Reference no: EM132960321
On January 1, 2020, Victory Corp. issued a 3-year, 4,000, P1,000 convertible bonds at 105. Interest is to be paid annually at the stated coupon rate of 10% every December 31. Each bond is convertible, at the holder's option, into 30, P25 par value common shares at any time up to maturity. On the date of issuance, prevailing market interest rate for similar debt without the conversion privilege was 12%.
On the same date market price of one common share was P30.
The present value of P1 at 12% for 3 periods is at 0.71178
The present value of P1 at 12% ordinary annuity is at 2.40183
1/1/20 3,807853
12/31/20 400,000 456,942 56,942 3,864,796
12/31/21 400,000 463,776 63,776 3,928,571
12/31/22 400,000 471,429 71,429 4,000,000
Problem 1. What is the equity component of the convertible debt?
Problem 2. What is the resulting bonds payable carrying value as of December 31, 2020?
Problem 3. Assuming that the convertible bonds above were converted on January 1, 2022, how much should be credited to Share premium/Additional paid-in capital from the equity conversion?
Problem 4. Assuming that the convertible bonds above were retired at 98 on January 1, 2022, when the prevailing quoted value of bonds were at 96, how much is the gain or loss to be recognized in the income statement for the retirement?
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