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PROBLEM 10: (FINANCIAL LIABILITY AT AMORTIZED COST)

Tango Company issued a three-year bond dated March 1, 2020 with a face value of P2,000,000.

These bonds have a coupon rate of 12% payable semi-annually every March 1 and September 1. The

prevailing market rate of interest on the date the bonds were issued was at 10%.

Tango Company as planned, was able to sell all of its bonds on March 1, 2020 at the prevailing market

rate of interest.

The entries prepared by the company were: 3/1: Debit to Cash and credit to Bonds Payable for the

total proceeds from the issuance of the bonds; 9/1 Debit to Interest expense and credit to Cash at

P50,000. No amortization has been made per books nor were accruals at year-end.

Required:

1. Proceeds from bond issuance on March 1, 2020.

2. Interest expense to be reported for the year ended December 31, 2020.

3. Carrying value of the bonds payable to be reported as of December 31, 2020.

4. Assuming all the bonds were reacquired on April 30, 2021, for P2,100,000, what is the gain or loss

on the early retirement of the bonds.

PROBLEM 11: (COMPOUND INSTRUMENT - CONVERTIBLE BONDS)

On January 1, 2020, Victory Corp. issued a 3-year, 4,000, P1,000 convertible bonds at 105. Interest

is to be paid annually at the stated coupon rate of 10% every December 31. Each bond is convertible,

at the holder's option, into 30, P25 par value common shares at any time up to maturity. On the date

of issuance, prevailing market interest rate for similar debt without the conversion privilege was 12%.

On the same date market price of one common share was P30.

The present value of P1 at 12% for 3 periods is at 0.71178

The present value of P1 at 12% ordinary annuity is at 2.40183

Effective Interest Amortization Table

Interest

payment

Effective

interest

Amortization

of premium

Carrying

amount

(4M*10%) (CA*12%)

1/1/20 3,807853

12/31/20 400,000 456,942 56,942 3,864,796

12/31/21 400,000 463,776 63,776 3,928,571

12/31/22 400,000 471,429 71,429 4,000,000

1. What is the equity component of the convertible debt?

2. What is the resulting bonds payable carrying value as of December 31, 2020?

3. Assuming that the convertible bonds above were converted on January 1, 2022, how much should

be credited to Share premium/Additional paid-in capital from the equity conversion?

4. Assuming that the convertible bonds above were retired at 98 on January 1, 2022, when the

prevailing quoted value of bonds were at 96, how much is the gain or loss to be recognized in the

income statement for the retirement?

PROBLEM 12: (COMPOUND INSTRUMENT - BONDS WITH WARRANTS)

On January 1, 2020, Whiskey Corp. issued 1,000 of its January 1, 2015, 12%, 10 year, P1,000 face

value bonds with detachable stock warrants at P1,220,000. Each bond, which pays interests every

January 1 carried 5 detachable warrants which entitle the holder to acquire one share of Whiskey Corp.'s

P50 par value ordinary shares for every warrant at a specified option price of P55 per share.

Immediately after the issuance the prevailing market rate of interest is at 10% and the market value of

the warrants was P30.

The present value of P1 at 10% for 5 periods without annuity is at 0.62092

The present value of P1 at 10% for 10 periods without annuity is at 0.38554

The present value of P1 at 10% for 5 periods with ordinary annuity is at 3.79079

The present value of P1 at 10% for 10 periods with ordinary annuity is at 6.14457

Effective Interest Amortization Table

Interest

payment

Effective

interest

Amortization

of discount

Carrying

amount

(1M*12%) (CA*10%)

1/1/20 1,075,816

1/1/21 120,000 107,582 12,418 1,063,397

1/1/22 120,000 106,340 13,660 1,049,737

1. What is the equity component of the compound instrument?

2. What is the balance of the bonds payable as of December 31, 2021?

3. How much is the interest expense in 2021?

4. What is the credit to share premium assuming that 80% of the warrants issued with bonds were

exercised in 2022

ASAP!