Reference no: EM132965858
Question - COMPOUND FINANCIAL INSTRUMENTS (RETIREMENT) - On January 1, 2019, Corolla Company issued P3,000,000 of its 8%, 5-year bonds at 110. Interest is payable every June 30 and December 31. Each P1,000 bond is convertible into 10 ordinary shares of P50 par value. The prevailing market rate of interest for similar debt without conversion option is 10%.
On January 1, 2020, the entity issued P2,000,000, 10% serial bonds, to be repaid in the amount of P400,000 at the end of each year. Interest is payable annually on December 31. The bonds were issued to yield 12% a year.
On July 1, 2021, one-third of the term bonds were retired for P1,100,000 while one-third of the holders of the convertible bonds exercised the conversion privilege. On this date, the marker price of the share was P80 and the prevailing rate of interest on a similar debt instrument was 9% without the conversion option.
Required - Requirements and explanation for each:
1. How much is the bond premium (discount) on January 1, 2019? Explain.
2. How much is the equity component arising from the issuance of bonds payable on January 1, 2019? Explain.
3. How much is the gain (loss) on the retirement to be recognized in profit or loss on July 1, 2021?
4. How much is the net increase (decrease) in share premium as a result of the conversion on July 1, 2021?
5. How much is the carrying value of the term bonds as of December 31, 2021?
6. How much is the carrying value of the serial bonds as of December 31, 2021?
7. How much is the total interest expense for the year ended December 31, 2021?
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