Reference no: EM132556073
Questions -
Q1. On January 1, 2020, Rosales Company issued P10,000,000 face amount, 5-year bonds at 109. Each P1,000 bond was issued with 50 detachable share warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P25. Immediately after issuance, the market value of each warrant was P5.
The stated rate of interest on the bonds is 11% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without the warrants is 12%.
Round off all present value factors to two decimal places
1. What is the equity component arising from the issuance of bonds on January 1, 2020?
2. What is the share premium to be recognized if only the warrants on the P2,000,000 face value bonds were exercised?
Q2. At the beginning of 2020, Black Beans Company issued 5,000, 6% convertible bonds. The bonds have a three-year term and are issued at 110 with a face amount of P1,000 per bond. Interest is payable annually every December 31. Each bond is convertible at anytime up to maturity into 100 ordinary shares with par value of P5.
When the bonds are issued, the prevailing market rate of interest for similar instrument without the conversion option is 9%.
Round off present value factors to two decimal places
3. What is the equity component arising from the original issuance of the convertible bonds?
4. What amount should be credited to share premium assuming all the bonds were converted into ordinary shares on June 30, 2021?
5. What amount should be credited to share premium assuming only 3,000 bonds were converted into ordinary shares on June 30, 2021?
Q3. On December 31, 2020, Pisces Corp. showed the following:
6% bonds payable P8,000,000
Discount on bonds 1,000,000
Share premium - issuance 10,000,000
Bond conversion privilege outstanding 1,400,000
The interest is payable annually every December 31. The convertible bonds are not converted but fully paid on December 31, 2020. On such date, the quoted price of the convertible bonds with conversion option is 105 which is the payment to the bondholders plus interest. However, the quoted price of the bonds without the conversion privilege is 95.
6. What is the total payment to bondholders on December 31, 2020?
7. What is the gain or loss from extinguishment of bonds?
Q4. On January 1, 2020, Ann Price loaned P90,156 to Joe Kiger. A zero-interest-bearing note (face amount, P120,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2022. The prevailing rate of interest for a loan of this type is 10%.
8. What amount of interest income should Ms. Price recognize in 2020?
Q5. On January 1, 2020, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a P3,000,000 zero-interest-bearing note payable in 5 equal annual installments of P600,000, with the first payment due December 31, 2020. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was P2,163,000 at January 1, 2020.
9. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2020 after adjusting entries are made, assuming that the effective-interest method is used?