Problem 20-16: (Unamortized Discount)

On January 2, 2014, Anger Company issued its 9% bonds in the face amount of P 4,000,000 which

mature on January 1, 2024. The bonds were issued for P 3,756,000 to yield 10%. Anger uses the

interest method of amortizing bond discount. Interest is payable annually on December 31.

At December 31, 2015, how much should be Anger's unamortized bond discount?

al P192,364

b) P228,400

c) P211,240

d) P244,000

Answer: C

Face Value P4,000,000

Less: Carrying Value, December 31, 2015 3,788,760

Unamortized bond discount P 211,240

Date Interest Paid Interest Expense Discount Amortization Carrying Value

01.01.14 0 0 0 P3,756,000

12.31.14 P360,000 P375,600 P15,600 3,771,600

12.31.15 360,000 377,160 17,160 3,788,760

Interest Expense = Carrying value of the liability x Yield rate

Problem 20 - 15: (Carrying Value of Debt Instruments)

On January 2, 2014, East Co. issued 9% bonds in the amount of P1,000,000 which mature on

January 2, 2024. The bonds were issued for P939,000 to yield 10%. Interest is payable annually

on December 31. East uses the interest method of amortizing bond discount. In its December

31, 2014 statement of financial position, what amount should East report as bonds payable?

a) P939,000

b) P947,000

c) P942,900

d) P1,000,000

Answer: C

Carrying Value, January 2, 2014 P939,000

Add: Discount Amortization

Interest paid (P1,000,000 x 9%) P90,000

Less: Interest expense (P939,000 x 10%) 93,900 3,900

Carrying Value, December 31, 2014 P942,900

Problem 20 – 17: (Detachable Warrants)

During 2014, Royal Corporation booed at 95, one thousand of its 8% P5,000 bonds due in ten years.

One detachable stock purchase warrants entitling the holder to buy 20 shares of Royal’s

ordinary shares was attached to each bond. Shortly after issuance, the bonds are selling at 10%

ex-warrant, and each warrant was quoted at P60. The present value factors are the following:

PV of 10% for an ordinary annuity of P1 after 10 periods 6.145

PV of 10% after 10 interest periods .385

What amount of any of the proceeds from the bond issuance should be recorded as part e

Royal's shareholders' equity?

a) none

b) 9250000

c) P225,000

d) P367,000

Answer: D

Proceeds from issue (P5,000,000 x 95%) P4,750,000

Less Fair value of the bands (Schedule 1) 4,383,000

Fair value of equity component P 367,000

Schedule 1

Present value of total interest (P5,000,000 x 8% x 6.145) P2,458,000

Present value of principal (P5,000,000 x .385) 1,925,000

Fair value of debt instrument P4,383,000

Problem 20 - 22: (Issue of Convertible Debt Instruments)

On January 1, 2014, Grader Company issued its 10%, 4 year convertible debt instrument with a

face amount of P 4,000,000 for P4,400,000. Interest is payable every December 31 of each year.

The debt instrument is convertible into 35,000 ordinary shares with a par value of P100. When

the debt instruments were issued, the prevailing market rate of interest for similar debt without

conversion option is 8%.

PV of 8% for an ordinary annuity of P1 after 4 periods 3.312

PV of 8% after 4 interest periods .735

Question 2: What is the balance of the unamortized premium on debt instrument as of

December 31, 2014?

a) P 73,860

b) P205,984

c) P142,463

d) P264,800

Answer: B

Carrying value of debt as of January 1, 2014 P4,264,800

Less: Premium amortization

Interest Paid P400,000

Interest Expense (P4,424,800 x 8%) 341,184 58,816

Carrying value of debt as of December 31, 2014 P4,205,984

Less: Face value of debt 4,000,000

Unamortized premium as of December 31, 2014 P 205,984

Problem 20 - 23: (Issue of Convertible Debt Instruments)

On January 1, 2014, Tudor Company issued its 10%, 5-year convertible debt instrument with a

face amount of P10,000,000 for P10,000,000. Interest is payable every December 31 of each

year. The debt instrument is convertible 90,000 ordinary shares with a par value of P100.

When the debt instruments were issued, they were selling 97% without conversion option

Tudor Company incurred P80,000 transaction costs on the issue of the debt instruments.

Question 1: How much of the net proceeds represent the equity component?

a) P 297,600

b) P 9,920,000

c) P 9,622,400

d) P 10,000,000

Question 2: How much of the net proceeds represent the debt component?

a) P 297,600

b) P 9,622,400

c) P 9,920,000

d) P 10,000,000

Answers: Q1: A Q2: B

Ratio Proceeds Transaction Net Proceeds

Debt 97% P 9,700,000 P77,600 P9,622,400

Equity 3% 300,000 2,400 297,600

Total 100% P10,000,000 P80,000 P9,920,000

Problem 20- 26: (Conversion of Debt to Equity)

On January 1, 2014, Emilia Corporation issued its 5-year, 12% P5,000,000 face value convertible

debt instrument for P 4,800,000. The debt instrument is convertible into 80,000 ordinary shares

with a par value of P50 per share and can be converted anytime from January 2015 to maturity.

At the time of issue, the market rate of interest for a similar instrument is 14%. Interest is

payable every six months on January 1 and July 1.

On July 1, 2015, the entire debt instrument was converted into equity instrument by the issuance

of 80,000 ordinary shares of the enterprise. Transaction costs of P50,000 were incurred in

relation to the issue of new shares.

PV of 7% for an ordinary annuity of P1 after 10 periods 7.024

PV of 7% after 10 interest periods .508

What amount should be credited to the share premium account as a result of the conversion?

a) None

b) P831,349

c) P152,800

d) P881,549

Answer: B

Carrying value of debt as of December 31, 2015 P 4,728,549

Equity component 152,800

Total P4,881,349

Less: Par value of ordinary shares (80,000 shares x PS0) 4,000,000

Excess P 881,349

Less: Transaction costs 50,000

Credit to Share Premium P 831,349

 Date Interest Paid Interest Expense Discount Amortization Carrying Value

01.01.14 0 0 0 P4,647,200

07.01.14 P300,000 P325,304 P25,304 4,672,504

12.31.14 300,000 327,075 27,075 4,699,579

07.01.15 300,000 328,970 28,970 4,728,549

Total proceeds from issue of debt P4,800,000

Less: Liability component (PV expected cash flows)

Interest (P5,000,000 x 6% x 7.024) P2,107,200

Face (P5,000,000 x .508) 2,540,000 4,647,200

Equity component P 152,800

Problem 20-27: (Partial Conversion of Debt to Equity)

On January 1, 2014, Wisdom Company issued its 10%, 6-year convertible debt instrument with a face

amount of P 3,000,000 for P 3,500,000. Interest is payable every December 31 of each year.

The debt instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt

instrument is convertible into equity from the time of issue until maturity. Without the

conversion feature, the debt instrument would have sold at 106.

On December 31, 2015, Wisdom Company converted 1,000,000 debt instruments by issuing

10,000 ordinary shares. As of December 31, 2015, the unamortized premium on the debt

instrument is P135,000.

What amount should be credited to the share premium account as a result of the conversion

a) None

b) P151,667

c) P135,000

d) P180,000

Answer: B

Total issue price P 3,500,000

Less: Liability component (1,000,000 x 106%) 3,180,000

Equity Component P 320,000

Face of the debt instruments P 3,000,000