At the beginning of current year, Fence Company issued 12% P5,000,000 nonconvertible bonds at 103 which are due in 5 years. In addition, each P1,000 bond was issued 30 share warrants, each of which entitled the bondholder to purchase for P50 one share of Fence 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 the 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 0.52 and the present value of an ordinary annuity of 1 at 14% fo 5 periods is 3.43. 1. What amount should be recognized as discount or premium on the original issuance of the bonds? A. 342,000 premium B. 342,000 discount C. 450,000 premium D. 450,000 discount 2. What is the equity component arising from the issuance of bonds payable? A. 150,000 B. 450,00 C. 492,000 D. 0 3. What amount is created 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 7-9
At the beginning of current year, Fence Company issued 12% P5,000,000 nonconvertible bonds at 103 which are due in 5 years.
In addition, each P1,000 bond was issued 30 share warrants, each of which entitled the bondholder to purchase for P50 one share of Fence 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 the 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 0.52 and the present value of an ordinary annuity of 1 at 14% fo 5 periods is 3.43.
1. What amount should be recognized as discount or premium on the original issuance of the bonds?
A. 342,000 premium
B. 342,000 discount
C. 450,000 premium
D. 450,000 discount
2. What is the equity component arising from the issuance of bonds payable?
A. 150,000
B. 450,00
C. 492,000
D. 0
3. What amount is created 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
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