Compound Financial Instrument
Compound Financial Instrument
Compound Financial Instrument
1-2)
ABC Company issued 6,000 of 12%, 12-year, P1,000 face value bonds with detachable share
warrants at 120. Each bond has a detachable warrant for ten ordinary shares of ABC Company at a
specified option price of P20 per share. The par value of the ordinary share is P15. Immediately after
the issuance, the market value of bonds ex warrants was P6,500,000 and the market value of the-
warrants was P800,000.
i. What is the carrying amount of bonds payable at year end?
a. 6,000,000
b. 6,500,000
c. 6,900,000
d. 7,200,000
Answer: b.
Solution:
Issue price of bonds payable equal to market value ex-warrants 6,500,000
ii. The issuance of the bonds payable with share warrants will show which of the
following?
a. A credit to Cash 7,200,000
b. A credit to Bonds Payable 6,500,000
c. A debit to Discount on bonds payable 500,000
d. A credit to Share warrants outstanding 700,000
Answer: d.
Solution:
Cash 7,200,000
Bonds Payable 6,000,000
Premiums on bonds payable 500,000
Share warrants outstanding 700,000
3-4)
On December 31, 2015, Divergent Company had outstanding 10%, P2,000,000 face amount
convertible bonds payable maturing on December 31, 2020. Interst is payable on June 30 an
December 31. Each P1,000 bond is convertible into 50 shares of P15 par value. On December 31,
2015, the unamortized premium on bonds payable was P70,000. On December 31, 2015, 400 bonds
were converted when Divergents share had a market price of P25. The entity incurred P6,000 in
connection with the conversion. No equity component was recognized when the bonds were
originally issued.
i. What is the share premium from the issuance of shares as a result of the bond
conversion on December 21,2015?
a. 108,000
b. 114,000
c. 120,000
d. 130,000
Answer: a.
Solution:
Bonds Payable 2,000,000
Premium on bonds payable 70,000
Carrying amount 2,070,000
5-6)
Lychee Corporation issued P7,000,000 face value, 5-year bonds at 110 on December 31, 2015. Each
P1,000 bond was issued with 25 detachable share warrants, each of which entitled the bondholder
to purchase one ordinary share of P5 par value at P15. Immediately after issuance, the market value
of each warrant is P7. The stated interest on the bonds is 9% payable annually every December 31.
However, the prevailing market rate of interest for similar bonds without warrant is 11%.
i. On December 31, 2015, what amount should be recorded as discount or premium on
bonds payable?
a. 359,000
b. 395,000
c. 539,000
d. 593,000
Answer: c.
Solution:
PV of principal (7,000,000 x 0.59) 4,130,000
PV of interest payments (630,000 x 3.70) 2,331,000
TOTAL PRESENT VALUE OF BONDS PAYABLE 6,461,000
a. 3,525,000
b. 2,775,000
c. 1,750,000
d. 1,525,000
Answer: a.
Solution:
Carrying amount converted (5/20 x 11,100,000) 2,775,000
Applicable share premium from conversion privilege
(5/20 x 3,000,000) 750,000
Total consideration 3,525,000