Reference no: EM133172457
Question - You were given the list of compound financial instruments of Penshoppe Company. After reviewing the records, you were able to gather the following information:
On January 1, 2018, the entity issued 3,000 of its 10%, 5-year P1,000 face value bonds with detachable warrants at 110. Each bond carried a detachable warrant to acquire five shares of Watermelon Company's P50 par value ordinary shares at a specified option price of P60 per share. At the date of issuance, the market value of the bonds ex-warrant amounted to P2,500,000 and the market value of the warrants were ascertained to be at P500,000. On December 31, 2018, two-thirds of the total bondholders exercised the warrants. During this time, the bonds had a fair value of P2,800,000 without the warrant and the fair value of the entity's shares amounted to P90 per share.
At the beginning of the year, the entity had an outstanding 5% convertible bond with a face value of P10,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitles the bondholders to receive 15 shares of P50 par value ordinary shares in exchange for each P1,000 bond. On June 30, 2018, the holders of P1,800,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was P1,100 per bond and the market price of the ordinary shares was P35. Immediately before the conversion, the total unamortized bond discount was P500,000 and the total share premium - bond conversion privilege amounted to P200,000.
Required -
1. How much of the proceeds from the issuance of the bonds with warrants should be allocated to the equity component?
2. How much is the net increase (decrease) in shareholders' equity as a result of the exercise of the warrants?
3. How much is the net increase (decrease) in share premium as a result of the conversion?
4. How much is the carrying amount of the remaining convertible bonds immediately after the conversion?
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