Now we're gonna take a look at the accounting for US gaap, assuming the bond has a cash conversion feature.

So let's take a look at the key stats.

Got a bond par value of a thousand.

An equity par value of one cash coupon of 22% cash coupon, a maturity period of seven years.

But the ability of the investor to put the bond in year five, the cash redemption plus shares to full value is a thousand.

So that's what they'll get in cash.

The exercise price is a hundred, assume no transaction costs to make things easy.

And then a five year convertible bond with similar terms would be at a yield of 8%.

So the first thing that we do here under this accounting is we calculate what the present value is going to be.

So I'm just do equals minus pv.

And we've got a rate here, which is the 8% comma, the number of periods. And remember, 'cause there's a put option.

We'd actually use five years rather than seven years.

The cash payment is 20, which is the coupon, and the future value is 1000.

So I'll just take that 1000 there.

And that means the debt is gonna be valued at seven 60.

The cash proceeds of course, are gonna be equal to thousand 'cause we'll assume that's the same as the par value and the additional paid in capital is gonna be the difference between the two.

So under the cash conversion feature, the debt gets from the balance sheet as normal, and then any difference between that and the proceeds go into additional paid in capital.

And a year later what happens? Well, we get the cash coupon coming out of the cash account and that's 20.

And then we will calculate interest expense by taking the real yield on a non-convertible bond times the present value of the debt.

So we get 60.8 and that should be negative 'cause it's an expense.

And then we get the amortization, the discount, which is just the difference. So I'll take the minus 20, minus minus 60.8 and the debt will rise by 40.8.

Now let's take a look at what happens if this bond converts at the end of year three.

Now remember it had a five year period, so we've got two other bits of information. We've got the share price at the end of year three, and we've got a two year non-convertible bond with similar terms at 6.1%.

So what we have to do is we've just got to run through the advertised costs of the debt.

So remember we started out with the amount on the balance sheet, seven 60.4.

The interest expense is going to be the beginning amount times that interest rate we've got up above here.

I'll absolutely reference that the cash coupon is gonna stay the same at 20.

Animals will pick it up from here. Absolute reference that.

So then I'll do the ending amount.

And this is allowing us just to calculate what the value of the debt will be on the balance sheet at year three. So I'm gonna go through, And again, the interest is calculated by taking the 8% times the beginning balance.

The cash coupon stays constant, and then we calculate the ending value.

And if we continue to do that, you'll see by the end of year three we will be 8, 9, 3.

And if we carry it on until year five, that would eventually hit 1000.

So now what we're going to do is calculate the fair value of the convertible bond.

Now remember we are given this new yield here.

So what we're going to do is have to do another present value calculation here.

And we'll start with the rate, which is 6.1%.

The number of periods in this case is gonna be two, the payment is going to be 20, and the future value is gonna be 1000.

And that will give us the true value of the convertible bond.

So now what we need to do is calculate the value of the full conversion.

So I'm gonna go up and take the par value of the bond, which is 1000.

I'm gonna divide by the exercise price and then I'll multiply by the share price at the end of year three, which is 101,250.

Now how much cash do we get on? Well that is the par value.

Remember we said that this was gonna be the par value.

So the cash on conversion is gonna be the 1000, okay? And in this case, that is what we've agreed.

So the value of the share element is just the difference between these two items.

The value of the conversion minus the cash received.

So how many shares do we need to give over to generate that value? Well, the two 50 divide by the 1, 2, 5, and I get two shares handed over.

So now we need to do the accounting for the conversion.

And we know that we gave cash of 1000.

So cash on conversion's gonna go down by 1000.

Now the debt on the balance sheet is going to need to be revalued, but rather than doing revalue and then a loss, it's just simpler just to take the debt off the balance sheet at 8 9 3, and then we'll have a loss on extinguishing the debt.

And that's gonna be the difference between the fair value of the debt and the book value amount.

So what I'm gonna do is just take the 8 9 3 and I'm going to subtract the fair value of the bond, which means I need to expense another 31.9.

How much is comm stock going to go up? Well, it's two shares multiplied by the par value, which we can get up from the earlier question here.

I dunno if I should come. There we go, which is five, and then you can go through the individual double entries, but it's just easier to treat APIC as a plug.

So in this case you can see that this does not equal a thousand.

So what we'll do is we'll just take 1000 on this side of the balance sheet and sum everything up to make sure it balances and apick effectively takes the plug here.