3. Briefly explain Bonds with convertible features.

How do we account for bonds which can

be converted to shares? Prepare proforma journal entries.

Convertible Bonds entitle the bondholders to convert their bonds into a fixed number of
shares of the issuing company, usually at the time of their maturity. Thus, convertible bonds
have features of both equity as well as liability. Convertible notes do not mandate conversion.
They give an option to the bondholders at the time of conversion, and it is on their discretion
whether they want to convert and get equity shares or opt-out and get cash against these
bonds. Since the convertible bonds have features of both liability (debt) as well as equity, it
makes more sense to account for the liability portion and equity portion separately.
Convertible Bonds entitle bondholders to convert their bonds into a fixed number of
shares of the issuing company usually at the time of their maturity. Convertible bonds are a
type of compound financial instrument with characteristics of both liability and equity.

Proforma
Repurchase at Maturity. If the bonds are not converted at maturity, the following are the entry
to pay off the convertible debtholders.

Bonds Payable xxx

Cash xxx

(To record the purchase of bonds at maturity

Conversion of Bonds at Maturity. If the bonds are converted at maturity.

Share Premium—Conversion Equity xxx

Bonds Payable xxx

Share Capital—Ordinary xxx

Share Premium—Ordinary xxx

(To record the conversion of bonds at maturity)

Repurchase before Maturity.

Bonds Payable xxx

Share Premium—Conversion Equity xxx

Loss on Repurchase xxx

 Cash xxx

(To record the repurchase of convertible bonds)