Name: CANDOLE, Jorie Faye Ranara

GALLANO, Joshua Luther Jones Casido

Student ID: 513683 & 515933
Course: BS Accountancy (2nd Year)

LET’S ANALYZE ULO deg COMPOUND FINANCIAL INSTRUMENT

Problem 1
Umbrella Corporation has 4,000, 10%, 10-year bonds, face value 1,000, and sold it at 105. Each
bond is accompanied by one warrant that permits the bondholder to purchase 20 shares of capital, par
50, at 55 per share, or a total of 80,000 shares. The prevailing market rate of interest for similar bonds
without warrants is 12% per annum with which

the PV of 1 at 12% for 10 periods is 0.322

and in an ordinary annuity is 5.65

What is the entry to record issuance of the compound instrument and the exercise of the 70%
warrants? Assume also the expiration of the 30% warrants and prepare the entry.

Issue Price of Bonds 4,000 x 1,000 = 4,000,000 * 105% 4,200,000

Total Present Value of Bonds Payable
PV of Principal = 4,000,000 * 0.322 1,288,000
PV of Interest Payments = 4,000,000 * 10% * 5.65 2,260,000 3,548,000
Residual Amount Allocated to Share Warrants 652,000

Cash 4,200,000
Discount on Bonds Payable 452,000
(4,000,000 – 3,548,000)
Bonds Payable 4,000,000
Share Warrants Outstanding 652,000
To record issuance of bonds. .
Cash (4,000 * 20 * 55) 4,400,000
Share Warrants Outstanding 652,000
Ordinary Share Capital 4,000,000
(4,000 * 20 * 50)
Share Premium 1,052,000
Cash 3,080,000
Share Warrants Outstanding 456,400
Ordinary Share Capital 2,800,000
Share Premium 736,400
To record the 70% exercise of the warrant.

Share Warrants Outstanding 195,600

(652,000 * 30%)
Share Premium – Unexercised Warrants 195,600
To record the expiration of the warrants.
Name: CANDOLE, Jorie Faye Ranara
GALLANO, Joshua Luther Jones Casido
Student ID: 513683 & 515933
Course: BS Accountancy (2nd Year)

Problem 2
At the beginning of the current year, Claudine Corporation issued 6,000, 5-year bonds, face
value 1,000 each at 105. The bonds has a conversion privilege that provides for an exchange of a 1,000
bond for 20 shares of capital, par 50. Without such conversion privilege, the bonds would only sell at
98.
Prepare the entries in connection with the issuance of the bonds and the conversion of the bonds
at the end of the current year.

Issue Price of Bonds 6,000 * 1,000 = 6,000,000 * 105% 6,300,000

Allocated to the fair value of B/P = 6,000,000 * 98% 5,880,000
Allocated to conversion privilege 420,000

Cash 6,300,000
Discount on Bonds Payable 120,000
(6,000,000 – 5,880,000)
Bonds Payable 6,000,000
Share Premium - Conversion Privilege 420,000
To record issuance of the compound instrument.

Bonds Payable 6,000,000

Share Premium – CP 420,000
Discount on Bonds Payable 96,000
(Less: 120,000/ 5 = 24,000)
Ordinary Share Capital 6,000,000
(6,000 * 20 * 50)
Share Premium 324,000

Problem 3
Faith Company issued 5500 convertible bonds on January 1, 2019. The bonds have a three-year
term and are issued at 110 with a face value of 1,000 per bond. Interest is payable annually in arrears
at a nominal 6% interest rate. Each bond is convertible at any time up to maturity into 100 common
shares with par value of 5. When the bonds are issued, the prevailing market interest rate for similar
debt instrument without conversion option is 9%.

The present value of 1 at 9% for 3 periods is 0.77

and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53

Case a. Prepare the entries of the company in connection with the bonds for its 3-year term assuming
the bonds were not converted.
Case b. Suppose that the company converted the bonds on December 31, 2019, Prepare the entries
on the bonds during 2019.
Name: CANDOLE, Jorie Faye Ranara
GALLANO, Joshua Luther Jones Casido
Student ID: 513683 & 515933
Course: BS Accountancy (2nd Year)

Issue Price of Bonds 5,500 x 1,000 = 5,500,000 * 110% 6,050,000

Total Present Value of Bonds Payable
PV of Principal = 5,500,000 * 0.77 4,235,000
PV of Interest Payments = 5,500,000 * 6% * 2.53 834,900 5,069,900
Allocated to Share Premium – Conversion Privilege 980,100

Date Interest Paid Interest Expense Discount Amortization Carrying Amount

5,069,900
Year 1 330,000 456,291 126,291 5,196,191
Year 2 330,000 467,657 137,657 5,333,848
Year 3 330,000 496,152 166,152 5,500,000

CASE A

YEAR 1
Cash 6,050,000
Discount on Bonds Payable 430,100
Bonds Payable 5,500,000
Share Premium – CP 980,100
-Dec 31
Interest Expense 126,291
Discount on Bonds Payable 126,291

Interest Expense 330,000

Cash 330,000
(5,500,000 * 6%)
YEAR 2
Interest Expense 137,657
Discount on Bonds Payable 137,657

Interest Expense 330,000

Cash 330,000

YEAR 3
Interest Expense 166,152
Discount on Bonds Payable 166,152

Bonds Payable 5,500,000

Interest Expense 330,000
Cash 5,830,000
Name: CANDOLE, Jorie Faye Ranara
GALLANO, Joshua Luther Jones Casido
Student ID: 513683 & 515933
Course: BS Accountancy (2nd Year)

Share Premium – CP 980,100

Share Premium – Issuance 980,100

CASE B

YEAR 1
Cash 6,050,000
Discount on Bonds Payable 430,100
Bonds Payable 5,500,000
Share Premium – CP 980,100
-Dec 31
Interest Expense 126,291
Discount on Bonds Payable 126,291

Interest Expense 330,000

Cash 330,000

Bonds Payable 5,500,000

Share Premium – CP 980,100
Discount on Bonds Payable 303,809
(430,100 – 126,291)
Share Capital 2,750,000
(5,500 * 100 * 5)
Share Premium – Issuance 3,426,291