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(1) On January 1, 2020, Mipha Company decided to issue 5,000 10-year bonds of 8% P1,000 face value
with warrants to acquire share capital at P30 per share. The interest on the bonds is payable annually
every December 31.
Each bond contains one warrant which can be used to acquire 4 shares of P25 par value share capital.
It is reliably determined that without warrants, the bonds would sell at 114.7 with a 6% effective yield.
The bond price with warrants is 120. All warrants are exercised on December 31, 2020.
REQUIRED: Prepare the journal entries for 2020 in connection with the bond issuance and the exercise
of warrants. Use effective interest method of amortization.
Answer:
Each bond is convertible at any time up to maturity into 25 shares of capital with par value of P20. The
bonds are converted on December 31, 2020. When the bonds are issued, the prevailing market rate for
similiae bonds without conversion privilege is 9%.
The present value of 1 at 9% for three periods is 0.77 and the present value of an ordinary annuity of 1
at 9% for three periods is 2.53
REQUIRED: Prepare the journal entry to record issuance of the bonds om January 1, 2020, interest
payment, effective amortization and bond conversion on December 31, 2020.
Answer:
1. Cash 2,200,000
Discount on bonds payable 156,400