1) Compound financial instruments contain both a liability and equity component. Bonds with warrants include share warrants as the equity portion, while convertible bonds allocate some value to the conversion privilege.
2) At issuance, the proceeds are split between the liability and equity portions. For bonds with warrants, the residual goes to the warrants. For convertible bonds, it goes to the conversion privilege.
3) If the warrants are exercised or bonds converted, entries are made to reduce the respective equity accounts and increase share capital and share premium.
1) Compound financial instruments contain both a liability and equity component. Bonds with warrants include share warrants as the equity portion, while convertible bonds allocate some value to the conversion privilege.
2) At issuance, the proceeds are split between the liability and equity portions. For bonds with warrants, the residual goes to the warrants. For convertible bonds, it goes to the conversion privilege.
3) If the warrants are exercised or bonds converted, entries are made to reduce the respective equity accounts and increase share capital and share premium.
1) Compound financial instruments contain both a liability and equity component. Bonds with warrants include share warrants as the equity portion, while convertible bonds allocate some value to the conversion privilege.
2) At issuance, the proceeds are split between the liability and equity portions. For bonds with warrants, the residual goes to the warrants. For convertible bonds, it goes to the conversion privilege.
3) If the warrants are exercised or bonds converted, entries are made to reduce the respective equity accounts and increase share capital and share premium.
1) Compound financial instruments contain both a liability and equity component. Bonds with warrants include share warrants as the equity portion, while convertible bonds allocate some value to the conversion privilege.
2) At issuance, the proceeds are split between the liability and equity portions. For bonds with warrants, the residual goes to the warrants. For convertible bonds, it goes to the conversion privilege.
3) If the warrants are exercised or bonds converted, entries are made to reduce the respective equity accounts and increase share capital and share premium.
FINANCIAL INSTRUMENT COMPOUND FINANCIAL INSTRUMENT A financial instrument that contains both a LIABILITY component and an EQUITY component Bonds with WARRANTS Bondholders are given the right to ACQUIRE a speci ed number of ordinary shares of the issuing corporation at a GIVEN PRICE within a certain time period EQUITY component = SHARE WARRANTS OUTSTANDING ( SWO )
CONVERTIBLE Bonds Bondholders are given the right to EXCHANGE their bondholding into ordinary shares or other securities of the issuing company within a speci ed period of time EQUITY component = SHARE PREMIUM - BOND CONVERSION PRIVILEGE ( BCP ) fi fi ISSUE PRICE BIFURCATION
Examples: 101, 105, 95, 98 PV of FACE VALUE XX PV of PERIODIC INTEREST XX Effective Rate XX ISSUANCE OF BONDS BONDS WITH WARRANTS Journal entries:
PREMIUM DISCOUNT
Cash xx Cash xx Bonds payable xx Discount on bonds payable xx Premium on bonds payable xx Bonds payable xx Share Warrants Outstanding xx Share Warrants Outstanding xx
CONVERTIBLE BONDS Cash xx Cash xx Bonds payable xx Discount on bonds payable xx Premium on bonds payable xx Bonds payable xx SP-Bond conversion privilege xx SP-Bond conversion privilege xx EXERCISE OF WARRANTS Journal entries: CONVERSION OF BONDS
Cash xx Bonds payable xx
Share warrants outstanding xx Premium on bonds payable xx SP-Bond conversion privilege xx Ordinary share par or stated value xx Share premium-ordinary xx Discount on bonds payable xx Ordinary share par or stated value xx Share premium-ordinary xx
ORDINARY CV OF BONDS CASH SWO/SP-BCP SHARE SP-ORDINARY PAYABLE CAPITAL
EXERCISE OF WARRANTS
CONVERSION OF BONDS Exercise price or Option price
ISSUE PRICE = 5,000,000 x 1.04 = 5,200,000
Number of WARRANTS = 5,000 bonds x 1 warrant per bond = 5,000 warrants
P5,000,000 / P1,000
Number of SHARES = 5,000 warrants x 20 shares per warrant = 100,000 ordinary shares ISSUE PRICE = 5,200,000
SP-Bond conversion privilege 105,836 529,180 x 20%
CV of bonds CONVERTED = Discount on bonds payable 34,738 1,000,000 - 965,262 4,826,311 x 20% = 965,262 Ordinary share 500,000 5,000 shares x P100
Share premium-ordinary 571,098
T
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