Question

On January 1, 20X1, Metro Plaza Inc. (MPI), a real estate company using IFRS, issued$1,000,000, 8%, five year bonds for a cash price of $1,250,000. Interest is payable semi-annually on June 30 and December 31. Each $100 bond includes 20 warrants. Each warrant can be exchanged for one common share of MPI at an exercise price of $10 per share. The market rate of interest is 6% for similar bonds without warrants and the fair market value of these bonds was determined to be $1,085,302.

Required:

1. Prepare the appropriate journal entry to record the issue of the bonds on January 1, 20X1;
2. Prepare the appropriate journal entry required on December 31, 20X1;
3. How would the bonds be reported on the balance sheet at December 31, 20X1;
4. 30% of the warrants were exercised on July 1, 20X3 when the shares of MPI were being traded at $11,50. Prepare the appropriate journal entry or entries which the company should make on July 1, 20X3 to record this transaction.

Note: You may find it useful and easier to answer this question by preparing a bond amortization table.

Answer 1

1) the bond will be recorded at fair value

JOURNAL ENTRY

1) 1ST JANUARY 2001

CASH/ BANK A/C Dr. 1250000$

TO BOND a/c Cr. 1085302 $

TO EQUITY a/c Cr. 164698 $

2) 30 JUNE 2001

INTERST EXPENSE A/C Dr. 32560 $

TO BOND A/C 32560 $

BOND A/C Dr. 40000 $

TO BANK A/C Cr 40000 $

31/12/2001

INTEREST EXPENSE A/C Dr. 32335 $

TO BOND A/C 32335 $

BOND A/C Dr. 40000 $

TO BANK A/C Cr. 40000$

3)

AMORTIZATION TABLE

BALANCE OF BOND ON 2001 DECEMBER = 1070197 $

CURREN LIABILITY = 1070197-1054172 = 16025 $

NON CURRENT LIABILITY = 1054172 $

STATEMENT OF FINANCOL POSITION (EXTRAC)

LIABILITY AMOUNT

NON CURRENT LIABILITY  

BOND 1054172 $

CURRENT LIABILITY

BOND 16025 $

PERIOD

(EACH HALF YEARLY ) OPENING BALANCE INTEREST EXPENSE PAYMENT CL BALANCE

1 1085302 $ 32560 $ 40000 $ 1077862

2 1077862 $ 32335 $ 40000 $ 1070197

3 1070197 $ 32106 $ 40000 $ 1062303

4 1062303 $ 31869 $ 40000 $ 1054172

5 1054172 $ 31625 $ 40000 $ 1045797

6 1045797 $ 31374 $ 40000 $ 1037171

7 1037171 $ 31115 $ 40000 $ 1028286

8 1028286 $ 30848 $ 40000 $ 1019134 $

9 1019134 $ 30574 $ 40000 $ 1009708

10 1009708 $ 30292 $ 1040000 $ 0

1 JULY 2003

BOND VALUE = 1000000 $

WARRANT BALANCES = 1000000 $/100*20 =200000 WARRANT

30 % EXERCISABLE = 200000 *30 % = 60000

= 60000*11.50

BOND LIABLITY THAT WONT BE REQUIRED TO BE PAID AFTTER MATURITY = 1045797 *30 % =313739 $

JOURNAL ENTRY

BANK A/C Dr. 600000 $

BOND A/C Dr. 313739 $

TO EQUIRT SHARE CAPITAL A/C 600000$ ( 60000 SHARES * 10 $ F E VALUE )

TO SECURITY PREMIUM A/C 313739 $