PROBLEM 6-8

BY: BUENVIAJE, JILLIAN B.

PROBLEM 6-8
Sunshine co. issued a 4-year P5000,000

face value of 12% convertible bonds at 105 on Jan. 1, 2013, maturing on Jan, 1, 2018 and paying interest annually on Dec. 31. It is reliably ascertained that the bonds would sell at P4,700,000 w/o the conversion feature w/ an effective yield of 14%.

PROBLEM 6-8
Each P 1,000 bond is convertible into

8 shares of P100 par value share capital. On Dec. 31 ,2013, all of the bonds are converted into share capital. At this time, the share has a market value of P150 and the bonds are quoted at 101.

ANSWER
Cash (5,000,000 x 105%) 5,250,000 Discount on bonds payable 300,000 Bonds payable 5,000,000 Share premium conversion privilege 550,000
Issue price Issue price w/o conversion privilege 5,250,000 (4,700,000) Bonds payable Issue price w/o conversion privilege 5,000,000 (4,700,000)

SHARE PREMIUM

550,000

DISCOUNT ON BONDS PAYABLE

300,000

ANSWER

Interest expense (14% x 4,700,000) Discount on bonds payable Cash (12% x 5,000,000)

658,000 58,000 600,000

ANSWER
Bonds payable Share premium conversion privilege Discount on bonds payable Share capital Share premium-issuance 5,000,000 550,000 242,000 4,000,000 1,308,000 5,000,000 (242,000) 550,000 5,308,000 (4,000,000)

Bonds payable Discount on bonds payable Share premium conversion privilege Total consideration Share capital issued (40,000 shares x 100) Share premium issuance

1,308,000