Title | 439488583-IA-Reviewer |
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Course | Accounting |
Institution | Far Eastern University |
Pages | 8 |
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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 ...
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 P 211,240
Unamortized bond discount
Date
Interest Paid
Interest Expense
Discount Amortization
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
Carrying Value
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%) Less: Interest expense (P939,000 x 10%) Carrying Value, December 31, 2014
P90,000 93,900
3,900 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 PV of 10% after 10 interest periods
6.145 .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) Present value of principal (P5,000,000 x .385) Fair value of debt instrument
P2,458,000 1,925,000 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 Interest Expense (P4,424,800 x 8%) Carrying value of debt as of December 31, 2014 Less: Face value of debt Unamortized premium as of December 31, 2014
P400,000 341,184
58,816 P4,205,984 4,000,000 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
100%
P10,000,000
P80,000
P9,920,000
Total
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 PV of 7% after 10 interest periods
7.024 .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 Credit to Share Premium
50,000 P
831,349
Date
Interest Paid
Interest Expense
Discount Amortization
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
Carrying Value
P4,800,000
Less: Liability component (PV expected cash flows) Interest (P5,000,000 x 6% x 7.024) Face (P5,000,000 x .508) Equity component
P2,107,200 2,540,000
4,647,200 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 Less: Liability component (1,000,000 x 106%)
P 3,500,000 3,180,000
Equity Component
P 320,000
Face of the debt instruments
P 3,000,000...