Problem 6

Classroom Discussion
1.) Requirement A

Issue Price 4,800,000

Transaction Costs (473,767)
Carrying Amount on 4,326,233
1/1/x1
Requirement B

Face Amount 5,000,000

Initial Carrying Amount 4,326,233
Net Discount on Bonds 673,767
Payable
 •PERIODIC PAYMENTS are LESS THAN PERIODIC
Requirement C INTEREST EXPENSES

DATE INTEREST INTEREST AMORTIZATION PRESENT

PAID EXPENSE 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
Requirement D

1/1/x1
Cash 4,800,000
Discount on Bonds 200,000
Payable
Bonds Payable 5,000,000
1/1/x1
Discount on Bonds 473,767
Payable
Cash 473,767
Continuation

12/31/x1
Interest Expense 692,197
Cash 500,000
Discounts on Bonds 192,197
Payable
12/31/x2
Interest Expense 722,949

Cash 500,000
Discount on Bonds 222,949
Payable
Continuation

12/31/x3
Interest Expense 758,621
Cash 500,000
Discount on 258,621
Bonds Payable
Bonds Payable 5,000,000
Cash 5,000,000
2.) Requirement A

Issue Price 5,415,183

Accrued Interest (175,000)
Carrying Amount – 4/1/x1 5,240,183
Requirement B

4/1/x1
Cash 5,415,183
Bonds 5,000,000
Payable
Premium on 240,183
Bonds
Payable

Interest 175,000
Expense
Requirement C
5,240,183 x 12% x 9/12
= 471,616
3.)

Cash Flows PV Factors Issue Price

Principal 5,000,000 0.79383 3,969,161
Interest 700,000 2.57710 1,803,968

5,773,129
4.)

12/31/x2
Bonds Payable 5,000,000
Premium on Bonds 277,777
Payable
Loss on 122,223
Derecognition
Cash 5,400,000
Continuation

DATE INTEREST INTEREST AMORTIZATION PRESENT

PAID EXPENSE VALUE
1/1/x1 5,773,129
12/31/x1 700,000 461,850 238,150 5,534,979
12/31/x2 700,000 422,798 257,202 5,277,777
5.) Requirement A

1/1/x1
Cash 5,200,000
Bonds Payable 5,000,000
Premium on Bonds 50,000
Payable
Share Premium – 150,000
(Conversion
Feature)
Requirement B

DATE INTEREST INTEREST AMORTIZATION PRESENT

PAID EXPENSE 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
Continuation

1/1/x3
Bonds Payable 5,000,000
Premium on Bonds 18,886
Payable
Ordinary Share Capital 2,000,000
Share Premium 3,018,886
Share Premium – 150,000
(Conversion Feature)
Share Premium 150,000
6.)

Total Retirement Price 5,200,000

Fair Value of Bonds (5,100,000)
Retirement Price Allocated to Equity Component 100,000
Continuation

DATE INTEREST INTEREST AMORTIZATION PRESENT

PAID EXPENSE 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
Continuation

1/1/x3
Bonds Payable 5,000,000
Premium on Bonds 18,886
Payable
Loss on Derecognition 81,114
Cash 5,100,000
Share Premium 150,000
Cash 100,000
Share Premium 50,000
7.)

Note Payable 1,000,000

Carrying Amount of 900,000
Equipment
Gain on Derecognition 100,000
8.)

Note Payable 600,000

Fair Value of Shares 750,000
Loss on Derecognition (15,000)
9.)

ORIGINAL TERMS MODIFIED TERMS

Principal 2,800,000 2,500,000
Accrued Interest 400,000 -
Nominal Rate 14% 9%
Maturity Already Due 4 years
Continuation

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 of Ordinary Annuity
@14% , n=4
Carrying Amount of Old Liability 3,200,000
Difference 1,064,214
Continuation

Difference 1,064,214
Divide by: 3,200,000
Carrying Amount of Old Liability
Change in Liability - SUBSTANTIAL 33%
Continuation

December 31, 20x1

Old Loan Payable 2,800,000

Interest Payable 400,000
Discount on Loan 364,214
Payable
Loan Payable 2,500,000
Gain on 1,064,214
Modification