Reference no: EM132967618
Question - On January 1, 2018, a corporation issued P4,000,000 8% 8-year convertible bonds at 95. Interest is payable every December 31. As of this date, the effective interest rate of similar bonds is 10%. Without the conversion feature, the applicable interest rate to these bonds is 11%.
The bonds can be converted to 5 P20 par ordinary shares for every P1,000 bonds.
On January 1, 2021, before any investors can exercise the conversion option, the corporation decided to retire the bonds at 105. At this date, bonds without the conversion feature trade at 102.
Round off present value factors to four decimals.
(1) Determine the Gain (loss) on January 1, 2021 due to the pre-termination of bonds (if loss, enclose in parentheses or add a negative sign).
(2) Determine the Increase in share premium on issuance after the pre-termination on January 1, 2021.
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