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

	Date	Ledger A/c	Debit	Credit
{1}	1 Jan 20X1	Bank A/c Dr	1,250,000
		To 8% Five Year bond   Payable/c	1,000,000
		To Premium on Bonds Payable		250,000
		(Being the Bonds are issued at a premium above the par value)
	30 Jun 20X1	Interest Expense A/c Dr	40,000
		To Bank A/c		40,000
		(being the interest Paid Semiannually)
{2}	31 Dec 20X1	Interest Expense A/c Dr	40,000
		Premium on Bonds Payable	50,000
		To Bank A/c		90,000
		(Being the interest paid semiannually at 8% and premium amortized over the life of the bond)
{3}		Metro Plaza Inc.
		Balance Sheet (Extract)
		December 31 20X1
		Long Term Liabilities
		8% Five Year Bond Payable A/c (Due on 31 Dec 20X5)	1,000,000
		Add: Premium on Bonds payable	200,000	1,200,000
{4}		8% Five Year Bond payable A/c Dr	300,000
		To common Share A/c		300,000
		(Being the share warrants are exchanged for common stock of Metro Plaza Inc)