NADUMA, KAYE KHORAINE ACC211 (2482)

ROSAURO, KRYZTLE SHAMMAINE COMPOUND FIN.

INSTRUMENT
10 PROBLEMS W/ SOLUTIONS

1. At year-end, Fort Company issued 5,000 8%, 10-year bonds, P1,000

face amount with detachable share warrants at 110. Each bind carried
a detachable warrant for 10 ordinary shares of Fort Company at a
specified option price of P25 per share. The par value of ordinary share
is P20. Immediately after issuance, the market value of the bonds
without warrants was P5,400,000 and the market value of the warrants
was P600,000.
What is the carrying amount of bonds payable at year-end?

Issue price of BP—equal to market value w/o the warrants

m
er as
5,400,000

co
eH w
2. Moriones Company issued P5,000,000 face amount 12% convertible
bonds at 110 at the beginning of the current year. The bonds pay

o.
rs e
interest semiannually on January 1 and July 1. It is estimated that the
ou urc
bonds would sell only at 103 w/o the conversion feature. Each 1,000
bond is convertible into 10 ordinary shares with P100 par value.
What is the increase in the SHE arising from the original issuance of
o

the convertible BP?

aC s
vi y re

Issue price of BP (5M*110) 5,500,000

Market value of BP (5M*103) (5,150,000)
Residual amount allocated to conversion privilege
350,000
ed d
ar stu

3. At the beginning of the current year, Sabo Company issued 5,000 convertible
bonds payable. The bonds have a three-year term and are issued at 110 with a
is

face amount of P1,000 per bond. Interest is payable annually in arrears at a

Th

nominal 6% interest rate. Each bond is convertible at any time up to maturity into
100 ordinary shares with par value of P5. When the bonds are issued, the
prevailing market interest rate for similar debt instrument without conversion
sh

option is 9%. The present value of 1 at 9% for 3 periods is .77 and the present
value of an ordinary annuity of 1 at 9% for 3 periods is 2.53. What is the equity
component of the original issuance of the convertible bonds payable?

This study source was downloaded by 100000827689665 from CourseHero.com on 06-26-2021 04:31:28 GMT -05:00

https://www.coursehero.com/file/85469156/CFI-10-problems-with-solutionsdocx/
 PV of principal (5,000,000 x .77) 3,850,000
PV of annual interest payments (300,000 x 2.53) 759,000
Total present value of bonds 4,609,000

Issue price of convertible bonds (5,000,000 x 110) 5,500,000

Present value of bonds (4,609,000)
Equity component - Share premium 891,000

4. Luffy Company had 600,000 convertible 8% bonds payable outstanding on June

30, 2013. Each 1,000 bond was convertible into 10 ordinary shares of 50 par
value. On July 1, 2013, the interest was paid to bondholders, and the bonds were

m
er as
converted into ordinary shares which had fair value of 75 per share. The

co
eH w
unamortized premium on these bonds was 12,000 at the date of conversion. No

o.
equity component was recognized when the bonds were originally issued. What
rs e
is the increase in the share capital and share premium as a result of bond
ou urc
conversion?
o

Increase in share capital (6,000 x 50) 300,000

aC s
vi y re

Bonds payable 600,000

Premium on bonds payable 12,000
ed d
ar stu

Carrying amount 612,000

Ordinary shares issued at par value 300,000
Increase in share premium 312,000
is
Th

5. At the beginning of the current year, Ace Company issued 5,000,000 of 12%
nonconvertible 5-year bonds at 103. In addition, each 1,000 bond was issued
sh

with 30 detachable share warrants, each of which entitled the bondholder to

purchase, for ₱50, one ordinary share of CAE Company, par value ₱25. The
quoted market value of each warrant was ₱4. The market value of the bonds ex-

This study source was downloaded by 100000827689665 from CourseHero.com on 06-26-2021 04:31:28 GMT -05:00

https://www.coursehero.com/file/85469156/CFI-10-problems-with-solutionsdocx/
 warrants at the time of issuance is 95. What amount of the proceeds from the
bond issue should be recognized as an increase in shareholders’ equity?

Issue price of bonds with warrants (5,000,000 x 103%) 5,150,000

Market value of bonds without warrants (5,000,000 x 95%) 4,750,000
Equity component 400,000

6-8
6. On December 31, 2016, Tamia Company showed the following
balances:
Bonds Payable- 6% 4 000 000
Discount on bonds Payable 500 000

m
er as
Share Premium- Issuance 5 000 000

co
Share Premium- Conversion Privilege 700 000

eH w
The interest is payable annually every December 31. The convertible

o.
rs e
bonds are not converted but fully paid on December 31, 2016.
ou urc
On such date, the quoted price of the convertible bonds with
conversion option is 105 which is the payment to the bondholders plus
o

interest.
aC s
vi y re

However, the quoted price of the bonds without the conversion

privilege is 95.

What is the carrying amount of the bonds payable on December 31,

ed d

2016?
ar stu

Bonds Payable 4 000 000

Discount on BP (500 000)
is

CA 3 500 000
Th

7. What is the gain or loss from extinguishment of bonds?

3 500 000
3 800 000
(300 000) loss
sh

8. What is the total payment to the bondholders on December 31, 2016?

4 000 000*1.05 4 200 000
4 000 000*.06 240 000
4 440 000

This study source was downloaded by 100000827689665 from CourseHero.com on 06-26-2021 04:31:28 GMT -05:00

https://www.coursehero.com/file/85469156/CFI-10-problems-with-solutionsdocx/
 9. At the beginning of the current year, Case company issued 5 000 000
of 12% nonconvertible 5-year bonds 103.

In addition, each 1 000 bond was issued with 30 detachable share

warrants, each of which entitled the bondholder to purchase, for P50,
one ordinary share of case company, par value of P25.

The quoted market value of each warrant was P4. The market value of
the bonds ex-warrants at the time of issuance is 95.

What is the carrying amount of the bonds payable?

5 000 000*.95 4 750 000

10. Refer to no. 9, what amount of the proceeds from the bond issue
should be recognized as an increase in shareholder’s equity?

m
er as
5 000 000*1.03 5 150 000

co
eH w
5 000 000*.95 4 750 000
Residual amount allocated to warrants 400 000

o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000827689665 from CourseHero.com on 06-26-2021 04:31:28 GMT -05:00

https://www.coursehero.com/file/85469156/CFI-10-problems-with-solutionsdocx/
Powered by TCPDF (www.tcpdf.org)