Problem 20-16: (Unamortized Discount)
On January 2, 2014, Anger Company issued its 9% bonds in the face amount of P 4,000,000 which
mature on January 1, 2024. The bonds were issued for P 3,756,000 to yield 10%. Anger uses the
interest method of amortizing bond discount. Interest is payable annually on December 31.
At December 31, 2015, how much should be Anger's unamortized bond discount?
al P192,364
b) P228,400
c) P211,240
d) P244,000
Answer: C
Face Value P4,000,000
Less: Carrying Value, December 31, 2015 3,788,760
Unamortized bond discount P 211,240
Date Interest Paid Interest Expense Discount Amortization Carrying Value
01.01.14 0 0 0 P3,756,000
12.31.14 P360,000 P375,600 P15,600 3,771,600
12.31.15 360,000 377,160 17,160 3,788,760
Interest Expense = Carrying value of the liability x Yield rate
Problem 20 - 15: (Carrying Value of Debt Instruments)
On January 2, 2014, East Co. issued 9% bonds in the amount of P1,000,000 which mature on
January 2, 2024. The bonds were issued for P939,000 to yield 10%. Interest is payable annually
on December 31. East uses the interest method of amortizing bond discount. In its December
31, 2014 statement of financial position, what amount should East report as bonds payable?
a) P939,000
b) P947,000
c) P942,900
d) P1,000,000
Answer: C
Carrying Value, January 2, 2014 P939,000
Add: Discount Amortization
Interest paid (P1,000,000 x 9%) P90,000
Less: Interest expense (P939,000 x 10%) 93,900 3,900
Carrying Value, December 31, 2014 P942,900
Problem 20 – 17: (Detachable Warrants)
During 2014, Royal Corporation booed at 95, one thousand of its 8% P5,000 bonds due in ten years.
One detachable stock purchase warrants entitling the holder to buy 20 shares of Royal’s
ordinary shares was attached to each bond. Shortly after issuance, the bonds are selling at 10%
ex-warrant, and each warrant was quoted at P60. The present value factors are the following:
PV of 10% for an ordinary annuity of P1 after 10 periods 6.145
PV of 10% after 10 interest periods .385
What amount of any of the proceeds from the bond issuance should be recorded as part e
Royal's shareholders' equity?
a) none
b) 9250000
c) P225,000
d) P367,000
Answer: D
Proceeds from issue (P5,000,000 x 95%) P4,750,000
Less Fair value of the bands (Schedule 1) 4,383,000
Fair value of equity component P 367,000
Schedule 1
Present value of total interest (P5,000,000 x 8% x 6.145) P2,458,000
Present value of principal (P5,000,000 x .385) 1,925,000
Fair value of debt instrument P4,383,000
Problem 20 - 22: (Issue of Convertible Debt Instruments)
On January 1, 2014, Grader Company issued its 10%, 4 year convertible debt instrument with a
face amount of P 4,000,000 for P4,400,000. Interest is payable every December 31 of each year.
The debt instrument is convertible into 35,000 ordinary shares with a par value of P100. When
the debt instruments were issued, the prevailing market rate of interest for similar debt without
conversion option is 8%.
PV of 8% for an ordinary annuity of P1 after 4 periods 3.312
PV of 8% after 4 interest periods .735
Question 2: What is the balance of the unamortized premium on debt instrument as of
December 31, 2014?
a) P 73,860
b) P205,984
c) P142,463
d) P264,800
Answer: B
Carrying value of debt as of January 1, 2014 P4,264,800
Less: Premium amortization
Interest Paid P400,000
Interest Expense (P4,424,800 x 8%) 341,184 58,816
Carrying value of debt as of December 31, 2014 P4,205,984
Less: Face value of debt 4,000,000
Unamortized premium as of December 31, 2014 P 205,984
Problem 20 - 23: (Issue of Convertible Debt Instruments)
On January 1, 2014, Tudor Company issued its 10%, 5-year convertible debt instrument with a
face amount of P10,000,000 for P10,000,000. Interest is payable every December 31 of each
year. The debt instrument is convertible 90,000 ordinary shares with a par value of P100.
When the debt instruments were issued, they were selling 97% without conversion option
Tudor Company incurred P80,000 transaction costs on the issue of the debt instruments.
Question 1: How much of the net proceeds represent the equity component?
a) P 297,600
b) P 9,920,000
c) P 9,622,400
d) P 10,000,000
Question 2: How much of the net proceeds represent the debt component?
a) P 297,600
b) P 9,622,400
c) P 9,920,000
d) P 10,000,000
Answers: Q1: A Q2: B
Ratio Proceeds Transaction Net Proceeds
Debt 97% P 9,700,000 P77,600 P9,622,400
Equity 3% 300,000 2,400 297,600
Total 100% P10,000,000 P80,000 P9,920,000
Problem 20- 26: (Conversion of Debt to Equity)
On January 1, 2014, Emilia Corporation issued its 5-year, 12% P5,000,000 face value convertible
debt instrument for P 4,800,000. The debt instrument is convertible into 80,000 ordinary shares
with a par value of P50 per share and can be converted anytime from January 2015 to maturity.
At the time of issue, the market rate of interest for a similar instrument is 14%. Interest is
payable every six months on January 1 and July 1.
On July 1, 2015, the entire debt instrument was converted into equity instrument by the issuance
of 80,000 ordinary shares of the enterprise. Transaction costs of P50,000 were incurred in
relation to the issue of new shares.
PV of 7% for an ordinary annuity of P1 after 10 periods 7.024
PV of 7% after 10 interest periods .508
What amount should be credited to the share premium account as a result of the conversion?
a) None
b) P831,349
c) P152,800
d) P881,549
Answer: B
Carrying value of debt as of December 31, 2015 P 4,728,549
Equity component 152,800
Total P4,881,349
Less: Par value of ordinary shares (80,000 shares x PS0) 4,000,000
Excess P 881,349
Less: Transaction costs 50,000
Credit to Share Premium P 831,349
Date Interest Paid Interest Expense Discount Amortization Carrying Value
01.01.14 0 0 0 P4,647,200
07.01.14 P300,000 P325,304 P25,304 4,672,504
12.31.14 300,000 327,075 27,075 4,699,579
07.01.15 300,000 328,970 28,970 4,728,549
Total proceeds from issue of debt P4,800,000
Less: Liability component (PV expected cash flows)
Interest (P5,000,000 x 6% x 7.024) P2,107,200
Face (P5,000,000 x .508) 2,540,000 4,647,200
Equity component P 152,800
Problem 20-27: (Partial Conversion of Debt to Equity)
On January 1, 2014, Wisdom Company issued its 10%, 6-year convertible debt instrument with a face
amount of P 3,000,000 for P 3,500,000. Interest is payable every December 31 of each year.
The debt instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt
instrument is convertible into equity from the time of issue until maturity. Without the
conversion feature, the debt instrument would have sold at 106.
On December 31, 2015, Wisdom Company converted 1,000,000 debt instruments by issuing
10,000 ordinary shares. As of December 31, 2015, the unamortized premium on the debt
instrument is P135,000.
What amount should be credited to the share premium account as a result of the conversion
a) None
b) P151,667
c) P135,000
d) P180,000
Answer: B
Total issue price P 3,500,000
Less: Liability component (1,000,000 x 106%) 3,180,000
Equity Component P 320,000
Face of the debt instruments P 3,000,000
