PROBLEM 1 (COMPOUND FINANCIAL INSTRUMENT – SHARE WARRANTS)

Note: Compound financial instrument is a financial instrument that contains both a liability and
equity element from the perspective of the issuer
Accounting for compound financial instruments requires the financial instrument to be split from
its liability component and equity component

Total consideration xx
Less: Market value of liability component xx
without warrants
Equity component – share warrants xx

On January 1, 2022, Saxony Company issued 5,000, 10%, 10-year bonds, face amount P1,000
per bond, at 105. Each bond is accompanied by one warrant that permits the holder to purchase
20 equity shares, P50 par, at P55 per share. The market interest rate for bonds without share
warrants is 12%. PV of 1 at 12% for 10 periods is 0.32 and present value of an ordinary annuity
of 1 at 12% for 10 periods is 5.65.
1. Prepare entry for the issuance of the bonds
2. Prepare entry for the exercise of 60% of the warrants
3. What is the equity component of the compound financial instrument?

PROBLEM 2 (COMPOUND FINANCIAL INSTRUMENT – CONVERTIBLE BONDS)

On January 1, 2022, Saxony Company issued 5,000, 8%, 10-year bonds, face amount P1,000
per bond, at 105. The bond contains a conversion privilege that provides for an exchange of a
P1,000 bond for 20 equity shares with par value of P50. The interest is payable semi-annually.
The market rate for bonds without conversion privilege is 10%. PV of 1 at 5% for 10 periods is
0.61 and the present value of an ordinary annuity of 1 at 5% for 10 periods is 7.72.
4. Prepare entry for the issuance of the bonds
5. Prepare entry for the conversion of all the bonds in January 1, 2023
6. What is the equity component of the compound financial instrument?

PROBLEM 3 (DEBT RESTRUCTURING – ASSET SWAP or DACION EN PAGO)

Note: Asset swap is a transfer by the debtor to the creditor any asset other than cash for the full
payment of an obligation

Bond/Note payable xx
Accrued interest payable xx
Total liability xx
Less: Carrying amount of the asset xx
Gain or loss on extinguishment xx
Saxony Company provided the following balances at year-end:

Notes payable 2,000,000

Accrued interest payable 400,000

At year-end, the company transferred to the creditor land costing P1,000,000 and building
costing P3,000,000 with accumulated depreciation of 1,800,000.
7. Prepare entry for the asset swap
8. What is the gain or loss on extinguishment of debt?

PROBLEM 4 (DEBT RESTRUCTURING – EQUITY SWAP)

Note: Equity instruments issued to extinguish a financial liability shall be measured at the
following amounts in order of priority:
1. Fair value of the equity instruments issued
2. Fair value of liability extinguished
3. Carrying amount of liability extinguished

Saxony Company provided the following balances at year-end:

Bonds payable 5,000,000

Accrued interest payable 500,000

The entity issued share capital with a total par value of P2,000,000 and fair value of P4,500,000
in full settlement of the bonds and accrued interest. The fair value of the bonds payable is
P4,700,000.
9. Prepare entry for the asset swap
10. What is the gain or loss on extinguishment of debt?
PROBLEM 5 (DEBT RESTRUCTURING – MODIFICATION OF TERMS)
Note: Modification of terms shall be accounted for as an extinguishment of old financial liability
and recognition of a new financial liability.
There is substantial modification of terms if the gain or loss on extinguishment is at least 10% or
more
The difference between the CA of the old liability and the PV of the new liability discounted
using the old effective rate shall be accounted for as gain or loss on extinguishment

On January 1, 2016, an entity showed the following:

Notes payable 5,000,000

Accrued interest payable 1,000,000

The entity granted by the creditor the following concessions on January 1, 2016:

• The accrued interest of P1,000,000 is forgiven

• The principal obligation is reduced to P4,000,000
• The new interest rate is 10% payable every December 31
• The new date of maturity is December 31, 2019
PROBLEM 6
Transylvania Company has the following information for the current year 2022:

• On January 1, 2022, issued 1,000, 4%, 5-year bonds, face amount of each bond is
P1,000 at 102. The bond contains a conversion privilege that each P1,000 bond is
convertible to 10 ordinary shares with a P20 par value. Interest is payable every end of
the year. The market rate without conversion privilege is 6%. On January 1, 2023, the
bondholders exercised their conversion privilege.

• On July 1, 2022, Transylvania entered into a dacion en pago agreement with a creditor.
The principal amount of the loan is P5,000,000 and accrued interest is P150,000. The
cost of land is P4,500,000

• On August 1, 2022, Transylvania issued 10,000 shares to pay its creditors. The amount
of the loan payable is P500,000. The par value of each share is P10, the fair value of
each share is P15. On this date, the fair value of the loan payable is P400,000.

11. Prepare entries for 2022