Reference no: EM132857039

Questions -

Q1. On May 1, 2021, Edrick Company issued P4M, 20 year, 10% bonds for P4,240,000. Each P1,000 bond had a detachable warrant eligible for the purchase of one share of Edrick's P50 par ordinary share for P60. Immediately after the bonds were issued Edrick's had the following market value

Bonds without warrants 1,040

Warrant 20

Ordinary share 55

Required -

a. Determine the cost assigned to warrants.

b. Premium to be recognized.

Q2. On March 1, 2021, ALL DAY CORP. issued P1,000,000 of its 10%, bonds at 103 due February 28, 2031. Each P1,000 bond was issued with 30 non-detachable share warrants, each of which entitles the holder to purchase for P50, one ordinary share of AKK DAY, par value P25. If sold without warrants, the bonds would yield 12%. The interest is payable semi annually.

Required -

a. Determine the amount assigned to the bonds and warrants.

b. Compute the interest expense for 2021.

c. Compute the carrying value of the bonds on December 31, 2021.

d. Journalize the exercise of the warrants assuming all warrants were exercised on June 30, 2022.

Q3. On July 1, 2021, the Rocks Company issued 200, 10%, P10,000 bonds at face value. The holder of each bond is entitled the convert the bond into 80, P100 par ordinary shares of Caltex Company. At anytime up to the bond maturity. When the bonds were issued, the prevailing interest rate for similar instruments without conversion option is 12%. The bonds pay interest annually every June 30. And mature on June 30 2026.

On June 30, 2023l after receiving the annual interest, holders of 120 bonds exercised their conversion privilege. Remaining bonds were retired on maturity date.

Required -

a. Allocate the proceeds from bond issuance between bonds and equity component

b. Prepare entries to record the foregoing.

Q4. Migs Company owes P2,000,000 plus P180,000 of accrued interest to Philippine National Bank. The debt is a 10-year, 10% note. During 2020, Migs business deteriorated due to a faltering regional economy. On December 31, 2020, Philippine National bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of P3,900,000, accumulated depreciation of P2,210,000, and a fair market value of P1,900,000.

Required -

a. Prepare journal entries for Migs Company and Philippine National Bank to record this debt settlement.

b. Assume that instead of transferring the machine, Migs decides to grant 15,000 shares of its ordinary shares (P100 par) which has a fair market value of P1,900,000 in full settlement of the loan obligation. If Philippine National Bank treats Migs' shares as a trading investment, prepare entries to record the transaction for both parties.

Q5. Monterey Co. is indebted to BDO under a P16,000,000, 10%, 4-year note dated December 31, 2017. Annual interest of P1,600,000 was paid on December 31, 2018 and 2019. During 2020, Monterey experienced financial difficulties and is likely to default unless concessions are made. On December 31, 2020, BDO agreed to restructure the debt as follows:

• Interest of P1,600,000 December 31, 2020 was waived.
• Extended the maturity to December 31, 2021.
• The principal amount is reduced to P14,000,000
• Interest of P1,540,000 of the new principal will be paid on maturity date

Required -

1. How much should Monterey report as gain on restructuring in it profit or loss for the year ended December 31, 2020, assume an income tax rate of 32% (carry present value factors up to three decimal places).

2. Prepare entries to record debt restructuring.

Q6. On December 31, 2020, Getz Company was experiencing financial difficulties and entered into a debt restructuring agreement with the creditor. The creditor restructured the obligation as follows:

• The principal was reduced from P20,000,000 to P18,000,000.
• Forgave the accrued interest of P2,400,000
• Extended the maturity date from December 31, 2012 to December 31, 2023
• Reduced the interest rate from 12% to 10%. Interest is payable annually on December 31, 2021, 2022 and 2023.

Required -

1. How much should the creditor report as loss on debt restructuring?

2. Prepare entries to record the debt restructuring.