BONDS PAYABLE

Problem 9
On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of
P1,000,000 due January 1, 2015. Interest is payable semiannually on January 1 and July 1.
On the date of issue, investors were willing to accept an effective interest of 6%.

Questions

1. The bonds were issued on January 1, 2007 at

a. A premium c. Book value
b. An amortized value d. A discount

2. Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective
interest amortization method, LACEA COMPANY recorded interest expense for the 6
months ended June 30, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,884

3. Same information in number 2. LACEA COMPANY recorded interest expense for the 6
months ended December 31, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,791

4. The carrying value of the bonds on July 1, 2008 is:

a. P 1,056,578 b. P 1,056,484 c. P 1,053,276 d. P
1,053,179

5. A bond issue sold at a premium is valued on the statement of financial position at the
a. Maturity value.
b. Maturity value plus the unamortized portion of the premium.
c. Cost at the date of investment.
d. Maturity value less the unamortized portion of the premium.

Solution
1. B
If nominal rate is less than the yield rate, there is discount
If nominal rate is more than the yield rate, there is premium
2. D
Date Interest Interest paid Amortization Carrying
expense Value
1,062,809
July 2007 31,884 35,000 3,116 1,059,693
December 2007 31,791 35,000 3,209 1,056,484
July 2008 31,695 35,000 3,305 1,053,179
Interest expense = Carrying value of the note X yield rate x 6/12
Interest paid = Face value of the note X nominal rate x 6/12
Amortization = Interest expense – Interest paid
 Carrying value – end = Carrying value – beg. – Amortization
3. D 4. D 5. B

Problem 10
The following data were obtained from the initial audit of Popoy Company:

Debit Credit Balance

15%, 10-year Bonds Payable, dated
January 1, 2006.
Cash proceeds from issue on January 1,
2007 of 500, P1,000 bonds 522,500 522,500

Bonds Interest Expense

Cash paid – Jan. 2, 2008 37,500 37,500
Cash paid – July 1, 2008 37,500 75,000
Accrual – December 31, 2008 37,500 112,500

Accrued Interest on Bonds

Balance – Jan. 1, 2008 37,500 37,500
Accrual – Dec. 31 2008 37,500 75,000

Treasury Bonds
Redemption price and interest to date
on 100 bonds permanently retired –
October 1, 2008 109,000 109,000

Questions
1. What should be the correct original entry to account for the issuance of bonds at
January 1, 2007?
DEBIT CREDIT
a. Cash 522,500 Bonds Payable 500,000
Discount on BP 22,500
b. Cash 500,000 Bonds Payable 500,000
c. Cash 522,500 Bonds Payable 500,000
Premium on BP 22,500
d. Cash 522,500 Bonds payable 522,500

2. The adjusting entry to accrue interest on bonds payable at December 31, 2007?
DEBIT CREDIT
a. Cash 37,500 Interest income 37,500
b. Interest expense 37,500 Interest payable 37,500
c. Interest receivable 37,500 Interest income 37,500
d. Interest expense 37,500 Interest income 37,500

3. The reversing entry related to accrual on bond interest expense at January 1, 2008?
DEBIT CREDIT
 a. Interest income 37,500 Cash 37,500
b. Interest payable 37,500 Interest expense 37,500
c. Interest payable 37,500 Retained earnings 37,500
d. Retained earnings 37,500 Interest expense 37,500

4. The journal entry to record payment of interest due on July 1, 2008?

DEBIT CREDIT
a. Cash 37,500 Interest payable 37,500
b. Interest payable 37,500 Cash 37,500
c. Interest receivable 37,500 Cash 37,500
d. Interest expense 37,500 Cash 37,500

5. The reversing entry related to accrual on bond interest expense at January 1, 2009?
DEBIT CREDIT
a. Interest income 37,500 Cash 37,500
b. Interest payable 30,000 Interest expense 30,000
c. Interest payable 15,000 Interest expense 15,000
d. Interest income 37,500 Interest expense 37,500

6. The adjusting entry that should have been made to amortize on bond premium at
December 31, 2007?
DEBIT CREDIT
a. Premium on BP 2,500 Interest expense 2,500
b. Premium on BP 2,500 Retained earnings 2,500
c. Premium on BP 2,250 Interest expense 2,250
d. Premium on BP 2,250 Retained earnings 2,250

7. The correcting entry to adjust for the error related to amortization on bond premium in
2008 is?
DEBIT CREDIT
a. Premium on BP 2,500 Retained earnings 2,500
b. Premium on BP 2,500 Interest expense 2,500
c. Premium on BP 4,875 Interest expense 2,375
Retained earnings 2,500
d. Premium on BP 4,875 Retained earnings 4,875

8. The correct entry to record retirement of 100 bonds on October 1, 2008?

a. Interest expense 3,750 Cash 109,000
Bonds payable 100,000
Premium on BP 3,625
Loss on retirement 1,625
b. Interest expense 3,750 Cash 109,000
Bonds payable 100,000
Premium on BP 3,625
Retained earnings 1,625
c. Interest expense 3,750 Cash 109,000
 Bonds payable 100,000
Premium on BP 3,713
Loss on retirement 1,537
d. Interest expense 3,750 Cash 109,000
Bonds payable 100,000
Premium on BP 3,713
Retained earnings 1,537

Solution
1. C Cash 522,500
Bonds payable 500,000
Bond premium 22,500
2. B Interest expense 37,500
Interest payable 37,500
3. B Interest payable 37,500
Interest expense 37,500
4. D Interest expense 37,500
Cash 37,500
5. B Interest payable 30,000
Interest expense 30,000
6. A Bond premium 2,500
Interest expense 2,500 (P22,500/108 x 12 = P2,500)
7. C Bond premium 4,875
Retained earnings 2,500 (P22,500/108 x 12 = P 2,500)
Interest expense 2,375 (P22,500/108 x 9 = P 1,875
4/5 x P22,500/108 x 3 = 500)
8. A OE: Treasury Bonds 109,000
Cash 109,000
CE: Bonds payable 100,000
Bond premium 3,625
Interest expense 3,750
Loss on retirement 1,625
Cash 109,000
Adj: Bonds payable 100,000
Bond premium 3,625
Interest expense 3,750
Loss on retirement 1,625
Treasury Bodns 109,000