Kulot Co. issued a 4-year 2,500,000 face value of 12% convertible bonds at 105 on January 1, 2020, maturing on January 1, 2024 and paying interest annually on December 31. It is reliably ascertained that the bonds would sell at 2,350,000 without the conversion feature with an effective yield of 14%. Each 1,000 bond is convertible into 10 shares of 100 par value share capital. On December 31, 2020, the entire bond issue was converted into share capital and on this date, the share has a market value of 150 and the bonds are quoted at 101.

1. What is the equity component of the issuance of the convertible bonds on January 1, 2020?

a. 275,000                                 c. 125,000

b. 150,000                                 d. P0

2. What amount of share premium should be recognized on conversion of bonds payable into share capital?

a. P0                                         c. 121,000

b. 275,000                                 d. 154,000