Compound Financial Instruments - financial instruments that have both liability and equity component fro

1) Debt instrument/Bonds Payable with detachable share warrants

2) Convertible Bonds

Accounting Treatment
Split Accounting -the compound financial instruments must be accounted for and presented separately.

Approach on how to split

The initial carrying amount of the compound financial instruments is required to be allocated
component is assigned the residual amount after deducting the amount separately determined

Net Proceeds from the issuance of compound financial instrument

Less Fair Value of Liability Component
Value Assigned to Equity component
When to Split
The split is made at the issuance date.

Bonds Payable with Detachable Share Warrants

Bonds may be issued with detachable warrants. These warrants entitles the bondholder to acquire e
subscription price.

Pro-forma entries to record transactions involving warrants

1) To record the issuance
Cash
Discount on Bonds Payable (if applicable)
Bonds Payable
Premium on Bonds Payable (if applicable)
Share Premium - Warrants Outstanding

2) When warrants are exercised

Cash
Share Premium - Warrants Outstanding
Share Capital
Share Premium

3) when warrants expire or not exercised

Share Premium - Warrants Outstanding
Share Premium - unexercise warrants

Problem 1:

Expresss Corporation issued bonds payable with warrants of 4,000, 10% 5-year bonds, face value
bond is accompanied by warrant that permit the bondholder to purchase 20 ordinary share with
interest rate is payable annually on December 31. The bonds matures on December 31, 2024. W
market rate of interest for similar bonds without warrants is 12% per annum.
Expresss Corporation issued bonds payable with warrants of 4,000, 10% 5-year bonds, face value
bond is accompanied by warrant that permit the bondholder to purchase 20 ordinary share with
interest rate is payable annually on December 31. The bonds matures on December 31, 2024. W
market rate of interest for similar bonds without warrants is 12% per annum.

Required compute for the following:

1) Amount allocated to the warrants
2) Interest expense in 2020.
3) Carrying value of the bonds at December 31, 2020.
4) Net effect to equity assuming 60% of warrants were exercised.
5) Net effect to equity assuming the other 40% of warrants expired.

Proceeds
Less FV of Bonds w/o warrants
Face Value 4,000,000.00 X 0.567427 2,269,707.42
Interest 400,000.00 X 3.604776 1,441,910.48
Equity Component (Share Premium - Warrants outstanding)

Cash 3,920,000.00
Discount on Bonds Payable 288,382.10
Bonds Payable
Share Premium - Warrants Outstanding

Subscription Price (4,000 X 20 X 60% X P55)

Cash 2,640,000.00
Share Premium - Warrants Outstanding 125,029.26
Share Capital
Share Premium

Share Premium - Warrants Outstanding 83,352.84

Share Premium - unexercise warrants

Convertible Bonds
Bonds that give the holder an option to convert the bonds into bond issuer's equity securities. An en
financial instrument that:
a) creates financial liability of the entity and
b) grants an option to the holder of the instrument to convert it into equity instrument of the enti

To record the issuance of the bonds

Cash
Discount on Bonds Payable (if applicable)
Bonds Payable
Premium on Bonds Payable (if applicable)
Share Premium - conversion privilege

Retirement of convertible bonds

 Prior to date of maturity
Retirement Price
Less Retirement Price Applicable to Liability (PV of the Bonds using current rate)
Increase (Share Premium)/ (Decrease) (charged to Share Premium - conversion privilege

Retirement Price Applicable to Liability (PV of the Bonds using current rate)
Less Carrying Value of Bonds on the date of retirement
(Gain)/Loss on extinguishment of bonds

At the date of maturity

No gain or loss is recognized and the Share Premium - conversion privilege is transferred to Share Premium

Conversion of Convertible Bonds

1) Regular Conversion - non gain or loss on conversion shall be recognized.
2) Induced Conversion - loss on conversion may be recognized but not gain.

Induced Conversion
The debtor enterpise shall recognize an expense equal to the fair value of all the securities and other con
of the fair value of the securities issuable pursuant to the original conversion terms.

The fair value of all the securities and other consideration transferred shall be measured at the date of
debt holder. (This is normally the conversion date)

Fair Value of shares converted

Less Fair value of shares under original conversion terms
Loss on induced conversion

Face amount of debt securities converted

Divide by: New conversion rate
Number of share issued upon conversion
Multiply by: Fair Value of Share on conversion date
Fair Value of Shares Converted.

Face amount of debt securities converted

Divide by: Old conversion rate
Number of share issued under original conversion
Multiply by: Fair Value of Share on conversion date
Fair Value of Shares under original conversion.

or

Shares to be issued - amended

Less Shares to be issue - original
Incremental Shares to be issued
Multiply by: Fair Value of Share on conversion date
 Loss on induced conversion

Problem 2
On January 1, 2015, Callus Corporation issued a 10% convertible bonds with a face value of P4,000,000, matu
convertible into ordinary shares of Callus at a conversion price of P25 per share. Interest is payable semi-annual
issued nonconvertible debt with a 10-year term bearing a coupon interest rate of 11%.

On January 1, 2020, the convertible bonds has a fair value of P4,400,000. Callus makes a tender offer to the bondho
holders of P2,000,000 bonds accepted the offer. At the date of repurchase, Callus could have issued a non-conver
interest rate of 8%.

On December 31, 2020, to induce the holders of the remaining bonds to convert the bonds promptly, Callus red
converted before March 1, 2021. The market price of Callus ordinary share on the date the terms are amended is P3

Required:
1) Proceeds from issuance of convertible bonds allocated to equity.
2) Carrying value of the bonds on December 31, 2019.
3) The amount to be recognized in profit or loss as a result of the repurchase of the bonds on January 1, 2020.
4) The amount of decrease in equity as a result of the repurchase of the bonds on January 1, 2020.
5) The amount to be recognized in profit or loss as a result of the amendment of the terms on December 31, 2020

Total Proceeds
Less FV of Bond w/o conversion option
Face Value 4,000,000.00 X 0.342729 1,370,915.85
Interest 200,000.00 X 11.95038 2,390,076.50
1) Proceeds from issuance of convertible bonds allocated to equity.

Face Value 4,000,000.00 X 0.585431

Interest 200,000.00 X 7.537626
2) Carrying value of the bonds on December 31, 2019.

Retirement Price (4,400,000 X 2M/4M)

Less Retirement Price Applicable to Liability (PV of the Bonds using current rate)
Face Value 2,000,000.00 X 0.675564 1,351,128.34
Interest 100,000.00 X 8.110896 811,089.58
Increase (Share Premium)/ (Decrease) (charged to Share Premium - conversion privilege

Retirement Price Applicable to Liability (PV of the Bonds using current rate)
Carrying Value of Bonds
Loss on extinguishment of bonds

Fair Value of shares converted

Less Fair value of shares under original conversion terms
Loss on induced conversion
Face amount of debt securities converted
Divide by: New conversion rate
Number of share issued upon conversion
Multiply by: Fair Value of Share on conversion date
Fair Value of Shares Converted.

Face amount of debt securities converted

Divide by: Old conversion rate
Number of share issued under original conversion
Multiply by: Fair Value of Share on conversion date
Fair Value of Shares under original conversion.

Shares to be issued - amended

Less Shares to be issue - original
Incremental Shares to be issued
Multiply by: Fair Value of Share on conversion date
Loss on induced conversion

Bonds Payable 2,000,000.00

Loss on induced conversion 640,000.00
Share Premium - Conversion Privilege 119,503.82
Share Capital (100,000 at an assume par value of P20)
Discount on BP
Share Premium

Face Value 2,000,000.00 X 0.651599

Interest 100,000.00 X 6.334566
Carrying Value 12/31/20
Discount
d equity component from the issuer's perspective.

ed separately.

equired to be allocated to its equity and liability components, the equity

separately determined for the liability component.
PV Factor
PXXX,XXX 3,920,000.00 Face 4,000,000.00 0.56742685572
XXX,XXX 3,711,617.90 Int 400,000.00 3.60477620235
XX,XXX 208,382.10

ondholder to acquire equity securities of the bond issuer at an agreed

XXX
XX Face Value - FV of Liability Component
XXX
XX Face Value - FV of Liability Component
XX

XXX
XX
XXX
XX

XX
XX

ar bonds, face value of P1,000 at 98 on January 1, 2020. Each

ordinary share with a par value of P50 at P55 per share. The
cember 31, 2024. When the bonds are issued, the prevailing
ar bonds, face value of P1,000 at 98 on January 1, 2020. Each
ordinary share with a par value of P50 at P55 per share. The
cember 31, 2024. When the bonds are issued, the prevailing

Interest
208,382.10 Date Payment Expense
445,394.15 Jan 1, 2020
3,757,012.05 3,757,012.05 Dec 31, 2020 400000 445,394.15
2,640,000.00 Dec 31, 2021 400000 450,841.45
- Dec 31, 2022 400000 456,942.42
Dec 31, 2023 400000 463,775.51
3,920,000.00 Dec 31, 2024 400000 471,428.57

3,711,617.90 445,394.15
208,382.10 400,000.00
45,394.15

4,000,000.00
208,382.10

2,640,000.00

2,400,000.00
365,029.26

83,352.84

quity securities. An entity recognizes separately the components of the

y instrument of the entity.

XXX
XX
XXX
XX
XX
 XXX,XXX
XXX,XXX
XX,XXX

XXX,XXX
XXX,XXX
XX,XXX

ferred to Share Premium

ecurities and other consideration transferred in the transaction in excess

s.

measured at the date of inducement offer is accepted by the convertible

XXX,XXX 156250
XXX,XXX 125000
XX,XXX 31250

XXX,XXX 500000
XX 80
XX,XXX 6250
XX 25
XXX,XXX 156250

XXX,XXX 500000
XX 100
XX,XXX 5000
XX 25
XXX,XXX 125000

XX,XXX 6250
XX,XXX 5000
X,XXX 1250
XX 25
 XX,XXX 31250

e of P4,000,000, maturing on December 31,2024. Each P1,000 bond is

is payable semi-annually in cash. At the date of issue, Callus could have
(NR - ER) X FV X PVAF
FV - [(NR - ER) X FV X PVAF]
der offer to the bondholders to repurchase the bonds for P4,400,000. The
ve issued a non-convertible debt with a five-year term bearing a coupon

ds promptly, Callus reduces the conversion price to P20 if the bonds are
erms are amended is P32.

4,000,000.00
- 239,007.65
3,760,992.35 3,760,992.35
on January 1, 2020. 237,594.17
37,782.08
on December 31, 2020.

4,000,000.00 Cash
Discount on BP
BP
3,760,992.35 3,767,846.93 Share Premium - Conversion Privilege
239,007.65 3,775,078.51
3,782,707.83 For the interest
2,341,722.32 3,790,756.76 Interest Expense
1,507,525.17 3,799,248.38 Cash
3,849,247.48 3,808,207.04
3,817,658.43 Interest Expense (base on amortization table)
2,200,000.00 3,827,629.64 Discount on BP
3,838,149.27
3,849,247.48 For the retirement
2,162,217.92 Update the amortization for 2019
37,782.08
Bond Payable
2,162,217.92 Loss on extinguishment of bonds
1,924,623.74 Cash
237,594.17 Discount on BP

3,200,000.00 Share Premium - Conversion Privilege

2,560,000.00 Cash
640,000.00
Bond Payable
2,000,000.00 Loss on extinguishment of bonds
20.00 Share Premium - Conversion Privilege
100,000.00 Cash
32 Discount on BP
3,200,000.00

2,000,000.00
25.00
80,000.00
32.00
2,560,000.00

100,000.00
80,000.00
20,000.00
32.00
640,000.00 it will be added to Share Premium

2,000,000.00
63,345.66
696,158.16
Interest Discount Carrying
1,303,197.74 Date Payment Expense Amort. Value
633,456.60 Jan 1, 2015 3,760,992.35
1,936,654.34 Jun 30, 2015 200,000.00 206,854.58 - 6,854.58 3,767,846.93
63,345.66 Dec 31, 2015 200,000.00 207,231.58 - 7,231.58 3,775,078.51
Jun 30, 2016 200,000.00 207,629.32 - 7,629.32 3,782,707.83
Dec 31, 2016 200,000.00 208,048.93 - 8,048.93 3,790,756.76
Jun 30, 2017 200,000.00 208,491.62 - 8,491.62 3,799,248.38
Dec 31, 2017 200,000.00 208,958.66 - 8,958.66 3,808,207.04
Jun 30, 2018 200,000.00 209,451.39 - 9,451.39 3,817,658.43
Dec 31, 2018 200,000.00 209,971.21 - 9,971.21 3,827,629.64
Jun 30, 2019 200,000.00 210,519.63 - 10,519.63 3,838,149.27
Dec 31, 2019 200,000.00 211,098.21 - 11,098.21 3,849,247.48
Jun 30, 2020 200,000.00 211,708.61 - 11,708.61 3,860,956.10
Dec 31, 2020 200,000.00 212,352.59 - 12,352.59 3,873,308.68
Jun 30, 2021 200,000.00 213,031.98 - 13,031.98 3,886,340.66
Dec 31, 2021 200,000.00 213,748.74 - 13,748.74 3,900,089.39
Jun 30, 2022 200,000.00 214,504.92 - 14,504.92 3,914,594.31
Dec 31, 2022 200,000.00 215,302.69 - 15,302.69 3,929,897.00
Jun 30, 2023 200,000.00 216,144.33 - 16,144.33 3,946,041.33
Dec 31, 2023 200,000.00 217,032.27 - 17,032.27 3,963,073.61
Jun 30, 2024 200,000.00 217,969.05 - 17,969.05 3,981,042.65
Dec 31, 2024 200,000.00 218,957.35 - 18,957.35 4,000,000.00
Fair Value of Bonds
2,269,707.42
1,441,910.48
3,711,617.90 288,382.10
Discount Carrying
Amort. Value
3,711,617.90
- 45,394.15 3,757,012.05
- 50,841.45 3,807,853.50
- 56,942.42 3,864,795.92
- 63,775.51 3,928,571.43
- 71,428.57 4,000,000.00
 ER) X FV X PVAF Disc or Prem
(NR - ER) X FV X PVAF] Present Value

4,000,000.00
239,007.65
4,000,000.00
239,007.65

400,000.00
400,000.00

2,000,000.00
237,594.17
2,162,217.92
75,376.26

37,782.08
37,782.08

2,000,000.00
 237,594.17
37,782.08
2,200,000.00
75,376.26

1,936,654.34
 Amount PV Factor Present Value or using PV for 4 periods
Face Value 5,000,000.00 0.65 3,249,656.93 0.71
Interest 550,000.00 3.8896512634 2,139,308.19 3.24
Issue Price 5,388,965.13
Less Amortization of Premium - 64,993.14
Carrying Value 12/31/20 5,323,971.99 (1)

Carrying Value of Bonds 12/31/21 3,151,877.68

Less reirement price 3,030,000.00
Gain on early retirement of bonds 121,877.68 (2)

Proceeds 2,000,000.00
Less PV of Bonds at 10%
Amount PV Factor Present Value
Face Value 2,000,000.00 0.6209213231 1,241,842.65
Interest 160,000.00 3.7907867694 606,525.88 1,848,368.53
Proceeds allocated to liability component 151,631.47 (3)

Carrying Value of Bonds 12/31/2020 1,873,205.38

Accrued Interest Payable 160,000.00
Carrying Value of Liability 12/31/2020 2,033,205.38 (4)

Interest Expense for 2021 101,660.27 (5)

Shares to be issued - amended 9,000.00

Less Shares to be issue - original 8,000.00
Incremental Shares to be issued 1,000.00
Multiply by: Fair Value of Share on conversion date 132.00
Loss on induced conversion 132,000.00 (6)

Period Cash Flows

Equipment Fair Value - 946,500.00
Interest Payment 1 - 50,000.00
Principal and Interest Payment 2 - 1,050,000.00
Effective Rate of the Note 8% (7)

Interest Jan - Mar 2021 (946,500 X 8% X 3/12) 18,930.00

Interest Apr - Dec 2021 (946,500 X 1.08 - 50,000) X 8% X 9/12 58,333.20
Interest Expense for 2021 77,263.20 (8)

Cost 2,000,000.00
Less Down Payment 600,000.00
Face Value of promissory note 1,400,000.00

Date Payment Interest Principal Carrying Value

Jul 1, 2020 1,400,000.00
Jul 1, 2021 500,000.00 224,000.00 276,000.00 1,124,000.00
Jul 1, 2022 500,000.00 179,840.00 320,160.00 803,840.00
Jul 1, 2023 500,000.00 128,614.40 371,385.60 432,454.40
Jul 1, 2024 500,000.00 67,545.60 432,454.40 -

Carryng Value of July 1, 2021 1,124,000.00

Add Interest July 1 - Dec 31 89,920.00
Carrying Value of Note Dec. 31, 2021 1,213,920.00 (9)

Interest Expense Jan - Jun 2021 112,000.00

Interest Expense Jul - Dec 2021 89,920.00
Interest Expense for 2021 201,920.00 (10)
sing PV for 4 periods
###
###
###
 Nominal PVF/PVAF Fair Value
Face Value 5,000,000.00 0.57 2,850,000.00
Interest 550,000.00 3.60 1,980,000.00
CV of Bonds on date of issuance 4,830,000.00

Face Value 5,000,000.00

CV of Bonds on date of issuance 4,830,000.00
Discount 170,000.00

Total Proceeds 5,450,000.00

CV of Bonds on date of issuance 4,830,000.00
Equity Component 620,000.00

Excess of subscription price (120 - 100) X (5,000 X 10) 1,000,000.00

Equity Component 620,000.00
Amount credited to Share Premium 1,620,000.00

Cash 6,000,000.00
Share Premium - Warrants Outstanding 620,000.00
Share Capital 5,000,000.00
Share Premium 1,620,000.00

1) 4,750,000.00
2) 500,000.00
3) 1,500,000.00