TOPIC 04

Noncurrent Liabilities – Compound Financial Instrument

Share Warrants – Separation & Exercise of Warrants

Numbers 1, 2 and 3
On January 1, 2016, Dragonflame Company issued P5,000,000 of 12% nonconvertible bonds at 110 which are due on
December 31, 2020. In addition, each P1,000 bond was issued with 30 detachable share warrants, each of which
entitled the bondholder to purchase for P50 one share of Drangonflame Company with par value of P25.

On January 1, 2016, the quoted market value of each warrant was P5. The market value of the bond ex-warrant at the
time of issuance is 98.

1) What is the carrying amount of the bonds payable at the time of issuance?
A. 5,500,000
B. 4,900,000
C. 5,000,000
D. 4,750,000
2) What amount of the proceeds from the bond issue should be recognized as an increase in shareholders’ equity?
A. 600,000
B. 300,000
C. 200,000
D. 400,000

3) What amount should be recorded as share premium upon exercise of all of the share warrants?
A. 3,750,000
B. 4,350,000
C. 4,250,000
D. 4,500,000

Accounting For The Bonds Separately

Numbers 4 and 5
On January 1, 2021, Jumbo Corporation issued a P3,000,000 6% convertible bonds at par. The bonds are redeemable
at a premium of 10% on December 31, 2024 or it may be converted into ordinary shares on the basis of 50 shares for
each P1,000 bond at the option of the holder.

The interest rate for an equivalent bond without the conversion rights would have been 10%.

Present value of 1 at 10% for 3 periods 0.6830

Present value of ordinary annuity of 1 at 10% for 3 periods 3.1699
4) The issuance of convertible bonds on January 1, 2021 increased the entity’s equity by
A. 380,418
B. 175,518
C. 73,068
D. 0

5) The carrying amount of the bonds payable as of December 31, 2021 is

A. 2,701,540
B. 2,926,930
C. 3,000,000
D. 3,039,625

Intermediate Accounting 2 | Bernadette L. Baul, CPA Page 1 of 2

Conversion Options – Separation & Exercise of Warrants
Numbers 6 & 7
On January 1, 2019, Dias Company issued 3-year, 4,000 convertible bonds at face value of P1,000 per bond. Interest
is to be paid annually in arrears at the stated coupon rate of 6%. Each bond is convertible, at the holder’s option, into
200 P2 par value ordinary shares at any time up to maturity.

On the date of issuance, the prevailing market interest rate for similar debt without the conversion privilege was 9%.
On the same date, the market price of one ordinary share was P3. The bonds were converted on December 31, 2020.

Present value of 1 at 9% for 3 periods 0.7722

Present value of ordinary annuity of 1 at 9% for 3 periods 2.5313
6) The equity component of the convertible debt is
A. 303,688
B. 1,973,621
C. 1,600,000
D. 2,400,000
7) The interest expense to be reported on Dias Company’s income statement for the year ended December 31, 2020
is
A. 101,000
B. 110,107
C. 240,000
D. 341,008
8) Entry to record the bond conversion on December 31, 2020, should include a credit to share premium – issuance
of
A. 2,289,893
B. 2,400,000
C. 2,593,676
D. 0

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Intermediate Accounting 2 | Bernadette L. Baul, CPA Page 2 of 2