ACTIVITY: COMPOUND FINANCIAL INSTRUMENT

Deadline: April 27, 2022 (Wednesday) @ 10:30 AM

Prepare what is being asked for each problem. Show your solutions.

Problem 1

On January 1, 2020, ABC Company issued P50,000,000, 3-year convertible bonds at par with the
following considerations:
(a) there were no issue costs related
(b) the coupon rate is 10%, payable annually in arrears on December 31
(c) the bond is redeemable at par on January 1, 2023
(d) bonds issued by similar companies without any conversion rights currently bear interest at
15%

Required:
Prepare the necessary journal entries assuming the bondholders:
a. opted for conversion
b. opt for cash payment

Problem 2

On April 1, 2006, an 8% convertible loan with a nominal value of P600,000 was issued at par. It
is redeemable on March 31, 2010 also at par. Alternatively, it may be converted into equity
shares on the basis of 100 new shares for each P200 worth of note.

An equivalent loan note without the conversion option would have carried interest at 10%.
Interest of P48,000 has already been paid and included as a finance cost.

Required:
Prepare journal entries for the following:
a. all necessary journal entries for the year 2006
b. 60% of the note is converted
c. the remaining notes were paid in cash
Problem 3

At year end, ABC Company issued P5,000 of 8%, 10-year, P1,000 face value bonds with
detachable share warrants at P110. Each bond carried a detachable warrant for ten ordinary
shares of ABC Company at a specified option price of 25 per share. The par value of the
ordinary share is P20.

Immediately after issuance, the market value of the bonds without the warrants was
P5,400,000 and the market value of the warrants was P600,000.

Required:
Prepare all the necessary journal entries assuming the share warrants are fully exercised.

Problem 4

On January 1, 2015, Case Company issued P5,000,000 of 12% nonconvertible bonds at 103
which are due on February 28, 2020. In addition, each P1,000 bond was issued with 30
detachable share warrants, each of which entitled the bondholder to purchase, for P50, one
ordinary share of Case Company, par value of 25.

On January 1, 2015, the quoted market value of each warrant was P4. The market value of the
bond ex-warrants at the time of issuance is 95.

Required:
Prepare all the necessary journal entries assuming the share warrants are fully exercised.