On January 1, 2021, Kat Company has decided to raise additional capital by issuing P5,000,000 face amount, 5 year bonds with interest rate of 12% payable annually on December 31. To help the sale of the bonds, share warrants are issued – one warrant for each P1,000 bond sold.

The warrant entitles the holder to purchase 5 shares at P100 per share. The par value of the share is P50.

It is reliably determined that the value of the warrants is P30 each time of issuance of the bonds.

The bonds are sold for P5,100,000 with warrants but would have sold only at P4,657,000 without warrants with 14% effective yield.

Required:

Prepare journal entries for the current year in connection with the bonds including the exercise of the share warrants. The effective interest method of amortization is used.

Answer rating: 100% (QA)

Computation for Value Allocated to Bond and Shares Under ... View the full answer