Compound Financial Instrument and Extinguishment of Debt Quiz

Problem 1.
1. Assuming 80% of the bonds are converted into ordinary shares on December 31, 2022, record
the journal entry if the conversion.
ANSWER: 104,934
Present value of the face amount
[(2,000 bonds x P1,000/bond) x 0.79] 1,580,000
Add: Present value of the periodic interest payments
[(2M x 6%) x 2.58] 309,600
Amounts assigned to the bonds, 1/1/2022 1,889,600

Issue price of the convertible bonds (2M x 1.05) 2,100,000

Less: Amount assigned to the bonds (See no. 1) (1,889,600)
Amount assigned to the equity portion, 1/1/2022 210,400

Cash 2,100,000
Discount on bonds payable 110,400
Bonds payable 2,000,000
Bond conversion privilege outstanding 210,400

Date Interest Interest Discount Carrying

payment expense amortization value
1/1/2022 1,889,600
12/31/2022 120,000 151,168 31,168 1,920,768

1 bond = 20 ordinary shares

1,600 bonds exercised (2T bonds x 80%) = 32,000 ordinary shares issued

Carrying value of bonds converted

(1,920,768 x 80%) 1,536,614
Add: Bond conversion privilege exercised
(210,400 x 80%) 168,320
Total 1,704,934
Less: Total par value of shares issued
(32T shares x P50/share) (1,600,000)
Share premium 104,934

2. Assuming all the bonds are converted into ordinary shares December 31, 2022, what amount
should be credited to share premium upon conversion?
ANSWER: 131,168
1 bond = 20 ordinary shares
2,000 bonds exercised = 40,000 ordinary shares issued

Carrying value of bonds converted

(1,920,768 x 100%) 1,920,768
Add: Bond conversion privilege exercised
(210,400 x 100%) 210,400
Total 2,131,168
Less: Total par value of shares issued
(40T shares x P50/share) (2,000,000)
Share premium 131,168

Journal entry:
Bonds payable 2,000,000
Bond conversion privilege outstanding 210,400
Discount on bonds payable 79,232
Ordinary share capital 2,000,000
Share premium 31,168

Problem 2.
Ans: 4,000,000
Carrying value of the liability settled (10M+ 1.2M) 11,200,000
Less: Carrying value of the asset transferred (7,200,000)
Gain on extinguishment of liability 4,000,000

Problem 3.
Ans: 0
Note payable 7,500,000
Interest payable 750,000
Ordinary share capital (52,500 sh. x P100/sh.) 5,250,000
Share premium* 3,000,000

Problem 4.
Answer:
Issue price of bonds with warrants (5,000,000 x 110) 5,500,000
Market value of bonds without warrants 5,400,000
Residual amount allocated to warrants - equity component 100,000

Entry to record the issue of bonds payable with share warrants

Cash 5,500,000
Bonds payable 5,000,000
Premium on bonds payable 400,000
Share warrants outstanding 100,000

Borrowing Cost and Government Grants

Problem 1.
Answer: P800,000

Specific borrowing

Interest from 3/1 to 11/1

(10Mx.12 x 8/12) 800,000
Problem 2.
Answer: P1,680,000
General Borrowings

Jan 1
(8M x 12/12) 8,000,000

June 30
(8M x 6/12) 4,000,000

Dec 31
(4M x 0/12) -

WA expenditures 12,000,000

x Capitalization rate .14

1,680,000

Actual borrowing costs 4,200,000

Problem 3.
Answer: P 4 million
Grant in recognition of specific expenses

Cash 60M

Deferred income from GG 60M

Expenses-GG 2M

Cash 2M

Deferred income from GG 4M

Income from GG (60Mx2/30) 4M

Problem 4.
1: Assuming the policy is to treat the grant as a reduction in the cost of the asset, what is the
depreciation for 2021?
Answer: P1,100,000
(6.6M – 600K) – 500K / 5years = 1.1M

2: Assuming the policy is to treat the grant as a deferred income, what is the total impact to the
2021 profit and loss?
Answer: P1,100,000
Depreciation (6.6M – 500K) / 5years 1.22M
Less: 600k / 5 years (120K)
Net impact 1.1M

Depreciation and Depletion Quiz

PROBLEM 1.
ANS: 240,000
Depreciation- 2022
(3,600,000 / 15) = 240,000

PROBLEM 2.
ANS: 50,000
Cost 520,000

Accumulated dep, 1/1/22 (400,000)

(500,000 x 12/15)

Carrying Amount, 1/1/22 120,000

Residual value (20,000)

Remaining depreciable amount 100,000

Divide by remaining life 2

Depreciation -2022 50,000

PROBLEM 3.
ANS: 12,040,000
PROBLEM 4.
ANS: 3,600,000

Depreciable Amount 15.0M

Depreciation - 1st yr (3.0M)

(200,000 x 15)

Remaining DA 12.0M

Depreciation - 2nd yr 2.4M

(12M/5)

Remaining DA 9.6M

/Rem est reserves .8M

Depreciation rate- 3rd yr 12/ton

X Output .3M tons

Depreciation - 3rd yr 3.6M

PROBLEM 5.
Ans: 294,000
Cost 7.6M
Accu. Dep (7.8M – 200K / 40 x 2) (380K) (2016-2017)
CV, 12/31/2017 7.42M
Improvement cost 760K
Total 8.18M
Accu. Dep (8.18M – 200K / 38 x 3) (630K) (2018-2020)
CV, 12/31/2020 7.55M

Revised life 30 years

Elapsed life (2016-2020) (5 years)
Remaining life as of 2021 25 years

Annual dep. 2021 onwards = 7.55M – 200K / 25 years = 294,000

IMPAIRMENT AND REVALUATION QUIZ

PROBLEM 1.

Question 1: The depreciation of the building for 2021 should be

ANS: 22,500,000

Annual depreciation = 300M / 20 years = 15M

Age of the Building = 90M / 15M = 6 years

Remaining useful life = 20 years – 6 years = 14 years

Depreciation expense 2021 = (315,000,000 / 14) = 22,500,000

Question 2: The December 31, 2021 statement of financial position should show revaluation
surplus at

ANS: 117,500,000

Revaluation surplus – 1/1/21

Land (70M – 50M) 20,000,000
Building (315M – 210M) 105,000,000
Total 125,000,000

Amount of Revaluation surplus transfer to Retained earnings

Revaluation surplus – 1/1/21 125,000,000

Less: Building = (105M / 14 years) (7,500,000)
Revaluation surplus – 12/31/21 117,500,000

PROBLEM 2.
ANS: 64,000
 CA Before I.L. CA after Re-allocation Final CA
initial alloc.

Goodwill 200,000 (200,000) -

Asset 1 300,000 (93,750) 206,250 23,750 230,000

Asset 2 400,000 (125,000) 275,000 (19,000) 256,000

Asset 3 100,000 (31,250) 68,750 (4,750) 64,000

1,000,000 (450,000) 550,000 550,000

Allocation of Balance (250,000) Re-allocation (23,750)

Asset 1 (3/8) 93,750 Asset 2 (4/5) 19,000

Asset 2 (4/8) 125,000 Asset 3 (1/5) 4,750

Asset 3 (1/8) 31,250

Allocation of Balance (180,000)

Asset 1 (4/5) 144,000

Asset 2 (1/5) 36,000

PROBLEM 3.
ANS: P3,500,000

Land B Revaluation – 2019 2M

Land B Revaluation – 2022 (1.5M)
Land A 3M
Amount of loss in 2022 3.5M

PROBLEM 4.
ANS: b. 400,000
PROBLEM 1.
ANS: 1,700,000 (1.5M + 150K + 50K)

PROBLEM 2.
ANS: 169,880
Average earnings 40,000

Normal Return (27,000)

Excess 13,000

x PVF 6.1446

Goodwill 79,880

Fv of net assets 90,000

Purchase Price 169,880

PROBLEM 3.
ANS: 450,000 [500K - (500K / 10) = 450,000

PROBLEM 4.
ANS: 75,000,000

Land for undetermined future use 5M

Vacant building to be leased out 20M
Hotel with minor ancillary services 50M
Total Investment Property 75M

PROBLEM 5.
ANS: ZERO