ACCT3103 - Intermediate Financial Accounting II

Assignment 1- Solutions

Question 1
1. Price of the bonds at January 1, 2021
Present value of principal $2,000,000 x 0.7903* = $1,580,600
Present value of interests $100,000 x 5.2421** = $ 524,210
Price of bonds = $2,104,810
* present value of $1: n=6, i=4%
**present value of an ordinary annuity of $1: n=6, i=4%

Bond premium = $2,104,810– $2,000,000 = $104,810

2. Issuance of bonds
January 1, 2021
Dr. Cash 2,104,810
Cr. Bond payable 2,000,000
Cr. Premium on bond payable (bal.fig) 104,810

3. Interest on Jun 30, 2021 & December 31, 2021

June 30, 2021
Dr. Interest expenses ($2,104,810 x 4%) 84,192
Dr. Premium on bond payable (bal.fig) 15,808
Cr. Cash 100,000

December 31, 2021

Dr. Interest expenses ($2,089,002 x 4%) 83,560
Dr. Premium on bond payable (bal.fig) 16,440
Cr. Cash 100,000
Question 2
1. Issuance of bonds
PV of bonds with the option feature at the issuance date (n=5,i=7%)
= $20,000,000  0.7130 + $1,600,000  4.1002 = $20,820,320
PV of bonds without the option feature at the issuance date (n=5,i=9%)
= $20,000,000  0.6499 + $1,600,000  3.8897 = $19,221,520

Discount on bonds payable = $20,000,000 – $19,221,520= $778,480.

Option value for 20,000 bonds = $20,820,320 – $19,221,520= $1,598,800.

January 1, 2020
Dr. Cash 20,820,320
Dr. Discount on Bonds Payable 778,480
Cr. Bonds Payable 20,000,000
Cr. Paid in capital from Conversion Feature 1,598,800

2. Bonds conversion
PV of bonds as on January 1, 2023 (n=2,i=9%)
= $20,000,000  0.8417 + $1,600,000  1.7591 = $19,648,560.

Discount on bonds payable = $20,000,000 - $19,648,560= $351,440.

January 1, 2023
Dr. Bonds Payable 20,000,000
Dr. Paid in capital from Conversion Feature 1,598,800
Cr. Discount on Bonds Payable 351,440
Cr. Share Capital - Ordinary (bal.fig.) 21,247,360

3. Repurchase of convertible bonds

Market value of 20,000 bonds redeemed on January 1, 2023 = $20,000,000 (since coupon rate =
market interest rate)
Redemption price: $20,000,000 x 106% = $21,200,000
Allocation of the redemption price: Value of bonds: $20,000,000 // Value of option: $1,200,000

January 1, 2023
Dr. Bonds Payable 20,000,000
Dr. Paid in capital from Conversion Feature 1,200,000
Dr. Loss on Redemption of Bond 351,440
Cr. Discount on Bonds Payable 351,440
Cr. Cash 21,200,000
Question 3
Carry value of the old debt = $2,000,000 + $120,000 = $2,120,000
PV (restructured debt) (n=2,i=6%) = $1.5m x 0.8900 + $60,000 x 1.8334 = $1,445,004
Difference = $2,120,000 - $1,445,004 = $674,996
Difference is 32% ($674,996 / $2,120,000), which is larger than the threshold 10%, the terms are
substantially modified.

PV of new debt (n=2, i=4%) = $1.5m x 0.9246 + $60,000 x 1.8861 = $1,500,000

Decrease in note payable = $2,000,000 - $1,500,000 = $500,000

1. January 1, 2021
Dr. Note payable (old) 2,000,000
Dr. Interest payable ($2m x 6%) 120,000
Cr. Note payable (new) 1,500,000
Cr. Gain on trouble debt restructuring (bal.fig) 620,000

Alternative
Dr. Note payable 500,000
Dr. Interest payable ($2m x 6%) 120,000
Cr. Gain on trouble debt restructuring (bal.fig) 620,000

2. December 31, 2021

Dr. Interest expense 60,000
Cr. Cash 60,000

3. December 31, 2022

Dr. Interest expense 60,000
Cr. Cash 60,000

Dr. Notes payable 1,500,000

Cr. Cash 1,500,000