Require 1 Require 2

Par value = 10,000,000

Coupon rate = 2%
Interest payment 100,000 Date Interest payment
Effective rate = 5% 2/1/X0
30/6/X0 100,000
Debt component 8,687,190 31/12/X0 100,000
Equity componen 1,312,810 30/6/X1 100,000
31/12/X1 100,000
30/6/X2 100,000
31/12/X2 100,000
30/6/X3 100,000
31/12/X3 100,000
30/6/X4 100,000
31/12/X4 100,000

30/6/X1
Dr Interest expense 223,112
Cr Cash 100,000
Cr Unamortised discount 123,112

31/12/X1
Dr Interest expense 226,190
Cr Cash 100,000
Cr Unamortised discount 126,190

Total amount of interest expense for 20X1 = 449,302

Require 3
1/7/X2
CA of debt component 9,303,126
CA of equity component 1,312,810
10,615,935
=> Bee should retire the bond if the redemption price is less than 10,615,935

Require 4
The market interest falls to 3%:
PV of remaining interest payment 478,264
PV of principle 9,282,603
FV of debt component 9,760,868

The market interest at 5%:

Debt component at 1/7/X2 9,303,126
Redemption expense 457,742
Redemption price 10,300,000
Difference 996,874
Reduce in equity 539,132

Journal entries:
Dr Bond payable 10,000,000
Dr Redemption expense (PL) 457,742
Dr Equity 539,132
Cr Unamortised discount 696,874
Cr Cash 10,300,000
 2.5%
Effective interest Amortised discount Unamortised discount CA of bond
1,312,810 8,687,190
217,180 117,180 1,195,630 8,804,370
220,109 120,109 1,075,521 8,924,479
223,112 123,112 952,409 9,047,591
226,190 126,190 826,219 9,173,781
229,345 129,345 696,874 9,303,126
232,578 132,578 564,296 9,435,704
235,893 135,893 428,404 9,571,596
239,290 139,290 289,114 9,710,886
242,772 142,772 146,341 9,853,659
246,341 146,341 (0) 10,000,000
Require 1
Grant date 1/1/20X1

Compound financial instrument

FV of equity alternative 308,000

FV of cash alternative (debt component) 300,000
Equity component 8,000

Require 2
31/12/20X1
Debt component 116,667
Equity component 2,667
Remuneration expense 119,333

Dr Remuneration expense 119,333

Cr Liability 116,667
Cr Share option reserve 2,667

31/12/20X2
Debt component 150,000
Equity component 2,667
Remuneration expense 152,667

Dr Remuneration expense 152,667

Cr Liability 150,000
Cr Share option reserve 2,667

31/12/20X3
Debt component 233,333
Equity component 2,667
Remuneration expense 236,000

Dr Remuneration expense 236,000

Cr Liability 233,333
Cr Share option reserve 2,667

(a) The employees chose cash alternative at the end of 20x3

Dr Liability 500,000
Cr cash 500,000
(b) The employees chose equity alternative at the end of 20x3
Dr Liability 500,000
Dr Share option reserve 8,000
Cr Share capital 508,000