GARCIA, JOHN VINCENT D.

IACC2 A087 BSA 2 BLOCK 5

CHAPTER 3 - PROBLEM 6
REMAINING NUMBERS FOR CLASSROOM DISCUSSION

Retirement of bonds prior to maturity

4. On January 1, 20x1, an entity issues bonds with face amount of ₱5,000,000 for
₱5,773,129. The bonds mature on December 31,20x3 and pay annual interest of
14%. The effective interest rate is 8%. On December 31, 20x2, after paying the
annual interest, the entity retires the bonds at a call premium of ₱400,000.
Requirement: Provide the entry on December 31,20x2 to record the retirement
of bonds.
December Bonds Payable 5,000,000
31, 20x2 Premium on Bonds Payable 277,777
Loss on Derecognition 122,223
Cash (5M + 400,000) 5,400,000

SUBSEQUENT MEASUREMENT: AMORTIZATION TABLE

Date Interest Paid Interest Amortization Present
Expense Value
January 1, 20x1 5,773,129
December 31, 700,000 461,850 238,150 5,534,979
20x1
December 31, 700,000 442,798 257,202 5,277,777
20x2
December 31, 700,000 422,223 277,777 5,000,000
20x3

Convertible Bonds – Conversion

5. On January 1, 20x1, an entity issues bonds with face amount of ₱5,000,000 for
₱5,200,000. The bonds mature on December 31, 20x3 and pay annual interest of
12%. The bonds can be converted into 10,000 ordinary shares of the entity with
par value share of ₱200. On January 1, 20x1, the bonds are selling at 101 without
the conversion feature. The effective interest rate on the bonds is 11.59%. All of
the bonds are converted into ordinary shared on January 1, 20x3.
Requirement:
Provide the entries to record the following:

a.) Issuance of the convertible bonds.

January Cash 5,200,000

1, 20x1 Bonds Payable 5,000,000
Premium on bonds payable [(5M x 101%)] 50,000
Share Premium – Conversion Feature (squeeze) 150,000

b.) Conversion of the bonds.

SUBSEQUENT MEASUREMENT: AMORTIZATION TABLE

Date Interest Interest Amortization Present
Paid Expense Value
January 1, 5,050,000
20x1
December 31, 600,000 585,295 14,705 5,035,295
20x1
December 31, 600,000 583,591 16,409 5,018,886
20x2
December 31, 600,000 581,6891 18,311 5,000,575
20x3

January Bonds Payable 5,000,000

1, 20x3 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

Convertible bonds – Retirement

6. Use the facts in the immediately preceding problem. However, in this case, the
entity retires the bonds on January 1, 20x3 at a call premium of ₱200,000. Without
the conversion feature, the bonds are selling on this date at 102.
Requirement: provide the entry to record the retirement of the bonds.

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

SUBSEQUENT MEASUREMENT: AMORTIZATION TABLE

Date Interest Paid Interest Amortization Present Value
Expense
January 1, 20x1 5,050,000
December 31, 600,000 585,295 14,705 5,035,295
20x1
December 31, 600,000 583,591 16,409 5,081,886
20x2
December 31, 600,000 581,689 18,311 5,000,575
20x3

January Bonds payable 5,000,000

1, 20x3 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

Asset Swap
7. On January 1, 20x1, an entity transfers a piece of equipment with historical cost
of ₱1,800,000, accumulated depreciation of ₱900,000 and fair value of ₱850,000
as full settlement of a note payable with a carrying amount of ₱1,000,000. How
much is the gain or loss on the derecognition of the note?
Solution:
Note payable (liability being settled) 1,000,000
Carrying amount of equipment (settlement) 900,000
Gain on derecognition (settlement less than liability) 100,000

Equity Swap
8. On January 1, 20x1, an entity issues 10,000 of its own shares, with par value per
share of ₱10 and fair value per share of ₱75 as full settlement of a note payable
with a carrying amount of ₱600,000. How much is the gain or loss on the
derecognition of the note?
Solution:
Note payable (liability being settled) 600,000
Fair value of shares (settlement) 750,000
Loss on derecognition (settlement exceeds liability) (150,000)

Modification of Terms
9. On December 31, 20x1, an entity enters into a restructuring agreement to modify
the terms of its existing loans as follows:
• The principal is reduced from ₱2,800,000 to ₱2,500,000.
• The lender waived the accrued interest of ₱400,000.
• The nominal rate is decreased from 14% to 9%.
• The maturity date is extended from December 31, 20x1 to January 1, 20x6.
The principal is due in lump sum at maturity date but interest is payable annually at each
year-end. The original effective interest rate is 14%. The prevailing rate on December
31, 20x1 is 12%.
Requirement: Provide the entry to record the modification of the loan.
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 × PV of 1 @ 14%, n=4) +
(Interest: 2.5M × 9% × PV ordinary annuity @ 14%, n=4) 2,135,786
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. Loan payable (old) 2,800,000

31, Interest payable 400,000
20x1 Discount on loan payable (new) (2.5M – 2,135,786) 364,214
Loan payable (new) 2,500,000
Gain on modification 1,064,214