PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solutions:

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):

Interest Interest Amortizatio Present

Date paid expense n 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 258,621

Bonds payable 5,000,000

Cash 5,000,000

2. Solution:

Requirement (a):
Issue price 5,415,183
(175,000
Accrued interest (5M x 14% x 3/12)
)
Carrying amount - 4/1/x1 5,240,183

Requirement (b):
4/1/x1
Cash 5,415,183
Bonds payable 5,000,000
Premium on bonds payable 240,183
Interest expense (or Interest payable) 175,000

Requirement (c):
(5,240,183 x 12% x 9/12) = 471,616
3. Solution:
Cash flows PV factors Issue price
0.7938 3,969,16
Principal
5,000,000 3 1
2.5771 1,803,96
Interest
700,000 0 8
5,773,129

4. Solution:

12/31/x2
Bonds payable 5,000,000
Premium on bonds payable 277,777
Loss on derecognition 122,223
Cash (5M + 400,000) 5,400,000

Interest Interest Amortizati Present

Date paid expense on value
1/1/x1 5,773,129
12/31/
461,850 238,150 5,534,979
x1 700,000
12/31/
442,798 257,202 5,277,777
x2 700,000
12/31/
422,223 277,777 5,000,000
x3 700,000

5. 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):
Interest Amortizatio Present
Date paid Interest expense n 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

6. Solution:
5,200,00
Total retirement price (5M + 200K)
0
(5,100,000
Fair value of bonds (5M x 102)
)
100,00
Retirement price allocated to equity component
0

Interest Interest Amortizati Present

Date paid expense on value
1/1/x1 5,050,000
12/31/
585,295 14,705 5,035,295
x1 600,000
12/31/ 600,000 583,591 16,409 5,018,886
 x2
12/31/
581,689 18,311 5,000,575
x3 600,000

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

7. Solution:
1,000,00
Note payable (liability being settled) 0
Carrying amount of equipment (settlement) 900,000
Gain on derecognition (settlement less than liability) 100,000

8. Solution:
Note payable (liability being settled) 600,000
Fair value of shares (settlement) 750,000
(150,000
Loss on derecognition (settlement exceeds liability) )

9. 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 2,135,786

(Principal: 2.5M x PV of 1 @14%, n=4) +
(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