Question
In: Accounting
P 16-9 on september 30,2017, Gargiola inc. Issued 4millions of 10 year, 8% convertible bonds for...
P 16-9 on september 30,2017, Gargiola inc. Issued 4millions of 10 year, 8% convertible bonds for 4.6millions. The bonds pay interest on march 31 and September 30 and mature on September 30, 2027. Each 1000$ bond can be converted into 80 no par value common shares. In addition, each bond include 20 detachable warrants. Each warrant can be used to purchase one common share at an exercise price of 15$. Immediately after the bond issuance, the warrants traded at 3$ each. Without the warrants and the conversion rights, the bonds would have been expected to sell for 4.2 million. On march 23, 2020, half of the warrants were exercised. The common shares of Gargiola inc. were trading at 20$ each on this day. Immediately after the payment of interest on the bonds, on september 30, 2022, all bonds outstanding were converted into common shares.
Instructions:
B) calculate the effective rate for the bonds. Leave at least 4 decimal place in your calculations C) prepare a bond amortization schedule from september 30, 2017 to september 30, 2022 using the effective interest rate
Solutions
Expert Solution
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| Part b | |||||
| PV | $ 4,200,000 | Bond value without conversion right | |||
| I | |||||
| N | 20 | Period (10*2) | |||
| PMT | $ -160,000 | 4million*4% | |||
| FV | $ -4,000,000 | Face Value | |||
| Type | - | ||||
| RATE(N,PMT,PV,FV,Type) | |||||
| 3.6436% | Effective Rate | ||||
| Part c | |||||
| Date | Cash Paid 4% | Effective Interest 3.6436% | Premium Amortization | Carrying Value | |
| 4m*4% | |||||
| Sep 30 2017 | $ 4,200,000 | ||||
| Mar 31, 2018 | $ 160,000 | $ 153,031 | $ 6,969 | $ 4,193,031 | |
| Sep 30 2018 | $ 160,000 | $ 152,777 | $ 7,223 | $ 4,185,808 | |
| Mar 31, 2019 | $ 160,000 | $ 152,514 | $ 7,486 | $ 4,178,323 | |
| Sep 30 2019 | $ 160,000 | $ 152,241 | $ 7,759 | $ 4,170,564 | |
| Mar 31, 2020 | $ 160,000 | $ 151,959 | $ 8,041 | $ 4,162,523 | |
| Sep 30 2020 | $ 160,000 | $ 151,666 | $ 8,334 | $ 4,154,188 | |
| Mar 31, 2021 | $ 160,000 | $ 151,362 | $ 8,638 | $ 4,145,550 | |
| Sep 30 2021 | $ 160,000 | $ 151,047 | $ 8,953 | $ 4,136,598 | |
| Mar 31, 2022 | $ 160,000 | $ 150,721 | $ 9,279 | $ 4,127,319 | |
| Sep 30 2022 | $ 160,000 | $ 150,383 | $ 9,617 | $ 4,117,702 | |
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