Reference no: EM133182411

Question - On January 1, 2023, Toy Company issued 10-year, P200,000 face value, 6% bonds at par (payable annually on January 1). Each P1,000 bond is convertible into 30 shares of Toy P2 par value ordinary shares. The company has had 10,000 ordinary shares (and no preference shares) outstanding throughout its life. None of the bonds have been converted as of the end of 2024.

Toy Company also adopted a share-option plan that granted options to key executives to purchase 4,000 shares of the company's ordinary shares. The options were granted on January 2, 2023, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expire 6 years from the date of grant. The option price was set at P4, and the fair value option pricing model determines the total compensation expense to be P18,000. All of the options were exercised during the year 2025: 3,000 on January 3 when the market price was P6, and 1,000 on May 1 when the market price was P7 a share. (Ignore all tax effects.)

Required -

a. Prepare the journal entry Toy would have made on January 1, 2023, to record the issuance of the bonds. The fair value of the debt without a conversion option (with an 8% effective rate) is P173,159.

b. Prepare the journal entry to record interest expense and compensation expense in 2024.

c. Toy Company's net income was P30,000 in 2024, and P27,000 in 2023. Compute basic and diluted earnings per share for Toy for 2024 and 2023. Toy Company's average share price was P4.40 in 2023 and P5 in 2024.

d. Assume that 75 percent of the holders of Toy Company's convertible bonds convert their bonds to shares on January 1, 2025, when Toy Company's shares are trading at P8 per share. Toy Company pays P2 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.