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    Quiz 2 BP With Answers

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    Thunder Corporation issued 2000 bonds at an effective interest rate of 9% that were redeemed early at a gain. It also issued 5000 convertible bonds that were later converted to equity, increasing share premium. The document provides financial information about the bond issuances and conversions, and asks to calculate values like issue price, carrying amounts, gain on early redemption, equity component, and increase in share premium.

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    Quiz 2 BP With Answers

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    spur ious
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    Thunder Corporation issued 2000 bonds at an effective interest rate of 9% that were redeemed early at a gain. It also issued 5000 convertible bonds that were later converted to equity, increasing share premium. The document provides financial information about the bond issuances and conversions, and asks to calculate values like issue price, carrying amounts, gain on early redemption, equity component, and increase in share premium.

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    Thunder Corporation issued 2000 bonds at an effective interest rate of 9% that were redeemed early at a gain. It also issued 5000 convertible bonds that were later converted to equity, increasing share premium. The document provides financial information about the bond issuances and conversions, and asks to calculate values like issue price, carrying amounts, gain on early redemption, equity component, and increase in share premium.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    118 views4 pages

    Quiz 2 BP With Answers

    Uploaded by

    spur ious
    Thunder Corporation issued 2000 bonds at an effective interest rate of 9% that were redeemed early at a gain. It also issued 5000 convertible bonds that were later converted to equity, increasing share premium. The document provides financial information about the bond issuances and conversions, and asks to calculate values like issue price, carrying amounts, gain on early redemption, equity component, and increase in share premium.

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    of 4

    Quiz 2

    PROBLEM NO. 7 – Audit of bonds payable


    On January 1, 2014, Thunder Corporation issued 2,000 of its 5-year, P1,000 face value, 11%
    bonds dated January 1 at an effective annual interest rate(yield) of 9%. Interest is payable each
    December 31. Thunder uses the effective interest method of amortization. On December 31,
    2015, the 2,000 bonds were extinguished early through acquisition in the open market by
    Thunder for P 1,980,000 plus accrued interest.

    Jan 1, 2014 - Issuance


    Cash 2,155, 534
    Bonds Payable 2,000,000
    Bonds Premium 155,534

    Dec 31, 2014 – Interest


    Interest Expense 220,000
    Cash 220,000

    Premium on Bonds 26,002


    Interest Expense 26,002

    Dec 31, 2015 – Amortization of premium until retirement


    Premium on Bonds 28,342
    Interest Expense 28,342

    Bonds Payable 2,000,000


    Premium on Bonds 101, 190
    Interest Expense 220,000
    Cash 2,200,000
    Gain on early retirement 121, 190
    On July 1, 2014, thunder issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at
    par. Interest is payable every June 30 and December 31. On the date of issue, the prevailing
    market interest rate for similar debt without the conversion option is 12%. On July 1, 2015, an
    investor in Thunder’s convertible bonds tendered 1,500 bonds for conversion into 15,000
    ordinary shares of Thunder, which had a fair value of P105 and a par value of P1 at the date of
    conversion.

    July 1, 2014 – Issuance


    Cash 4,580,950
    Discount on Bonds Payable 419,050
    Bonds Payable 5,000,000

    Dec 31, 2014 – Interest


    Interest Expense 250,000
    Cash 250,000

    Dec 31, 2014 – Amortization ([4,580,950 x 6%] -250,000)


    Interest Expense 24,857
    Discount on BP 24,857

    July 1, 2015 - Conversion


    Bonds Payable 5,000,000
    Discount on BP

    REQUIRED:
    Based on the above and the result of your audit, determine the following:
    (Round off present value factors to four decimal places)
    1. Issue price of the 2,000 5 year bonds
    2. Carrying amount of the 2,000 5 year bonds at December 31, 2014
    3. Gain on early retirement of bonds on December 31, 2015
    4. Equity component of the 6-year bonds
    5. Increase share premium as a result of the conversion of the 1,500 6-year

    SOLUTION:

    Requirement No. 1

    1,299,80
    PV of principal (P2,000,000 x 0.6499) 0

    PV of interest [(P2,000,000 x .11) x 3.8897] 855,734


    2,155,53
    Issue price 4

    Requirement No. 2

    2,155,53
    Carrying amount, 1/1/11 (see no. 1) 4
    Less premium amortization for 2011:
    Nominal interest (P2,000,000 x .
    11) 220,000
    Effective interest (P2,155,534 x .
    09) 193,998 26,002

    Carrying amount, 2,129,53


    12/31/11 2

    Alternative computation:

    1,416,80
    PV of principal (P2,000,000 x 0.7084) 0

    PV of interest [(P2,000,000 x .11) x 3.2397] 712,734

    Carrying amount, 2,129,53


    12/31/11 4

    Requirement No. 3

    Retirement price 1,980,000


    Carrying amount,
    12/31/12:

    2,129,53
    Carrying amount, 12/31/11 (see no. 1) 2
    Less premium amortization for 2012:
    Nominal interest (P2,000,000 x .
    11) 220,000
    Effective interest (P2,129,532 x .
    09) 191,658 28,342 2,101,190

    Gain early retirement of bonds 121,190

    Alternative computation:

    1,544,40
    PV of principal (P2,000,000 x 0.7722) 0
    PV of interest [(P2,000,000 x .11) x 2.5313] 556,886

    Carrying amount, 2,101,28


    12/31/10 6

    1,980,00
    Retirement price 0

    Gain early retirement of bonds 121,286

    Requirement No. 4

    Total proceeds 5,000,000


    Less liability component:

    Present value of the principal (P5,000,000 x 2,485,00


    0.4970) 0

    Present value of the interest [(P5,000,000 x .05 x 2,095,95


    8.3838) 0 4,580,950

    Equity component 419,050

    Requirement No. 5

    PV of principal (P1,500,000 x 0.5584) 837,600

    PV of interest [(P1,500,000 x .05) x 7.3601] 552,008

    1,389,60
    Carrying amount, 7/1/12 8

    Par value of shares issued (15,000 shares x P1) (15,000 )

    1,374,60
    Net increase in share premium 8

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