BANITOG, BRIGITTE C.

MIDTERM ASSESSMENT 1

21. On January 1, 20x1, Sixty Hours Co. Issued 1,000, P2,000, 10% bonds for P1,903,927. Principal is due on December 31, 20x3, while interest is
due annually every year-end. The effective interest rate is 12%

SOLUTION:

Face Amount of Bonds P 2,000,000

Cash Proceeds (Issue price) (1,903,927)

Discount on Bonds Payable P 96,073

Interest Payments = Face Amount x Nominal Interest Rate = 2,000,000 x 10% = 200,000

AMORTIZATION TABLE

DATE INTEREST PAYMENTS(a) INTEREST EXPENSE (b) AMORTIZATION (c) PRESENT VALUE (d)
(d x EIR) (b-a) (Prev. Bal. + c)

Jan. 1, 20x1 1,903,927

Dec. 31, 20x1 200,000 228,471 28,471 1,932,398

Dec. 31, 20x1 200,000 231,888 31,888 1,964,286

Dec. 31, 20x1 200,000 235,714 35,714 2,000,000

Unamortized Discount of Bonds Payable - Dec. 31, 20x1 = Face Amount - Carrying Amount

= 2,000,000 – 1,932,398 = 67,602

JOURNAL ENTREIS

Jan. 1, 20x1 Cash 1,903,927

Discount on Bonds Payable 96,073

Bonds Payable 2,000,000

Dec. 31, 20x1 Interest Expense 228,471

Cash 200,000

Discount on Bonds Payable 28,471

Dec. 31, 20x2 Interest Expense 231,888

Cash 200,000

Discount on Bonds Payable 31,888

Dec. 31, 20x3 Interest Expense 235,714

Bonds Payable 2,000,000

Cash 2,200,000

Discount on Bonds Payable 35,714

22. On January 1, 20x1, Faith Co. Issued 1,000, P2,000, 12% bonds for P2,206,168. Principal is due on December 31, 20x3, while interest is due
annually every year-end. Faith Co. incurred transaction costs of P106,694 on the issuance. the effective interest rates are 8% before adjustment for
transaction costs and 10% after adjustment for transaction costs.

Solution:

Issue Price before Bond issue cost P 2,206,168

Transaction Costs (106,694)

Carrying amount of Bonds Payable P 2,099,474

Discount on Notes Payable = (Face Amount - Issue Price) + Transaction Costs

= (2,000,000 – 2,206,168) + 106,694 = 99,474

AMORTIZATION TABLE

DATE INTEREST PAYMENTS(a) INTEREST EXPENSE (b) AMORTIZATION (c) PRESENT VALUE (d)
(d x EIR) (b-a) (Prev. Bal. + c)

Jan. 1, 20x1 2,099,474

Dec. 31, 20x1 240,000 209,947 (30,053) 2,069,421

Dec. 31, 20x1 240,000 206,942 (33,058) 2,036,363

Dec. 31, 20x1 240,000 203,636 (36,364) 2,000,000

Outstanding Balances Fraction Allocation of Amortization

Discount on Bonds Payable (206,168) 206,168 /312,862 (19,804)

Bond Issue Costs 106,694 106,694 /312,862 (10,249)

99,474 (30,053)

JOURNAL ENTRIES:

Jan. 1, 20x1 Cash 2,099,474

Discount on Bonds Payable 99,474

Bonds Payable 2,000,000

Jan. 1, 20x1 Cash 2,099,474

Discount on Bonds Payable (206,168)

Bond Issue Cost 106,694

Bonds Payable 2,000,000

Dec. 31, 20x1 Interest Expense 209,947

Cash 240,000

Discount on Bonds Payable (19,804)

Bonds Issue Cost (10,249)

23. On January 1, 20x1, Hope Co. issued 5-year, 12%, P2,000,000 bonds for P2,151,632. Principal is due at maturity, while interest is due annually
every year-end. The effective interest rate is 10%. On July 1, 20x3, Hope Co. retired all the bonds at 102. The retirement price includes payment for
the accrued interest.

AMORTIZATION TABLE

DATE INTEREST PAYMENTS(a) INTEREST EXPENSE (b) AMORTIZATION (c) PRESENT VALUE (d)
(d x EIR) (b-a) (Prev. Bal. - c)

Jan. 1, 20x1 2,151,632

Dec. 31, 20x1 240,000 215,163 24,837 2,126,795

Dec. 31, 20x2 240,000 212,680 27,320 2,099,475

July 1, 20x3 120,000 104,974 15,026 2,084,449

Solution:

Carrying amount of bonds retired 2,084,449

Retirement price including payment for Accrued Interest (2M x 102%) 2,040,000

Accrued Interest (120,000)

Retirement Price (Call Price) 1,920,000

Gain on Extinguishment of Bonds 164,449

JOURNAL ENTRIES

The entry to update the carrying amount of the bonds payable

July. 1, 20x1 Interest Expense 104,974

Premium on Bonds Payable 15,026

Interest Payable 120,000

The entry to record the extinguishment

July. 1, 20x1 Bonds Payable 2,000,000

Interest Payable 120,000

Premium on Bonds Payable 84,449

Cash 2,040,000

Gain on Extinguishment of bonds 164,449

Premium on Bonds Payable = 2,084,449 - 2,000,000 = 84,449

24. On January 1, 20x1, Patience Co. issued 10%, 3-year, P2,000,000 convertible bonds at 105. Each P1,000 bond is convertible into 8 shares with
par value per share of P100. Principal is due on Dec 31, 20x3, while interest is due annually every year-end. On issuance date, the bonds were
selling at a yield to maturity market rate of 12% without the conversion option. All the bonds were converted into equity on December 31, 20x2.
Patience Co. incurred stock issuance costs of P20,000.

Fair Value of the Bond without the conversion option

Future Cash Flows PV @ 12%, n=3 PV Factors Present Value

Principal 2,000,000 PV of P1 0.711780 1,423,560

Interest 200,000 PV of OA of P1 2.401831 480,366

Fair value of debt instrument w/o conversion feature 1,903,926

Issue Price allocation

Equity Component = Issue Price - Fair Value of Debt Instrument without equity feature

= (P2,000,000 x 105%) – 1,903,926 = 196,074

AMORTIZATION TABLE

DATE INTEREST PAYMENTS(a) INTEREST EXPENSE (b) AMORTIZATION (c) PRESENT VALUE (d)

(d x EIR) (b-a) (Prev. Bal. + c)

Jan. 1, 20x1 1,903,926

Dec. 31, 20x1 200,000 228,471 28,471 1,932,397

Dec. 31, 20x2 200,000 231,888 31,888 1,964,285

Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

JOURNAL ENTRIES

Jan. 1, 20x1 Cash 2,100,000

Discount on Bonds Payable 96,074

Bonds Payable 2,000,000

Share Premium - conversion feature 196,074

Dec. 31, 20x1 Interest Expense 228,471

Discount on Bonds Payable 28,471

Cash 200,000

Dec. 31, 20x2 Interest Expense 231,888

Discount on Bonds Payable 31,888

Cash 200,000

Entries to record conversion

Dec. 31, 20x2 Bonds Payable 2,000,000

Discount on Bonds Payable 35,714

Share Capital [(8 shares x 1,000) x 100] 800,000

Share Premium (squeezed) 1,164,286

Share Premium 20,000

Cash 20,000

Share Premium - conversion feature 196,074

Share Premium 196,074

25. On January 1, 20x1, Kindess Co. issued 3-year, 10% P2,000,000 convertible bonds for P2,200,000. Principal is due at maturity but interest is
payable every year-end. The bonds are convertible into 6,000 ordinary shares with par value per share of P200. On issuance date, the prevailing
market rate of interest for similar debt without a conversion feature was 12%. On Dec 31, 20x2, Kindness Co. retired all the bonds for P2,000,000.
On retirement date, the current rate for similar debt instrument without a conversion feature was 11%.

Fair Value of the Bond without the conversion option

Future Cash Flows PV @ 12%, n=3 PV Factors Present Value

Principal 2,000,000 PV of P1 0.711780 1,423,560

Interest 200,000 PV of OA of P1 2.401831 480,366

Fair value of debt instrument w/o conversion feature 1,903,926

Issue Price allocation

Equity Component = Issue Price - Fair Value of Debt Instrument without equity feature

= P2,200,000 – 1,903,926 = 296,074

AMORTIZATION TABLE

DATE INTEREST PAYMENTS(a) INTEREST EXPENSE (b) AMORTIZATION (c) PRESENT VALUE (d)
(d x EIR) (b-a) (Prev. Bal. + c)

Jan. 1, 20x1 1,903,926

Dec. 31, 20x1 200,000 228,471 28,471 1,932,397

Dec. 31, 20x2 200,000 231,888 31,888 1,964,285

Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

JOURNAL ENTRIES

Jan. 1, 20x1 Cash 2,200,000

Discount on Bonds Payable 96,074

Bonds Payable 2,000,000

Share Premium - conversion feature 296,074

Dec. 31, 20x1 Interest Expense 228,471

Discount on Bonds Payable 28,471

Cash 200,000

Future Cash Flows PV @ 11%, n=1 PV Factors Present

Value

Principal 2,000,000 PV of P1 0.900901 1,801,802

Interest 200,000 PV of OA of P1 0.900901 180,180

Fair value of debt instrument w/o conversion feature

1,981,982

Equity component = Total Retirement Price - Fair value of the bonds without conversion feature

= 2,000,000 - 1,981,982 = 18,018

Gain (loss) on Extinguishment = Carrying amount of bonds on Retirement date - Retirement price allocated to bonds

= 1,964,285 - 1,981,982 = (17,697)

Dec. 31, 20x2 Bonds Payable 2,000,000

Share Premium-conversion feature 296,074

Loss on Extinguishment of Bonds 17,697

Discount on BP (2M - 1,964,285) 35,715

Cash 2,000,000

Share Premium (squeezed) 278,056

Equity component allocated from issue price 296,074

Equity component allocated from the retirement price (18,018)

Amount permanently closed to share premium account 278,056