Problem 7-9

At the beginning of the current year, Fence Company issued 12% P5,000,000
nonconvertible bonds at 103 which are due in 5 years
In addition, each P1, 000 bond was issued 30 share warrants each of which entitled the
bondholder to purchase for P50 one share of Fence company, par value P25. Interest is
payable annualy every end of the year.
On the date of issuance, the market value of the share was P40 and the market value of
the warrant was P4.
The market rate of interest for similar bonds ex-warrants is 14%. The present value of 1
at 14% for 5 periods is 0.52 and the present value of an ordinary annuity of 1 at 14% for
5 periods is 3.43.
1. What amount should be recognized as discount premium on the original issuance of
the bonds?
a. 342,000 premium
b. 342,000 discount
c. 450,000 premium
d. 450,000 discount
2. What is the equity component arising from the issuance of bonds payable?
a. 150,00
b. 450,000
c. 492,000
d. 0
3. What amount is credited to share premium if all of the share warrants are
exercised?
a. 4,242,000
b. 3,500,000
c. 3,600,000
d. 3,950,000
Problem 7-10 (AICPA Adapted)
Armada Company 1ssued P5,000,000 face amount, 5-year bonds at 109. Each P1000
bond was issued with 10 share warrants, each of which entitled the bondholder to
purchase one share of P100 par value at P120. Immediately after issuance, the market
value of each warrant was P5.
The stated interest rate on the bond is 11% payable annually every end of the year.
However, the prevailing market rate of interest for similar bonds without warrants is
12%.
The present value of 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.
 1. What is the carrying amount of the bonds payable on the date of 1ssuance?
a. 5,450,000
b. 4,830,00
c. 5,000,000
d. 4,380,000
2 What amount should be recorded initially as discount or premium on bonds payable?
a. 170,000 discount
b. 450,000 premium
c. 450,000 discount
d. 800,000 discount
3. What is the equity component arising from the issuance bonds payable?
a. 450,000
b. 500,000
c. 620,000
d. 0
4. What amount is credited to share premium if all of the share warrants are exercised?
a. 1,000,000
b. 1,450,000
c. 1,500,000
d. 1,620,000
Problem 7-11 (AICPA Adapted)
At the beginning of current year, Case Company issued P5,000,000 of 12%
nonconvertible bonds payable at 103 which are due in five years.
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 the date of issuance, the quoted market value of each warrant was P4. The market
value of the bonds ex-warrants at the time of issuance is 95.
1. What is the carrying amount of the bonds payable on the date of issuance?
a. 5,000,000
b. 4,750,000
c. 5,150,000
d. 4,550,000
2. What amount of the proceeds from the bond issue should be recognized as an
increase in shareholders' equity?
a. 600,000
 b. 300,000
c. 200,000
d. 400,000
3. What amount is credited to share premium if all of the share warrants are exercised?
a. 4,350,000
b. 3,750,000
c. 4,150,00
d. 0
Problem 7-12 (IAA)
Moriones Company issued P5,000,000 face amount 12% 5-year convertible bonds at
110 at the beginning of current year, paying interest semiannually on January 1 and
July 1.
It is estimated that the bonds would sell only at 103 without the conversion feature.
Each P1,000 bond is convertible into 10 ordinary shares with P100 par value.
1. What is the increase in shareholders' equity arising from the original issuance of the
convertible bonds?
a. 350,000
b. 500,O00
c. 150,000
d. 0
Problem 7-13 (IFRS)
At the beginning of current year, Susan Company issued 5,000 convertible bonds. The
bonds have a three-year tern and are issued at 110 with a face amount of P1,000 per
bond. Interest is payable annually in arrears at a nominal 6% interest rate.
Each bond is convertible at anytime up to maturity into 100 ordinary shares with par
value of P5.
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 .77 and the present value of an ordinary
annuity of 1 at 9% for 3 periods is 2.53.
1. What is the equity component arising from the original issuance of the convertible
bonds?
a. 1,150,000
b. 1,650,000
c. 891,000
d. 391,000
Problem 7-14 (AICPA Adapted)
On December 31, 2020, Cey Company had outstanding 12% P5,000,000 face amount
convertible bonds maturing on December 31, 2025. Interest is payable on June 30 and
December 31. Each P1000 bond os convertible into 50 shares pf Cey Company with
P10 par value.
On December 31, 2020, the unamortized balance in the premium on bonds payable
account was P300,000. No equity component was recognized from the original
issuance of the convertible bonds.
On December 31, 2020, 2,000 bonds were converted when the share had a market
price of P24. The entity incurred P20,000 in connection with the bond conversion.
1. What is the share premium arising from the bond conversion?
a. 1,400,000
b. 1,100,000
c. 1,380,000
d. 1,120,000
Problem 7-15 (AICPA Adapted)
Spare Company had an outstanding share capital with par value of P50,000,000 and a
12% convertible bond issue in the face amount of P10,000,000. Interest payment dates
of the bond issue are June 30 and December 31.
The conversion clause in the bond indenture entitled the bondholders to receive 40
shares of Spare Company with P20 par value in exchange for each P1,000 bond.
The holder of P5,000,000 face value bonds exercised the conversion privilege at year-
end. The market price of the bonds at year-end was P1,000 per bond and the market
price of the share was P30.
The total unamortized bond discount was P500,000 and the share premium from
conversion privilege has a balance of P2,000,000 at the date of conversion.
1. What amount of share premium should be recognized by reason of the conversion
of bonds payable into share capital?
a. 2,000,000
b. 2.750,000
c.3,000,000
d. 1,760,000
Problem 7-16 (IAA)
On December 31, 2020, Tamia Company showed the following balances:
Bonds Payable – 6% 4,000,000
Discount on Bonds Payable 500,000
Share premium – issuance 5,000,000
Share premium – conversion privilege 700,000
The interest is payable annually every December 31. The convertible bond are not
converted but fully paid on December 31, 2020.
On such date, the quoted price of the convertible bonds with conversion option is 105
which is the payment to the bondholders plus interest.
However, the quoted price of the bonds without the conversion privilege is 95.
1. What is the carrying amount of the bonds payable on December 31, 2020?
a. 4,000.000
b. 4,500,000
c. 3,500,000
d. 4,200,000
2. What is the gain or loss from extinguishment of bonds?
a. 700,000 gain
b. 700,000 loss
c. 300,000 gain
d. 300,000 loss
3. What is the total payment to the bondholders December 31, 2020?
a. 4,200,000
b. 4,440,000
c. 4,240,000
d. 4,040,000
Problem 7-17 Multiple choice (FRS)
1. What is the principal accounting for a compound financial instrument?
a. The issuer shall classify compound instrument the liability and equity
b. The issuer shall classify the liability and equity components of a compound
instrument separately as liability and equity instrument.
c. The issuer shall classify a compound instrument as a liability in its entirety, until
converted into equity.
d. The issuer shall classify a compound instrument as a liability or equity instrument.

2. How are the proceeds from issuing a compound instrument allocated between the
liability and equity?
a. The liability component is measured at fair value and the remainder of the proceeds
is allocated to the equity component.
b. The proceeds are allocated to the liability and equity based on fair value.
c. The proceeds are allocated to the liability and equity based on carrying amount.
d. The proceeds are not allocated because the compound instrument is accounted for
either as liability or equity.

3. The proceeds from an issue of bonds with share warrants should not be allocated
between the liability and equity components when
a. The fair value of the warrants i8 not readily available.
b. The exercise of the warrants within the next reporting period seems remote,
c. The warrants issued are nondetachable
d. The proceeds should be allocated between liability and equity under all of these
circumstances.

4. When the cash proceeds from bonds issued with share warrants exceed the fair
value of the bonds without the warrants, the excess should be credited to
a. Share premium-ordinary
b. Retained earnings
c. Liability account
d. Share premium-share warrants
5. When bonds are issued with share warrants, the equity component is equal to
a. Zero
b. The excess of the proceeds over the face amount of the bonds.
c. The market value of the share warrants.
d. The excess of the proceeds over the fair value of the bonds without the share
warrants.

6. What is the main reason for issuing convertible bond?

a. The ease with which convertible bond is sold even if the entity has a poor credit
rating.
b. The fact that equity capital has issue cost and convertible bond has none.
c. Entities can obtain financing at lower rate.
d. Convertible bond will always sell at a premium.

7.The major difference between convertible bonds and bonds issued with share
warrants is that upon exercise of the warrants
a. The shares are held by the issuer for a certain period before issuance to the warrant
holder.
b. The holder has to pay a certain amount to obtain the shares
C. The shares involved are restricted.
d. No share premium can be part of the transaction

8. What is the accounting for issued convertible bond?

a. The instrument should be presented solely as bond
b. The instrument should be presented either as bond or equity but not both.
c. The instrument should be presented solely as equity.
d. The instrument should be presented as part bond and part equity.
9. Issued convertible bonds are
a. Separated into debt and equity components with the liability component recorded at
fair value and the residual assigned to the equity component.
b. Always recorded using the fair value option.
c. Recorded at face amount for the liability along with the associated premium or
discount.
d. Recorded at face amount without consideration of a premium or discount.

10. When convertible bond payable is not converted but paid at maturity
a. A gain or loss is recorded for the difference between the carrying amount of the bond
and the present value of the cash flows.
b. The amount allocated to equity is recorded as a gain.
c. The amount allocated to equity is recorded as a loss.
d. The carrying amount of the bond equal to face amount is derecognized.