Problem 7-1
At the beginning of the current year, Kobe Company issued 12% P5,000,000.00 nonconvertible bonds payable at
103 which are due in 5 years.
In addition, each P1,000 bond was issued 30 shares warrant, each of which entitled the bondholder to purchase for
P50 one share of Kobe Company, par value P25. Interest is payable annually every end of the year.
On the date of issuance, the market value of the share was P40 and the market value of share warrant was P4.
The market rate of interest for similar bonds ex-warrants is 14%. The present value of 1 at 14% for 5 periods is .52
and the present value of an ordinary annuity of 1 at 14% for 5 periods is 3.43.
1. What amount should be recognized as discount or premium on the original issuance of bonds payable?
a. 342,000 premium
b. 342,000 discount
c. 450,000 premium
d. 450,000 discount
2. What amount should be recorded as equity component from the issuance of bonds payable?
a. 150,000
b. 450,000
c. 492,000
d. 0
3. What amount should be credited to share premium if all of the share warrants are exercised?
a. 4,242,000
b. 3,500,000
c. 3,600,000
d. 3,950,000
Problem 7-2
Moses Company issued P5,000,000 face amount, 5-year bonds payable at 109. Each P1,000 bond was issued with
10 shares warrants, each of which entitled the bondholder to purchase one share of P100 par value at P120.
Immediately after issuance, the market value of each share warrant as P5.
The stated interest rate on the bonds is 11% payable annually every end of the year.
However, the prevailing market rate of interest for similar bonds without warrants is 12%.
The present value of 1 at 12% for 5 years is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5
periods is 3.60.
1. What is the carrying amount of bonds payable on the date of issuance?
a. 5,450,000
b. 4,830,000
c. 5,000,000
d. 4,380,000
2. What amount should be recorded initially as discount or premium on bonds payable?
a. 170,000 discount
b. 450,000 premium
c. 450,000 discount
d. 800,000 discount
3. What amount should be recorded as equity component arising from the issuance of bond payable?
a. 450,000
b. 500,000
c. 620,000
d. 0
4. What amount should be credited to share premium if all of the share warrants are exercised?
a. 1,000,000
b. 1,450,000
c. 1,500,000
d. 1,620,000
Problem 7-3
At the beginning of the current year, Case Company issued P5,000,000 of 12% nonconvertible bonds payable at 103
which are due in five years.
In addition, each P1,000 bond was issued with 30 detachable share warrants, each of which entitled the
bondholder to purchase for P50, one ordinary share of Case Company, par value P25.
On the date of issuance, the quoted market value of each share warrant was P4. The market value of the bonds ex-
warrants at the time of issuance is 95.
1. What is the carrying amount of the bonds payable on the date of issuance?
a. 5,000,000
b. 4,750,000
c. 5,250,000
d. 4,950,000
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 credited to share premium if all of the share warrants are exercised?
a. 3,750,000
b. 4,350,000
c. 4,150,000
d. 4,250,000
Problem 7-4
On December 31 2024, Tamaraw Company showed the following balance:
Bonds Payable- 6% 4,000,000
Discount on Bonds Payable 500,000
Share Premium Issuance 5,000,000
Share Premium- Conversion Privilege 700,000
The interest is payable annually every December 31. The convertible bonds are not converted but fully paid on
December 31 2024 for P4,200,000 plus accrued interest.
On December 31 2024, the quoted price of the bonds payable without the conversion privilege is 95.
1. What is the carrying amount of the bonds payable on December 31 2024?
a. 4,000,000
b. 4,500,000
c. 3,500,000
d. 4,200,000
2. What amount should be recorded as gain or loss from extinguishment on bonds payable?
a. 700,000 gain
b. 700,000 loss
c. 300,000 gain
d. 300,000 loss
3. What amount should be recorded as total payment to the bondholders on December 31 2024?
a. 4,200,000
b. 4,440,000
c. 4,240,000
d. 4,040,000
