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Compound Financial Instrument

Mipha Company issued 5,000 bonds with 8% interest payable annually and warrants to purchase shares at P30 each. All warrants were exercised on December 31, 2020. Journal entries were made on January 1 for the bond issuance, interest expense on December 31, 2020, and amortization of the bond premium. A final entry recorded the exercise of the warrants for cash and appropriate equity accounts. Daruk Company issued 2,000 convertible bonds at 110% of par that were converted to shares on December 31, 2020. Journal entries recorded the bond issuance with appropriate discount, annual interest expense, amortization of the bond discount, and final conversion of bonds to shares.

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1K views2 pages

Compound Financial Instrument

Mipha Company issued 5,000 bonds with 8% interest payable annually and warrants to purchase shares at P30 each. All warrants were exercised on December 31, 2020. Journal entries were made on January 1 for the bond issuance, interest expense on December 31, 2020, and amortization of the bond premium. A final entry recorded the exercise of the warrants for cash and appropriate equity accounts. Daruk Company issued 2,000 convertible bonds at 110% of par that were converted to shares on December 31, 2020. Journal entries recorded the bond issuance with appropriate discount, annual interest expense, amortization of the bond discount, and final conversion of bonds to shares.

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hae1234
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Submitted by: Limense, Princess Kathleen S.

(MIPHA & DARUK COMPANY)

(1) On January 1, 2020, Mipha Company decided to issue 5,000 10-year bonds of 8% P1,000 face value
with warrants to acquire share capital at P30 per share. The interest on the bonds is payable annually
every December 31.

Each bond contains one warrant which can be used to acquire 4 shares of P25 par value share capital.

It is reliably determined that without warrants, the bonds would sell at 114.7 with a 6% effective yield.
The bond price with warrants is 120. All warrants are exercised on December 31, 2020.

REQUIRED: Prepare the journal entries for 2020 in connection with the bond issuance and the exercise
of warrants. Use effective interest method of amortization.

Answer:

1. Cash (5,000,000 x 120%) 6,000,000


Bonds Payable 5,000,000
Premium on bonds payable 735,000
Share warrants outstanding 265,000

Issue price with warrants (5,000,000 x 120) 6,000,000


Market price of bonds without warrants (5,000,000 x 1.147) 5,735,000
Equity Component 265,000

2. Interest Expense (5,000,000 x 8%) 400,000


Cash 400,000

3. Premium on bonds payable (400,000-344,100) 55,900


Interest Expense (6% x 5,735,000-344,100) 55,900

4. Cash (20,000 shares x 30) 600,000


Share warrants outstanding 265,000

Share capital (20,000 x 25) 500,000


Share premium 365,000
2. On January 1, 2020, Daruk Company issued 2,000 convertible bonds. The bonds have a three-year
term and are issued at 110 with a face value of P1,000 per bond, giving total proceeds of P2,200,000.
Interest is payable annually in arrears at a nominal annual interest rate of 6%.

Each bond is convertible at any time up to maturity into 25 shares of capital with par value of P20. The
bonds are converted on December 31, 2020. When the bonds are issued, the prevailing market rate for
similiae bonds without conversion privilege is 9%.

The present value of 1 at 9% for three periods is 0.77 and the present value of an ordinary annuity of 1
at 9% for three periods is 2.53

REQUIRED: Prepare the journal entry to record issuance of the bonds om January 1, 2020, interest
payment, effective amortization and bond conversion on December 31, 2020.

Answer:

Present value of principal (2,000,000 x 0.77) 1,540,000


Present value of interest payments (120,000 x 2.53) 303,600
Total present value 1,843,600
Face value 2,000,000
Discounts on bonds payable 156,400

1. Cash 2,200,000
Discount on bonds payable 156,400

Bond payable 2,000,000


Share premium – conversion privilege 356,400

2. Interest expense 120,000


Cash (6% x 2,000,000) 120,000

3. Interest expense 45,924


Discount on bonds payable 45,924

Interest paid 120,000


Interest expense (9% x 1,843,600) 165,924
Discount amortization 45,924

4. Bonds payable 2,000,000


Share premium – conversion privilege 356,400

Discount on bonds payable 110,476


Share Capital 1,000,000
Share premium 1,245,924

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