Problem 1 Umbrella Corporation has 4,000, 10%, 10-year bonds, face value 1,000, and sold it at 105. Each bond is accompanied by one warrant that permits the bondholder to purchase 20 shares of capital, par 50, at 55 per share, or a total of 80,000 shares. The prevailing market rate of interest for similar bonds without warrants is 12% per annum with which the PV of 1 at 12% for 10 periods is .322 and in an ordinary annuity is 5.65.

What is the entry to record issuance of the compound instrument and the exercise of the 70% warrants? Assume also the expiration of the 30% warrants and prepare the entry.

Problem 2 At the beginning of the current year, Claudine Corporation issued 6,000, 5-year bonds, face value 1,000 each at 105. The bonds has a conversion privilege that provides for an exchange of a 1,000 bond for 20 shares of capital, par 50. Without such conversion privilege, the bonds would only sell at 98.

Prepare the entries in connection with the issuance of the bonds and the conversion of the bonds at the end of the current year.

Problem 3 Faith Company issued 5500 convertible bonds on January 1, 2019. The bonds have a three year term and are issued at 110 with a face value of 1,000 per bond. Interest is payable annually in arrears at a nominal 6% interest rate. Each bond is convertible at any time up to maturity into 100 common shares with par value of 5. When the bonds are issued, the prevailing market interest rate for similar debt instrument without conversion option is 9%. The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53.

Case a. Prepare the entries of the company in connection with the bonds for its 3 year term assuming the bonds were not converted.

Case b. Suppose that the company converted the bonds on December 31, 2019, Prepare the entries on the bonds during 2019.