Question

P16.8 On January 1, 2020, Salem Corp. issued $1.1 million of five-year, zero-interest-bearing notes along with warrants to buy 1 million common shares at $22 per share. On January 1, 2020, Salem had 9.3 million common shares outstanding and the market price was $21 per share. Salem Corp. received $1 million for the notes and warrants. If offered alone, on January 1, 2020, the notes would have been issued to yield 11% to the creditor. Assume that the company follows IFRS.

Instructions

Answer the following questions, rounding all numbers to the nearest dollar.

a. Prepare the journal entry(ies) to record the issuance of the zero-interest-bearing notes and warrants for the cash consideration that was received. Show calculations using any of the following methods: (1) factor tables, (2) a financial calculator, or (3) Excel function PV.

b. Prepare an amortization table for the notes using the effective interest method.

c. Prepare adjusting journal entries for Salem Corp. at the end of its fiscal year of December 31, 2020.

d. Prepare the journal entry required for Salem Corp. if a quarter of the warrants are exercised on January 1, 2023.

Answer 1

Answer:-

a.

The entry for the issuance of the notes on January 1, 2020:

1. Using Tables:

The present value of the note is: $1,100,000 X .59345 (factor for a single payment in 5 years at 11%) = $652,796 (Rounded by $1).

2. Using a financial calculator:
PV	$ ?	Yields $652,796
I	11%
N	5
PMT	$ 0
FV	$ (1,100,000)
Type	0

3. Excel formula =PV(rate,nper,pmt,fv,type)

Result: $652,796

January 1, 2020

Cash...................................................................   1,000,000

Notes Payable...........................................     652,796

Contributed Surplus—Stock Warrants....     347,204

The amortization schedule for the zero-interest-bearing note is:

Schedule for Interest and Discount Amortization—
Effective Interest Method
$1,100,000 note issued to yield 11%
Date		Cash Interest		Effective Interest		Discount Amortized		Carrying Amount
1/1/20								$ 652,796
12/31/20		$0		$71,8081		$ 71,808		724,6042
12/31/21		0		79,706		79,706		804,310
12/31/22		0		88,474		88,474		892,784
12/31/23		0		98,206		98,206		990,990
12/31/24		0		109,010*		109,010		1,100,000
Total		$0		$447,204		$447,204

1$652,796 X 11% = $71,808

2$652,796 + $71,808 = $724,604

*rounded $1

c.

December 31, 2020

Interest Expense............................................... 71,808

Notes Payable........................................... 71,808

d.

January 1, 2020

Cash (250,000 x $22)…………....................... 5,500,000

Contributed Surplus – Stock Warrants3..........   86,801

Common Shares....................................... 5,586,801

3($ 347,204 X 0.25 = $86,801)