On January 1, 2023, Legis Company issued 10-year, P200,000 face value, 6% bonds at par (payable annually on January 1). Each P1,000 bond is convertible into 30 shares of Legis P2 par value ordinary shares. The company has had 10,000 ordinary shares (and no preference shares) outstanding throughout its life. None of the bonds have been converted as of the end of 2024. Legis also adopted a share-option plan that granted options to key executives to purchase 4,000 shares of the company's ordinary shares. The options were granted on January 2, 2023, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expire 6 years from the date of grant. The option price was set at P4, and the fair value option pricing model determines the total compensation expense to be P18,000. All of the options were exercised during the year 2025: 3,000 on January 3 when the market price was P6, and 1,000 on May 1 when the market price was P7 a share. (Ignore all tax effects.) Instructions a. Prepare the journal entry Legis would have made on January 1, 2023, to record the issuance of the bonds. The fair value of the debt without a conversion option (with an 8% effective rate) is P173,159. b. Prepare the journal entry to record interest expense and compensation expense in 2024. c. Legis's net income was P30,000 in 2024, and P27,000 in 2023. Compute basic and diluted earnings per share for Legis for 2024 and 2023. Legis's average share price was P4.40 in 2023 and P5 in 2024. d. Assume that 75 percent of the holders of Legis's convertible bonds convert their bonds to shares on January 1, 2025, when Legis's shares are trading at P8 per share. Legis pays P2 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.
On January 1, 2023, Legis Company issued 10-year, P200,000 face value, 6% bonds at par (payable annually on January 1). Each P1,000 bond is convertible into 30 shares of Legis P2 par value ordinary shares. The company has had 10,000 ordinary shares (and no preference shares) outstanding throughout its life. None of the bonds have been converted as of the end of 2024. Legis also adopted a share-option plan that granted options to key executives to purchase 4,000 shares of the company's ordinary shares. The options were granted on January 2, 2023, and were exercisable 2 years after the date of grant if the grantee was still an employee of the company (the service period is 2 years). The options expire 6 years from the date of grant. The option price was set at P4, and the fair value option pricing model determines the total compensation expense to be P18,000. All of the options were exercised during the year 2025: 3,000 on January 3 when the market price was P6, and 1,000 on May 1 when the market price was P7 a share. (Ignore all tax effects.) Instructions a. Prepare the journal entry Legis would have made on January 1, 2023, to record the issuance of the bonds. The fair value of the debt without a conversion option (with an 8% effective rate) is P173,159. b. Prepare the journal entry to record interest expense and compensation expense in 2024. c. Legis's net income was P30,000 in 2024, and P27,000 in 2023. Compute basic and diluted earnings per share for Legis for 2024 and 2023. Legis's average share price was P4.40 in 2023 and P5 in 2024. d. Assume that 75 percent of the holders of Legis's convertible bonds convert their bonds to shares on January 1, 2025, when Legis's shares are trading at P8 per share. Legis pays P2 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Topic: Book Value Per Share and Earnings Per Share
Answer A and B only.
Transcribed Image Text:On January 1, 2023, Legis Company issued 10-year, P200,000 face value, 6% bonds at par
(payable annually on January 1). Each P1,000 bond is convertible into 30 shares of Legis P2
par
value ordinary shares. The company has had 10,000 ordinary shares (and no preference shares)
outstanding throughout its life. None of the bonds have been converted as of the end of 2024.
Legis also adopted a share-option plan that granted options to key executives to purchase 4,000
shares of the company's ordinary shares. The options were granted on January 2, 2023, and
were exercisable 2 years after the date of grant if the grantee was still an employee of the
company (the service period is 2 years). The options expire 6 years from the date of grant. The
option price was set at P4, and the fair value option pricing model determines the total
compensation expense to be P18,000. All of the options were exercised during the year 2025:
3,000 on January 3 when the market price was P6, and 1,000 on May 1 when the market price
was P7 a share. (Ignore all tax effects.)
Instructions
a. Prepare the journal entry Legis would have made on January 1, 2023, to record the issuance
of the bonds. The fair value of the debt without a conversion option (with an 8% effective rate) is
P173,159.
b. Prepare the journal entry to record interest expense and compensation expense in 2024.
c. Legis's net income was P30,000 in 2024, and P27,000 in 2023. Compute basic and diluted
earnings per share for Legis for 2024 and 2023. Legis's average share price was P4.40 in 2023
and P5 in 2024.
d. Assume that 75 percent of the holders of Legis's convertible bonds convert their bonds to
shares on January 1, 2025, when Legis's shares are trading at P8 per share. Legis pays P2 per
bond to induce bondholders to convert. Prepare the journal entry to record the conversion.
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