I have a client that raised $1MM in convertible notes at a $10MM cap with a 20% discount. They subsequently received their Series A investment of $10MM at a $40MM pre-money valuation at which time the convertibles converted into equity. The question is: what is the journal entry to reclass the convertibles into preferred stock on the balance sheet?
Entry for Conversion of Convertible Notes
This is an article by EY on accounting of Stocks, Equity and Debts with all scenarios. This may be helpful and you can consider all other scenarios from this as well.
Let me know if this doesn't help.
Move the long-term liability (convertible note and any accrued interest) into Preferred Equity (at par value of stock, most likely $0.0001/share) and the rest into Additional Paid in Capital.
Jon, I follow your earlier response but am uncertain of the last portion of the entry at conversion.
I have a Convertible Note with the following details:
Term No Term
Rate 10% Compounding Annually
Cap $10MM pre-money valuation--no impact as the valuation is well below $.
Actual Term 2 Years, 7 Mos, 6 Days
Calculated accrued interest $2,856.29.
(D) Cash $10,000
(Cr) Convertible Notes $10,000
(D) Interest Expense $2,856.29
(Cr) Accrued Interest $2,856.29
Entry at Conversion (due to investment milestone):
(D) Convertible Note $10,000
(D) Accrued Interest $2,856.29
( ) Preferred Stock, par $0.3253 ?
( ) APIC, Conversion ?
At Par, I can purchase 39,516 (whole shares) whereas at my 20% discount I can purchase 49,395 shares. The value of the 9,879 shares would be $3,213.64 (9,879 x $0.3253).