PROBLEM 2: FOR CLASSROOM DISCUSSION

10. Solution:

Requirement (a):
Issue price 4,800,000
Transaction costs (473,767)
Carrying amount - 1/1/x1 4,326,233

Requirement (b):
Face amount 5,000,000
Initial carrying amount (4,326,233)
Net discount on bonds payable 673,767

Requirement (c):

Date Interest paid Interest expense Amortization Present value

1/1/x1 4,326,233
12/31/x1 500,000 692,197 192,197 4,518,430
12/31/x2 500,000 722,949 222,949 4,741,379
12/31/x3 500,000 758,621 258,621 5,000,000

Answer: Periodic interest payments are less than periodic interest expenses.

Requirement (d):
1/1/x1
Cash 4,800,000
Discount on bonds payable 200,000
Bonds payable 5,000,000

1/1/x1
Discount on bonds payable (Bond issue costs) 473,767
Cash 473,767

12/31/x1
Interest expense 692,197
Cash 500,000
Discount on bonds payable 192,197

12/31/x2
Interest expense 722,949
Cash 500,000
Discount on bonds payable 222,949

12/31/x3
Interest expense 758,621
Cash 500,000
Discount on bonds payable 222,949

Bonds payable 5,000,000

Cash 5,000,000

11. Solution:
Requirement (a):
Issue price 5,415,183
Accrued interest (5M x 14% x 3/12)
(175,000)
Carrying amount - 4/1/x1 5,240,183
Requirement (b):
4/1/x1
Cash 5,415,183
Interest expense 175,000
Bonds payable 5,000,000
Premium on bonds payable 240,183

Requirement (c):
(5,240,183 x 12% x 9/12) = 471,616

12. Solution:
PV
Cash flows
factors Issue price
Principal
5,000,000 0.79383 3,969,161
Interest
700,000 2.57710 1,803,968
5,773,129

13. Solution:
12/31/x2
Bonds payable 5,000,000
Premium on bonds payable 277,778
Loss on derecognition 122,222
Cash (5M + 400,000) 5,400,000

Date Interest paid Interest expense Amortization Present value

1/1/x1 5,773,129
12/31/x1 700,000 461,850.33 238,150 5,534,979
12/31/x2 700,000 442,798.35 257,202 5,277,778
12/31/x3 700,000 422,222.22 277,778 5,000,000

14. Solution:
Requirement (a):
1/1/x1
Cash 5,200,000
Bonds payable 5,000,000
Premium on bonds payable [(5M x 101%) – 5M] 50,000
Share premium – conversion feature (squeeze) 150,000

Requirement (b):
Date Interest paid Interest expense Amortization Present value
1/1/x1 5,050,000
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575

1/1/x3
Bonds payable 5,000,000
Premium on bonds payable 18,886
Ordinary share capital (10,000 sh. x ₱200) 2,000,000
Share premium 3,018,886

Share premium – conversion feature 150,000

Share premium 150,000

15. Solution:

Total retirement price (5M + 200K) 5,200,000

Fair value of bonds (5M x 102) (5,100,000)
Retirement price allocated to equity component 100,000
 Date Interest paid Interest expense Amortization Present value
1/1/x1 5,050,000
12/31/x1 600,000 585,295 14,705 5,035,295
12/31/x2 600,000 583,591 16,409 5,018,886
12/31/x3 600,000 581,689 18,311 5,000,575

1/1/x3
Bonds payable 5,000,000
Premium on bonds payable 18,886
Loss on derecognition (squeeze) 81,114
Cash (allocation to debt component) 5,100,000
Share premium – conversion feature 150,000
Cash (allocation to equity component) 100,000
Share premium 50,000

16. Solution:

Carrying amount of equipment 900,000

Carrying amount of note payable 1,000,000
Gain on derecognition 100,000

17. Solution:

Requirement (a):
Fair value of shares 750,000
Carrying amount of note payable 1,000,000
Gain on derecognition 250,000

Requirement (b):
Note payable 1,000,000
Ordinary share capital (10,000 x ₱10) 100,000
Share premium [10,000 x (₱75 - ₱10)] 650,000
Gain on derecognition 250,000

18. Solution:

  Original terms Modified terms

Principal 2,800,000 2,500,000
Accrued interest 400,000 -
Nominal rate 14% 9%
Maturity already due 4 yrs.

Present value of new liability

(Principal: 2.5M x PV of 1 @14%, n=4) + 2,135,786
(Interest: 2.5M x 9% x PV ordinary annuity @14%, n=4)
Carrying amount of old liability (2.8M + 400K) 3,200,000
Difference 1,064,214

Difference 1,064,214
Divide by: Carrying amount of old liability 3,200,000
Change in liability - Substantial 33%

Dec. 31, 20x1

Loan payable (old) 2,800,000
Interest payable 400,000
Discount on loan payable (new) 364,214
(2.5M – 2,135,786)
Loan payable (new) 2,500,000
Gain on modification 1,064,214