16.2. On I/IA, XYZ issued S100,000 in deep discount (zero coupon) bonds to yield

Question

16.2. On I/IA, XYZ issued S100,000 in deep discount (zero coupon) bonds to yield 8%. The 51,000 bond Conuvears and are convertible in bonds esth the bonds total $2.000. On 1/1/F, all bonds are converted into common stock (1/1/F market value $60/sh.) using the "market value" method. s mature in 10 and are convertible into common shares at a rate of 20 shares per bond. Conversion cannot occur before 1//F. Based on recent similar issues, you te that without the conversion feature the bonds would yield 12%. Issue costs associated ve the amount reported as Bonds Payable (net) on the 12/31/A balance sheet. [50025 b. Give the interest expense reported in the 12/31/A income statement. 13706 c. Give the amount of gain/loss recognized upon conversion. |52942] d. Give the net effect on Stockholders' Equity of the conversion. [67058

Explanation / Answer

1)At 12/31/A ,number of years remaining to maturity = 9 years      [10-1 expired]

Price = Face value* 1/(+i)^n

         = 100000* 1/(1+.08)^9

         =100000* 1/(1.08)^9

         =100000* .50025

        = $ 50025

2)Issue price = Face value* 1/(+i)^n

         = 100000* 1/(1+.08)^10

         =100000* 1/(1.08)^10

        =100000 * .46319

       = 46319

Interest expense =Issue price(or carrying value) *yield

                   = 46319 *.08

                  = 3705.52   [rounded to 3706]

3)out of 10 years ,5 years is left unexpired       [A-E]

Number of shares issued upon conversion = 100000*20/1000 = 2000 shares

Value of shares issued = 2000*60 = 120000

Issuance cost remaining unamortised on date of conversion = 2000/10 = $ 200 per year       [1000-(200*5)]

         = 2000-1000

         = $ 1000

Carrying value of bond as on 1/1/F =Face value* 1/(+i)^n

           100000*1/(1+.08)^5

         = 100000* .68058

        = 68058

Net carrying value = 68058 - 1000 = 67058

Net gain /(loss) = Net carrying value of bond - value of shares issued

                    67058 -120000

                      52942

d)Net effect on equity = value of shares issued +net gain /(loss)

                      = 120000+ (-52942)

                     = 120000-52942

                      = 67058

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