COMPOUND

FINANCIAL
INSTRUMENT
 COMPOUND FINANCIAL INSTRUMENT
A financial instrument that contains both a
LIABILITY component and an EQUITY component
Bonds with WARRANTS
Bondholders are given the right to ACQUIRE a speci ed number of
ordinary shares of the issuing corporation at a GIVEN PRICE within a
certain time period
EQUITY component = SHARE WARRANTS OUTSTANDING ( SWO )

CONVERTIBLE Bonds
Bondholders are given the right to EXCHANGE their bondholding into
ordinary shares or other securities of the issuing company within a
speci ed period of time
EQUITY component = SHARE PREMIUM - BOND CONVERSION PRIVILEGE ( BCP )
fi
fi
 ISSUE PRICE
BIFURCATION

LIABILITY EQUITY
( “without” ) ( residual amount )

Total Amount SWO (Bonds with WARRANTS)

Quoted Price BCP (CONVERTIBLE bonds)

Face value x Quoted price

Examples: 101, 105, 95, 98 PV of FACE VALUE XX
PV of PERIODIC INTEREST XX
Effective Rate XX
 ISSUANCE OF BONDS
BONDS WITH WARRANTS
Journal entries:

PREMIUM DISCOUNT

Cash xx Cash xx
Bonds payable xx Discount on bonds payable xx
Premium on bonds payable xx Bonds payable xx
Share Warrants Outstanding xx Share Warrants Outstanding xx

CONVERTIBLE BONDS
Cash xx Cash xx
Bonds payable xx Discount on bonds payable xx
Premium on bonds payable xx Bonds payable xx
SP-Bond conversion privilege xx SP-Bond conversion privilege xx
 EXERCISE OF WARRANTS Journal entries: CONVERSION OF BONDS

Cash xx Bonds payable xx

Share warrants outstanding xx
Ordinary share par or stated value xx
Share premium-ordinary xx
Premium on bonds payable xx
SP-Bond conversion privilege xx
Discount on bonds payable xx
Ordinary share par or stated value xx
Share premium-ordinary xx

ORDINARY
CV OF BONDS
CASH SWO/SP-BCP SHARE SP-ORDINARY
PAYABLE
CAPITAL

EXERCISE OF
WARRANTS

CONVERSION
OF BONDS
 Exercise price or Option price

ISSUE PRICE = 5,000,000 x 1.04 = 5,200,000

Number of WARRANTS = 5,000 bonds x 1 warrant per bond = 5,000 warrants

P5,000,000 / P1,000

Number of SHARES = 5,000 warrants x 20 shares per warrant = 100,000 ordinary shares
 ISSUE PRICE = 5,200,000

LIABILITY EQUITY
( “without” ) ( residual amount )
350,000
4,850,000

5,000,000 x .97 = 4,850,000 350,000

Journal entry: ISSUANCE OF BONDS

Jan. 1, 2020
Cash 5,200,000
Discount on bonds payable 150,000 5,000,000 - 4,850,000
Bonds payable 5,000,000
Share warrants outstanding 350,000
 ISSUE PRICE = 5,200,000

LIABILITY EQUITY
350,000
( “without” ) ( residual amount )
4,850,000

5,000,000 x .97 = 4,850,000 350,000

850,000

Journal entry: EXERCISE OF WARRANTS

DEC. 31, 2022
Cash 2,000,000 100,000 shares x P20
Share warrants outstanding 350,000 350,000 x 100%
Ordinary share 1,500,000 100,000 shares x P15
Share premium-ordinary 850,000
 ISSUE PRICE = 5,200,000

LIABILITY EQUITY
( “without” ) ( residual amount )
350,000
4,850,000

850,000 5,000,000 x .97 = 4,850,000 350,000

510,000

Journal entry: EXERCISE OF WARRANTS

DEC. 31, 2022
Cash 1,200,000 60,000 shares x P20
Share warrants outstanding 210,000 350,000 x 60%
Ordinary share 900,000 60,000 shares x P15
Share premium-ordinary 510,000
 ISSUE PRICE = 5,000,000 x 1.03 = 5,150,000

Number of SHARES = 5,000 bonds x 5 shares per bond = 25,000 ordinary shares
P5,000,000 / P1,000
 ISSUE PRICE = 5,150,000

LIABILITY EQUITY
529,180
( “without” ) ( residual amount )
4,620,820

4,620,820 529,180
Present value of FACE VALUE
3,104,500
( 5,000,000 x .6209 )
Present value of INTEREST
1,516,320
( 400,000 x 3.7908 )
Journal entry: ISSUANCE OF BONDS Issue Price (LIABILITY) 4,620,820
Jan. 1, 2020
Cash 5,150,000
Discount on bonds payable 379,180 5,000,000 - 4,620,820
Bonds payable 5,000,000
SP-Bond conversion privilege 529,180
 ISSUE PRICE = 5,150,000

LIABILITY EQUITY
529,180 ( “without” ) ( residual amount )
4,620,820

2,855,491

4,620,820
-0-
529,180
NOMINAL EFFECTIVE CV OF
AMORTIZATION
DATE INTERES INTEREST BONDS
OF DISCOUNT
(8%) (10%) PAYABLE
1/1/20 - - - 4,620,820
Journal entry: CONVERSION OF BONDS 12/31/20 400,000 462,082 62,082 4,682,902
DEC. 31, 2022 12/31/21 400,000 468,290 68,290 4,751,192

Bonds payable 5,000,000 12/31/22 400,000 475,119 75,119 4,826,311

SP-Bond conversion privilege 529,180 529,180 x 100%

Discount on bonds payable
Ordinary share
Share premium-ordinary
T
CV of bonds CONVERTED =
173,689 5,000,000 - 4,826,311 4,826,311 x 100% = 4,826,311
2,500,000 25,000 shares x P100
2,855,491

 ISSUE PRICE = 5,150,000

LIABILITY EQUITY
529,180 ( “without” ) ( residual amount )
4,620,820

2,855,491

4,620,820
-0-
529,180
NOMINAL EFFECTIVE CV OF
AMORTIZATION
571,098 1,000,000 /5,000,000 = 20% DATE INTERES
(8%)
INTEREST
(10%)
OF DISCOUNT
BONDS
PAYABLE
1/1/20 - - - 4,620,820
Journal entry: CONVERSION OF BONDS 12/31/20 400,000 462,082 62,082 4,682,902
DEC. 31, 2022 12/31/21 400,000 468,290 68,290 4,751,192

Bonds payable 1,000,000 12/31/22 400,000 475,119 75,119 4,826,311

SP-Bond conversion privilege 105,836 529,180 x 20%

CV of bonds CONVERTED =
Discount on bonds payable 34,738 1,000,000 - 965,262
4,826,311 x 20% = 965,262
Ordinary share 500,000 5,000 shares x P100

Share premium-ordinary 571,098

T

 “When life gives you a hundred

reasons to break down and cry, show
life that you have a million reasons to
smile and laugh”
Study hard & Stay Strong!!!
Thank you!!!
Stay Safe and God Bless!!!