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    The Suns, Inc. issued $2,000,000 of 8% convertible bonds on January 2, 2004 that mature on January 1, 2008. On December 31, 2005, bondholders with $1,000,000 face value exercised their conversion privilege to receive common stock, and the company reacquired $500,000 face value of bonds at 110.

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    AP PROB 5

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    The Suns, Inc. issued $2,000,000 of 8% convertible bonds on January 2, 2004 that mature on January 1, 2008. On December 31, 2005, bondholders with $1,000,000 face value exercised their conversion privilege to receive common stock, and the company reacquired $500,000 face value of bonds at 110.

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    Problem No. 6: Questions

    Uploaded by

    jhobs
    The Suns, Inc. issued $2,000,000 of 8% convertible bonds on January 2, 2004 that mature on January 1, 2008. On December 31, 2005, bondholders with $1,000,000 face value exercised their conversion privilege to receive common stock, and the company reacquired $500,000 face value of bonds at 110.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 2

    PROBLEM NO.

    6
    On January 2, 2004, the Suns, Inc. issued P2,000,000 of 8% convertible bonds at
    par. The bonds will mature on January 1, 2008 and interest is payable annually
    every January
    1. The bond contract entitles the bondholders to receive 6 shares of P100 par value
    common stock in exchange for each P1,000 bond. On the date of issue, the
    prevailing market interest rate for similar debt without the conversion option is 10%.

    On December 31, 2005, the holders of the bonds with total face value of
    P1,000,000 exercised their conversion privilege. In addition, the company
    reacquired at 110, bonds with a face value of P500,000.

    The balances in the capital accounts as of December 31, 2004 were:

    Common stock, P100 par, authorized 50,000 shares, issued


    and outstanding, 30,000 shares

    P3,000,000 Premium on common stock

    500,000

    Market value of the common stock and bonds were as follows:

    Date Bonds Common stock


    December 31, 2004 118 40
    December 31, 2005 110 42

    QUESTIONS:
    Based on the above and the result of your audit, answer the following:
    1. How much of the proceeds from the issuance of convertible bonds should be
    allocated to equity?
    a. P634,000 b. P126,816 c. P221,664 d. P0
    2. How much is the carrying value of the bonds payable as of December 31,
    2004? a. P2,000,000 b. P1,389,400 c.
    P1,796,170 d. P1,900,502
    3. How much is the interest expense for the year 2005?
    a. P160,000 b. P138,940 c. P179,617 d. P190,050
    4. The entry to record the conversion on December 31, 2005 will include a credit to
    APIC of
    a. P365,276 b. P400,000 c. P307,893 d. P0
    5. How much is the loss on bond reacquisition on December 31, 2005?
    a. P50,000 b. P96,053 c. P67,362 d. P0

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