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QUIZZER - COMPOUND FINANCIAL INSTRUMENTS

FUND AND OTHER INVESTMENTS

1) UNO-DOS-TRES Company insures the life of its president for P8,000,000, the corporation being the
beneficiary of an ordinary life policy. The premium is P200,000, good for five years. The policy is dated
January 1, 2009. The cash surrender value on December 31, 2011 and 2012 are P60,000 and P80,000
respectively. The corporation follows the calendar year as its fiscal period. The president dies on October
1, 2012 and the policy is collected on December 31, 2012. What is the gain on life insurance settlement?

2) The following information relates to a noncurrent investment that TITUS Company placed in trust as
required by the underwriter of its bonds:

Bond sinking fund, 1/1/12 5,000,000


Additional investment in 2012 1,000,000
Dividend on investment 500,000
Interest revenue 1,500,000
Administration costs 800,000
Carrying amount of bonds payable 9,000,000

What amount should TITUS report in its December 31, 2012 statement of financial position related to its
bond sinking fund?

3) On January 1, 2005, PANDA Corporation issued a 10% convertible bonds with a face value of
P4,000,000 maturing on December 31, 2014. Each P1,000 bond is convertible into ordinary shares of
PANDA at a conversion price of P25 per share. Interest is payable half-yearly in cash. At the date of issue,
PANDA could have issued nonconvertible debt with a ten-year term bearing a coupon interest rate of 11%.

On January 1, 2010, the convertible bond has a fair value of P4,400,000. PANDA makes a tender offer to
the holders to repurchase the bonds for P4,400,000. The holders of the P2,000,000 bonds accepted the
offer. At the date of repurchase, PANDA could have issued nonconvertible debt with a five-year term
bearing a coupon interest rate of 8%. Use four decimal places.

The amount to be recognized in profit or loss as a result of the repurchase of the bonds on January 2010
is?

For numbers 4-8:

On January 2, 2011, FABIO, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will
mature on January 1, 2015 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, 2012, 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, 2011 were:

Ordinary share capital, P100 par, authorized 50,000 shares,


issued and outstanding, 30,000 shares P3,000,000
Premium on ordinary shares 500,000

Market value of the ordinary shares and bonds were as follows:

Date Bonds Ordinary shares


December 31, 2011 118 40
December 31, 2012 110 42

Based on the above information, answer the following:

4) How much of the proceeds from the issuance of convertible bonds should be allocated to equity?
5) How much is the carrying value of the bonds payable as of December 31, 2011?

6) How much is the interest expense for the year 2012?

7) The entry to record the conversion on December 31, 2012 will include a credit to Share Premium of

8) How much is the loss on bond reacquisition on December 31, 2012?

9) On January 1, 2016, ALLISON BURGERS Company issued its 10%, 5-year convertible debt instrument
with a face amount of P5,000,000 for P5,100,000. Interest is payable every December 31 of each year.
The debt instrument is convertible into 50,000 ordinary shares with a par value of P100 each. When the
debt instruments were issued, the prevailing market rate of interest for similar debt without the
conversion option is 11%. ALLISON BURGERS incurred transaction cost of P70,000 related to the issue of
the compound instrument. How much of the total proceeds represent the equity component? (Round off
present value factors to three decimal places.)

10) FLYAWAY Corporation insures the life of its president for P4,000,000, the corporation being the
beneficiary of an ordinary life insurance policy. The monthly premium is P6,000 payable every first day of
the month. The policy is dated January 1, 2009 and carries the following cash surrender values:

End of Policy Year Cash Surrender Value


2009 -
2010 -
2011 25,200
2012 30,000
2013 39,600
2014 50,400

The corporation follows the calendar year as its fiscal year. The president dies on October 31, 2014 and
the policy is collected on December 1, 2014. What is the gain on life insurance settlement?

Your life is a journey to meet your future self

-Anonymous