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Financial instruments

Example 3.1

A company issues 5% convertible bonds at their nominal value of $4 million on
1 January 20X3.

Each bond is convertible at any time up to maturity into 3 ordinary shares for
every $1 bond. Alternatively the bonds will be redeemed at par after 3 years.

The market rate applicable to non-convertible bonds is 6%

Required:

Show the journal entry required to record the initial recognition of the
convertible bonds on 1 January 20X3. Give your figures to the nearest
$000.

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