Assignment 1
Ex. 16.3
(a)
Present Value of Principal =100,000 x 0.35218(n = 10, i = 11%) =35,218
Present Value of Interest Payments = 10,000 X 5.88923(n = 10, i = 11%) =58,892
Present Value of the Liability Component = 35,218+58,892 =94,110
Fair Value of the convertible bonds =100,000
Fair value of liability component =94,110
Equity component =100,000-94,110 =5,890
So,
Cash ........................................................................................100,000
Bonds Payable ................................................................94,110
Share Premium—Conversion Equity ...............................5,890
(b)
Date
1/1/22
12/31/22
12/31/23
12/31/24
Cash
Paid
Interest
Expense
Discount
Amortized
10,000
10,000
10,000
10,352
10,391
10,434
352
391
434
Carrying Value of
Bonds
94,110
94,462
94,853
95,287
Gain or loss on liability component:
Present value of liability component at 1/1/25 - Less Carrying value = loss
So, 110,413 - 95,287 =15,126
Adjustment to equity:
Fair value of convertible bonds - Liability component = Adjustment to Share
Premium—Conversion Equity
112,000-110,413=1,587
So,
Share Premium—Conversion Equity..........................................1,587
Bonds Payable ...........................................................................95,287
Loss on Repurchase ..................................................................15,126
Cash............................................................................................. 112,000