Mitch T.

Minglana
BSA 301

INTERMEDIATE ACCOUNTING 2
ACTIVITY: COMPOUND FINANCIAL INSTRUMENT

Sunshine Company issued 4-year 10% convertible bonds with face amount of P5,000,000 at
105 on January 1, 2020, maturing on January 1, 2025 and paying interest annually on
December 31.It is reliably ascertained that the bonds would sell at P4,700,000 without the
conversion feature with an effective yield of 12%.Each P1,000 bond is convertible into 8
shares of P100 par value share capital. On December 31, 2020, all of the bonds are converted
into share capital. At this time, the share has a market value of P160 and the bonds are quoted
at 101.

Required:
1. Prepare journal entry to record the issuance of the bonds on January 1, 2020.

ANSWER:
Cash (5,000,000x105%) 5, 250,000
Discount on bonds payable 300,000
Bonds payable 5,000,000
Share premium-conversion privilege 550,000

2. Prepare journal entry to record the interest payment and amortization for 2020. The
effective interest method of amortization is used.

ANSWER:
Interest expense (12%x4, 700,000) 564,000
Discount on bonds payable 64,000
Cash (10%x5,000,000) 500,000
3. Prepare journal entry to record the conversion of bonds on December 31, 2020.

ANSWER:
Bonds Payable 5,000,000
Share premium-conversion privilege 550,000
Discount on bonds payable (300,000-64,000) 236,000
Share capital 4,000,000
Share premium—issuance 1,314,000

Bonds Payable 5,000,000

Discount on bonds payable (236,000)
Share premium-conversion privilege 550,000
Total consideration 5,314,000
Share capital issued (40,000x100) 4,000,000
Share premium—issuance 1,314,000