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    Compound Financial Instrument PDF

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    idontcaree123312
    1. The document presents two accounting problems involving the issuance of compound financial instruments consisting of bonds and warrants/conversion features. 2. For problem 1, entries are provided to record the issuance of bonds with warrants, the exercise of 70% of the warrants, and the expiration of the remaining 30% of warrants. 3. For problem 2, entries are provided to record the issuance of convertible bonds and the conversion of all bonds into shares at the end of the current year.

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    Compound Financial Instrument PDF

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    idontcaree123312
    1K views4 pages
    1. The document presents two accounting problems involving the issuance of compound financial instruments consisting of bonds and warrants/conversion features. 2. For problem 1, entries are provided to record the issuance of bonds with warrants, the exercise of 70% of the warrants, and the expiration of the remaining 30% of warrants. 3. For problem 2, entries are provided to record the issuance of convertible bonds and the conversion of all bonds into shares at the end of the current year.

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    1. The document presents two accounting problems involving the issuance of compound financial instruments consisting of bonds and warrants/conversion features. 2. For problem 1, entries are provided to record the issuance of bonds with warrants, the exercise of 70% of the warrants, and the expiration of the remaining 30% of warrants. 3. For problem 2, entries are provided to record the issuance of convertible bonds and the conversion of all bonds into shares at the end of the current year.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views4 pages

    Compound Financial Instrument PDF

    Uploaded by

    idontcaree123312
    1. The document presents two accounting problems involving the issuance of compound financial instruments consisting of bonds and warrants/conversion features. 2. For problem 1, entries are provided to record the issuance of bonds with warrants, the exercise of 70% of the warrants, and the expiration of the remaining 30% of warrants. 3. For problem 2, entries are provided to record the issuance of convertible bonds and the conversion of all bonds into shares at the end of the current year.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    The document discusses how to account for compound financial instruments such as bonds issued with warrants, including recording the initial issuance and subsequent events like warrant exercise and expiration.

    When compound financial instruments like bonds are issued with warrants, you allocate the proceeds between the liability component and the equity component. The liability amount is the present value of the bond cash flows without the warrants, while the residual is allocated to the equity warrants account.

    When warrants attached to bonds are exercised, cash is received and the related warrants outstanding account is reduced. The amounts received are then allocated between the share capital and share premium accounts.

    Name: CANDOLE, Jorie Faye Ranara

    GALLANO, Joshua Luther Jones Casido


    Student ID: 513683 & 515933
    Course: BS Accountancy (2nd Year)

    LET’S ANALYZE ULO deg COMPOUND FINANCIAL INSTRUMENT

    Problem 1
    Umbrella Corporation has 4,000, 10%, 10-year bonds, face value 1,000, and sold it at 105. Each
    bond is accompanied by one warrant that permits the bondholder to purchase 20 shares of capital, par
    50, at 55 per share, or a total of 80,000 shares. The prevailing market rate of interest for similar bonds
    without warrants is 12% per annum with which

    the PV of 1 at 12% for 10 periods is 0.322


    and in an ordinary annuity is 5.65

    What is the entry to record issuance of the compound instrument and the exercise of the 70%
    warrants? Assume also the expiration of the 30% warrants and prepare the entry.

    Issue Price of Bonds 4,000 x 1,000 = 4,000,000 * 105% 4,200,000


    Total Present Value of Bonds Payable
    PV of Principal = 4,000,000 * 0.322 1,288,000
    PV of Interest Payments = 4,000,000 * 10% * 5.65 2,260,000 3,548,000
    Residual Amount Allocated to Share Warrants 652,000

    Cash 4,200,000
    Discount on Bonds Payable 452,000
    (4,000,000 – 3,548,000)
    Bonds Payable 4,000,000
    Share Warrants Outstanding 652,000
    To record issuance of bonds. .
    Cash (4,000 * 20 * 55) 4,400,000
    Share Warrants Outstanding 652,000
    Ordinary Share Capital 4,000,000
    (4,000 * 20 * 50)
    Share Premium 1,052,000
    Cash 3,080,000
    Share Warrants Outstanding 456,400
    Ordinary Share Capital 2,800,000
    Share Premium 736,400
    To record the 70% exercise of the warrant.

    Share Warrants Outstanding 195,600


    (652,000 * 30%)
    Share Premium – Unexercised Warrants 195,600
    To record the expiration of the warrants.
    Name: CANDOLE, Jorie Faye Ranara
    GALLANO, Joshua Luther Jones Casido
    Student ID: 513683 & 515933
    Course: BS Accountancy (2nd Year)

    Problem 2
    At the beginning of the current year, Claudine Corporation issued 6,000, 5-year bonds, face
    value 1,000 each at 105. The bonds has a conversion privilege that provides for an exchange of a 1,000
    bond for 20 shares of capital, par 50. Without such conversion privilege, the bonds would only sell at
    98.
    Prepare the entries in connection with the issuance of the bonds and the conversion of the bonds
    at the end of the current year.

    Issue Price of Bonds 6,000 * 1,000 = 6,000,000 * 105% 6,300,000


    Allocated to the fair value of B/P = 6,000,000 * 98% 5,880,000
    Allocated to conversion privilege 420,000

    Cash 6,300,000
    Discount on Bonds Payable 120,000
    (6,000,000 – 5,880,000)
    Bonds Payable 6,000,000
    Share Premium - Conversion Privilege 420,000
    To record issuance of the compound instrument.

    Bonds Payable 6,000,000


    Share Premium – CP 420,000
    Discount on Bonds Payable 96,000
    (Less: 120,000/ 5 = 24,000)
    Ordinary Share Capital 6,000,000
    (6,000 * 20 * 50)
    Share Premium 324,000

    Problem 3
    Faith Company issued 5500 convertible bonds on January 1, 2019. The bonds have a three-year
    term and are issued at 110 with a face value of 1,000 per bond. Interest is payable annually in arrears
    at a nominal 6% interest rate. Each bond is convertible at any time up to maturity into 100 common
    shares with par value of 5. When the bonds are issued, the prevailing market interest rate for similar
    debt instrument without conversion option is 9%.

    The present value of 1 at 9% for 3 periods is 0.77


    and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53

    Case a. Prepare the entries of the company in connection with the bonds for its 3-year term assuming
    the bonds were not converted.
    Case b. Suppose that the company converted the bonds on December 31, 2019, Prepare the entries
    on the bonds during 2019.
    Name: CANDOLE, Jorie Faye Ranara
    GALLANO, Joshua Luther Jones Casido
    Student ID: 513683 & 515933
    Course: BS Accountancy (2nd Year)

    Issue Price of Bonds 5,500 x 1,000 = 5,500,000 * 110% 6,050,000


    Total Present Value of Bonds Payable
    PV of Principal = 5,500,000 * 0.77 4,235,000
    PV of Interest Payments = 5,500,000 * 6% * 2.53 834,900 5,069,900
    Allocated to Share Premium – Conversion Privilege 980,100

    Date Interest Paid Interest Expense Discount Amortization Carrying Amount


    5,069,900
    Year 1 330,000 456,291 126,291 5,196,191
    Year 2 330,000 467,657 137,657 5,333,848
    Year 3 330,000 496,152 166,152 5,500,000

    CASE A

    YEAR 1
    Cash 6,050,000
    Discount on Bonds Payable 430,100
    Bonds Payable 5,500,000
    Share Premium – CP 980,100
    -Dec 31
    Interest Expense 126,291
    Discount on Bonds Payable 126,291

    Interest Expense 330,000


    Cash 330,000
    (5,500,000 * 6%)
    YEAR 2
    Interest Expense 137,657
    Discount on Bonds Payable 137,657

    Interest Expense 330,000


    Cash 330,000

    YEAR 3
    Interest Expense 166,152
    Discount on Bonds Payable 166,152

    Bonds Payable 5,500,000


    Interest Expense 330,000
    Cash 5,830,000
    Name: CANDOLE, Jorie Faye Ranara
    GALLANO, Joshua Luther Jones Casido
    Student ID: 513683 & 515933
    Course: BS Accountancy (2nd Year)

    Share Premium – CP 980,100


    Share Premium – Issuance 980,100

    CASE B

    YEAR 1
    Cash 6,050,000
    Discount on Bonds Payable 430,100
    Bonds Payable 5,500,000
    Share Premium – CP 980,100
    -Dec 31
    Interest Expense 126,291
    Discount on Bonds Payable 126,291

    Interest Expense 330,000


    Cash 330,000

    Bonds Payable 5,500,000


    Share Premium – CP 980,100
    Discount on Bonds Payable 303,809
    (430,100 – 126,291)
    Share Capital 2,750,000
    (5,500 * 100 * 5)
    Share Premium – Issuance 3,426,291

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