. (ii) Calculate the stream of Interest Expenses across the five years of the term of the Debentures. (Rounding off adjustment, if any, be made in the interest calculation of financial year 2025-2026). (iii) Provide the accounting entries at the time of repurchase of the convertible debentures. The following present values of 1at 8%, 9%, and 12% are supplied to you: Interest Rate Year 1 Year 2 Year 3 Year 4 Year 5 8% 0.926 0.857 0.794 0.735 0.681 9% 0.917 0.842 0.772 0.708 0.650 12% 0.893 0.797 0.712 0.636 0.567

Suggested Answer and Working Notes:

(i) At the time of initial recognition Particulars ₹ Liability component Present value of 5 yearly interest payments of 1,20,000, discounted at 12% annuity (1,20,000 x 3.605) 4,32,600 Present value of 15,00,000 due at the end of 5 years, discounted at 12%, compounded yearly (15,00,000 x 0.567) 8,50,500 12,83,100 Equity component (15,00,000 - 12,83,100) 2,16,900 Total proceeds 15,00,000 Note: Since 105is the conversion price of debentures into equity shares and not the redemption price, the liability component is calculated @100 each only. Journal Entry Particulars ₹ Bank Dr. 15,00,000 To 8% Debentures (Liability component) 12,83,100 To 8% Debentures (Equity component) 2,16,900 (Being debentures initially recorded at fair value) (ii) Calculation of stream of interest expenses during the term of Debentures Opening Balance Finance cost @ 12% Interest 8% Closing Balance 1 12,83,100 1,53,972 1,20,000 13,17,072 2 13,17,072 1,58,049 1,20,000 13,55,121 3 13,55,121 1,62,615 1,20,000 13,97,736 4 13,97,736 1,67,728 1,20,000 14,45,464 5 14,45,464 1,74,536* 1,20,000 15,00,000 * Difference of 1,080 (1,74,536 – 1,73,456) in the finance cost is due to rounding off and approximation to the nearest absolute figure (iii) At the time of repurchase of convertible debentures The repurchase price is allocated as follows: Carrying Value @ 12% Fair Value @ 9% Difference Particulars Particulars ₹ Liability component Present value of 2 remaining yearly interest payments discounted at 12% and 9%, respectively. [* 1,20,000 x (0.893 + 0.797)] 2,02,800 [1,20,000 x (0.917 + 0.842)] 2,11,080 Present value of 15,00,000 due in 2 years, discounted at 12% and 9%, compounded yearly, respectively (15,00,000 x 0.797) 11,95,500 (15,00,000 x 0.842) 12,63,000 Liability component 13,98,300 14,74,080 (75,780) Equity component 2,16,900 1,00,920 1,15,980 Total 16,15,200 15,75,000 40,200 *See Note (i) ***15,75,000 – 14,74,080 = 1,00,920 Journal Entries Particulars ₹ 8% Debentures (Liability component) Dr. 13,98,300 Profit and loss A/c (Debt settlement expense) Dr. 75,780 To Bank A/c 14,74,080 (Being the repurchase of the liability component recognised) 8% Debentures (Equity component) Dr. 2,16,900 To Bank A/c 1,00,920 To Retained Earnings/Reserves and Surplus A/c 1,15,980 (Being the cash paid for the equity component recognised) Note: Alternatively, one may adjust the liability component of debentures taking the closing balance as per amortization table and pass the following journal entry: Particulars ₹ 8% Debentures (Liability component) Dr. 13,97,736 Profit and loss A/c (Debt settlement expense) Dr. 76,344 To Bank A/c 14,74,080 (Being the repurchase of the liability component recognised) Loss on Debt Settlement = 14,74,080 - 13,97,736 = 76,344.

Topics: Ind AS 109, General

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