1.

It is any contract that gives rise to both a financial asset of one entity and a financial liability

Or equity instrument of another entity.

A. Debt instrument

B. Derivative instrument

C. Equity instrument

D. Financial instrument

2. Which of the following is not classified as a financial instrument?

A. Convertible bond

B. Foreign currency contract

C. Loan receivable

D. Warranty provision

3. A financial liability is a contractual obligation

I. To deliver cash or other financial asset to another entity.

II. To exchange financial instruments with another entity under conditions that are

Potentially unfavorable.

A. I only

B. II only

C. Both I and II

D. Neither I nor II

4. Which of the following should be considered a financial liability?

A. A constructive obligation

B. A warranty obligation

C. Deferred revenue

D. Redeemable preference share

5. Equity instruments include all of the following, except

A. Ordinary shares

B. Preference shares

C. Corporate bonds and other debt instruments issued by the entity.

D. Warrants or options that allow the holder to purchase a fixed number of ordinary shares
Of the issuing entity in exchange for a fixed amount of cash

6. Convertible bonds

A. Are usually secured by a mortgage.

B. May be exchanged for equity shares.

C. Have priority over other indebtedness.

D. Pay interest only in the event earnings are sufficient.

7. The conversion of bonds is usually recorded by

A. Carrying amount method

B. Fair value method

C. Incremental method

D. Proportional method

8. When an entity issued convertible bonds, how will share premium be computed if the bonds

Were converted into ordinary shares?

A. It is the difference between the face value of the bonds and the total par or stated value

Of the shares issued.

B. It is the difference between the carrying amount of the bonds and the total par or stated

Value of the shares issued.

C. It is the difference between the carrying amount of the bonds plus share premium from

Conversion privilege and the total par or stated value of the shares issued.

D. It is the difference between the face value of the bonds plus the share premium from

Conversion privilege and the total par or stated value of the shares issued.

9. The major difference between convertible bonds and bonds issued with share warrants is

That upon exercise of the warrants

A. The shares involved are restricted.

B. No share premium can be part of the transaction.

C. The holder has to pay a certain amount to obtain the shares.

D. The shares are held by the issuer for a certain period before they are issued to the

Warrant holder.

10. An entity issued bonds payable with non-detachable share warrants. In computing interest
Expense for the first year, the effective interest rate is multiplied by the

A. Face value of the bonds

B. Share warrants outstanding

C. Fair value of the bonds ex-warrant

D. Proceeds received from sale of the bonds

Problem Solving

1. During 2013, Brad Company issued 5,000 convertible preference shares of P100 par value for P110
per share. One preference share can be converted into three ordinary shares of P25 par value at the
option of the preference shareholder. On December 31,2013, when the market value of the ordinary
share was P40, all of the preference shares were converted. What amount should be credited to
ordinary share capital and share premium as a result of the conversion, respectively?

A. 375,000 and 175,000

B. 375,000 and 225,000

C. 500,000 and 50,000

D. 600,000 and 0

2. On December 31, 2013, Moses Company issued P5,000,000 face value, 5-year bonds at 109. Each P
1,000 bond was issued with 50 detachable share warrants, each of which entitled the bondholder to
purchase one ordinary share of P5 par value at P25. Immediately after issuance, the market value of
each warrant was P5. The stated interest rate on the bonds is 11% payable annually every December 31.
However, the prevailing market rate of interest for similar bonds without warrants is 12%. The present
value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5
periods is 3.60. On December 31, 2013, what amount should be recorded as discount or premium on
bonds payable?

A. 170,000 discount

B. 450,000 discount

C. 450,000 premium

D. 800,000 discount

3. At the beginning of the current year, Ria Company issued 10,000 ordinary shares of P20 par value and
20,000 convertible preference shares of P20 par value for a total of P800,000. At this date, the ordinary
share was selling for P36, and the convertible preference share was selling for P27. What amount of the
proceeds should be allocated to the convertible preference shares?
A. 440,000

B. 480,000

C. 540,000

D. 600,000

4. On March 1, 2013, Case Company issued P5,000,000 of 12% nonconvertible bonds at 103 which are
due on February 28,2018. In addition, each P1,000 bond was issued with 30 detachable share warrants,
each of which entitled the bondholder to purchase, for P50, one ordinary share of Case Company, par
value P25. On March 1, 2013, the quoted market value of each warrant was P4. The market value of the
bonds ex-warrants at the time of issuance is 95. What amount of the proceeds from the bond issue
should be recognized as an increase in shareholders' equity?

A. 200,000

B. 300,000

C. 400,000

D. 600,000

5. In 2014, Hyatt Company issued for P110 per share, 15,000 convertible preference shares of P100 par
value. One preference share may be converted into three ordinary shares with P25 par value at the
option of the preference shareholder. On December 31, 2015, all of the preference shares were
converted into ordinary shares. The market value of the ordinary share at the conversion date was P40.
What amount should be credited to ordinary share capital on December 31, 2015?

A. 1,125,000

B. 1,500,000

C. 1,650,000

D. 1,800,000
SOLUTIONS:

1. Issue price of preference shares (5,000 x 110) 550,000 - Ordinary shares at par (5,000 x 3 = 15,000
shares x 25) 375,000 = Share premium 175,000

2. PV of principal (5,000,000 x .57) 2,850,000 + PV of annual interest payments (550,000 x 3.60)

Bonds payable 5,000,000 - Present value of bonds payable 4,830,000 = Discount on bonds payable
170,000

3. Market value Fraction Allocated proceeds Ordinary shares (10,000 x 36) 360,000 X 36/90 = 320,000
Preference shares (20,000 x 27) 540,000 X 54/90 = 480,000

4. Issue price of bonds with warrants (5,000,000 x 103%) 5,150,000 - Market value of bonds without
warrants (5,000,000 x 95%) 4,750,000 = Residual amount allocated to warrants - equity component
400,000

5. A.

To record the issuance of preference shares:

Cash (15,000 x 110) 1,650,000

Preference share capital 1,500,000

Share premium – PS 150,000

To record the conversion of preference shares into ordinary shares:

Preference share capital 1,500,000

Share premium – PS 150,000

Ordinary share capital (45,000 x 25) 1,125,000

Share premium – ordinary 525,000

(15,000 preference shares x 3 = 45,000 ordinary shares)