Exercise: Compound Financial Instrument

Saturday, October 8, 2022 11:44 PM

PROBLEM 1: On December 31, 2028, Pepper Corporation issued 1,000 of its 10%, 10-year, P1,0
share warrants at 103. Each bond carried two share warrants, each warrant entitling the holder
Pepper's P20 par value ordinary share at a specified option price of P25 per share. Immediately
without warrant sells at 97 and each ordinary share sells at P75.

Required:
1. How much is the proceeds from the issuance of bonds with warrants?
2. How much proceeds is allocated to the bonds?
3. How much proceeds is allocated to the share warrants?
4. How much is the discount on bonds payable on the date of issuance?
5. How much share premium is credited on the date of exercise?
*see answers on the notebook

PROBLEM 2: On January 1, 2024, Pepper Company issued a 3-year, 16,000, P1,000 convertible
to be paid annually at the stated coupon rate of 12% every December 31. each bond is converti
option, into 30, P25 par value ordinary shares at any time to maturity. On the date of issuance,
interest rate for similar debt without the conversion privilege was 9%. On the same date, marke
share was P30.

The bonds were converted on January 1, 2026.

REQUIRED: Compute for the following items:

1. Equity component of the convertible debt
2. Bonds payable carrying value as of December 31, 2024
3. Amount to be credited to share premium from the equity conversion