Question

On January 1, 2019, BC corp. issued $1,200,000 of five-year zero interest bearing notes along with warrants to buy 100,000 common shares at $20 per share. On January 1, 2019 BC corp. had 9,600,000 shares outstanding and the market price was $19 per share. BC co. received $1,000,000 for the notes and warrants. If offered alone, on January 1, 2019 the notes would have been issued to yield 12% to the creditor. Assume that the company follows IFRS.

Instructions:

1. Prepare the journal entries to record the issuance of the notes and the warrants for the cash consideration that was received on Jan 1, 2019
2. Prepare the amortization table for the note using effective interest rate
3. Prepare the journal entries for BC co. at Dec 31, 2019 assuming it is year end.
4. If 30% of the warrants were exercised at Jan 1, 2021, what journal entry (s) required to record the transaction.

Answer 1

Your answer is as follows:

Present value of $1,200,000 five year zero interest bearing notes @ 12%

Value at the end of five years = $1,200,000

Period = 5 years

Interest rate = 12%

Presnt Value = $1,200,000*PVIF(12%,5)

$ 680,912.23

BC corp. receive $ 1,000,000 which is allocated to Zero interest Notes $ 680,912.23 and remaining amount is for warrants outstanding which is taken into Additional Paid up Capital amount is $ 319,087.77 (1,000,000 - 680,912.23)

a. Journal Entry ( Amount in $)

Date	Particulars	Debit	Credit
Jan 1, 2019	Cash	1,000,000
	5 year zero Interest Notes		680,912.23
	Additional Paid up Capital - Stock warrants		319,087.77

Cash received against 5 year zero Interest Notes and share warrants.

b. Amortisation table (Amount in $)

Year	Opening value of Notes	Interest @ 12% annual	Closing value of Notes
Year 1	680,912.23	81,709.47	762,621.70
Year 2	762,621.70	91,514.60	854,136.30
Year 3	854,136.30	102,496.36	956,632.66
Year 4	956,632.66	114,795.92	1,071,428.58
Year 5	1,071,428.58	128,571.43	1,200,000.01

c. Journal Entry ( Amount in $)

Date	Particulars	Debit	Credit
Dec 31, 2019	Interest Expense	81,709.47
	5 year zero Interest Notes		81,709.47

Interest for the year Debit and accounted against 5 year zero Interest Notes.

d. Journal Entry ( Amount in $)

Date	Particulars	Debit	Credit
Jan 1, 2021	Cash	600,000
	Additional Paid up Capital - Stock warrants	95,736.33
	Common Stock		300,000
	Additional Paid up Capital - Common Stock		395,736.33

Accounting for 30% warrants exercise (30% of 100,000) (30,000 common stock issue @ 20 Each). We assume that Common stock face value is $ 10. So remaining $ 10 taken into Additional paid up Capital.

Additional paid up capital - stock warrants of $ 95,736.33 (30% of $ 319,087.77 ) also transfer to Additional Paid up Capital - Common Stock.