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    Compound Financial Instrument - HO

    Uploaded by

    Sam Jam
    Compound Financial Instrument

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Compound Financial Instrument - HO

    Uploaded by

    Sam Jam
    1 views1 page
    Compound Financial Instrument

    Original Title

    Compound-Financial-Instrument_HO

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    © © All Rights Reserved

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    Compound Financial Instrument

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1 views1 page

    Compound Financial Instrument - HO

    Uploaded by

    Sam Jam
    Compound Financial Instrument

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 1

    COMPOUND FINANCIAL INSTRUMENT

    PROBLEM 1
    At the beginning of the current year, Monic Company decided to issue 5,000 10-year bonds
    payable of 8% P1,000 face amount each with share warrants to acquire equity shares at P30 per
    share. The interest on the bonds is payable annually every December 31.
    Each bond contains one share warrant which can be used to acquire 4 shares of P25 par value share
    capital.
    It is reliably determined that without share warrants, the bonds payable would sell at 115, with a
    6% effective yield. The bond price with share warrants is 120.
    REQUIRED:
    Prepare journal entries for the current year in connection with the bond issuance:
    1. Assuming that all the share warrants were exercised at the end of the year.
    2. Assuming that 2,500 share warrants were exercised at the end of the year, while the rest
    expired.

    PROBLEM 2
    On January 1, 2021, Andrea Company issued 4,000 convertible bonds payable with P1,000 face
    amount per bond. The bonds have a three-year life and are issued at 105 or a total proceeds of
    P4,200,000.
    Interest is payable annually at 6% every December 31. Each bonds is convertible into 20 ordinary
    shares with P50 par value.
    When the bonds are issued, the market rate of interest for similar bonds without conversion option
    is 8%. The PV of 1 at 8% for three periods is 0.79, and the PV of an ordinary annuity of 1 at 8%
    for three periods is 2.58.
    REQUIRED:
    1. Prepare journal entry to record the original issuance of the convertible bonds payable.
    2. Prepare journal entry to record the conversion of the bonds at December 31, 2022, assuming:
    a. All the bonds were converted, and share issue cost of P250,000 were incurred.
    b. 2,000 bonds were converted, and share issue cost of P150,000 were incurred.
    3. Prepare journal entry assuming that the right to convert expired on December 31, 2022.

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