PROBLEMS

PROBLEM 1: TRUE OR FALSE

__1. Unlike notes payable which involve a single creditor, bonds
enable entities to borrow from several creditors.
__2. The contract between an issuer and its bondholders is called a
debenture.
__3. It is the responsibility of the underwriter to monitor the issuer's
compliance with its obligations under a bond issue.
__4. Convertible bonds contain an exercisable option for the issuer.
__5. The market rate tends to go up when the demand for bonds
decreases.
__6. When the market rate is higher than the stated rate, the bonds will
sell at a price higher than the bonds' par value.
__7. If the carrying amount of a bond issue exceeds the face amount,
the difference is called discount on bonds payable.
__8. According to the PFRS, discounts or premiums on bonds payable
may be amortized using the straight-line method.
__9. Registered bonds are bonds that can be freely transferred and
have a detachable coupon for each interest payment.
__10. One reason why coupon bonds are seldom issued anymore by
corporations is that there is no readily available record of who actually
receives the interest.

PROBLEM 2: MULTIPLE CHOICE - THEORY

1. It is a type of bond that the bondholder can exchange for other
securities of the issuer.
a) debenture bond
b) collateral trust bond
c) convertible bond
d) james bond
2. Transaction costs of issuing bonds
a) are added to the carrying amount of the bonds.
b) are recognized as outright expenses.
c) are amortized as expense over the term of the bonds.
d) a and c.

The interest expense for the year ended December 31,

20x1 would be for:
 a) four (4) months c. seven (7) months

b) six (6) months d. ten (10) months

4. For a bond issue that sells for less than its par value, the
market rate of interest is
a. Dependent on rate stated on the bond.
b) Equal to rate stated on the bond.
a. Less than rate stated on the bond.
b. Higher than rate stated on the bond.

5. The market price of a bond issued at a discount is the present

value of its principal amount at the market (effective) rate of
interest
a. Less the present value of all future interest payments at the market.
b. Less the present value of all future interest payments at the rate of
interest stated on the bond.
c. Plus the present value of all future interest payments at the
market (effective) rate of interest.
d. Plus the present value of all future interest
payments at the rate of interest stated on the bond.
(AICPA)

6. The issue price of a bond is equal to the present value

of the future cash flows for interest and principal
when the bond is issued
Atface amount At a discount At a premium
a. Yes No Yes
b. Yes No No
c. No Yes Yes
d. Yes Yes Yes

Kenwood Co. neglected to amortize the premium on outstanding

ten-year bonds payable. What is the effect of the failure to record
 premium amortization on interest expense and bond carrying
value, respectively?
a) Understate; understate c) Overstate; overstate
b) Understate; overstate d) Overstate; understate
8. On March 1, 1997, Clark Co. issued bonds at a discount. Clark
incorrectly used the straight-line method instead of the effective
interest method to amortize the discount. How were the following
amounts, as of December 31, 1997, affected by the error?

Bond carrying amount Retained earnings

a. Overstated Overstated
b. Understated Understated
c. Overstated Understated
d. Understated Overstated
(On January 2, 20x1, Nast Co. issued 8% bonds with a face amount of
PI,OOO,OOO that mature on January 2, 20x7. The bonds were issued
to yield 12%, resulting in a discount of P150,000. Nast incorrectly used
the straight-line method instead of the effective interest method to
amortize the discount. How is the carrying amount of the bonds affected
by the error?

At Dec. 31,20x1 At Jan. 2,20x7 At Dec. 31, 20x1 At Jan. 2, 2027

a. Overstated Understated c. Understated Overstated
b. Overstated No effect d. Understated No effect
10. The equity component of a compound financial instrument is
determined
a. by allocating the issue price to the liability and equity
components based on their relative fair values.
b. by allocating the equity component its fair value.
c. by deducting the fair value of the liability com without
the equity feature from the issuance price of the
compound instrument.
d. none of these

PROBLEM 3: EXERCISES
1. On January 1, 20x1, Sixty Hours Co. issued 1,000, P2,000,
10% bonds P1,903,927. Principal is due on December 31,
20x3, while interest is due annually every year-end. The
interest rate is 12%.

Requirement: Provide the journal entries over the life of

the bonds.

2. On January 1, 20x1, Faith Co. issued 1,000, P2,000, 120% bonds

for P2,206,168. Principal is due on December 31, 20x3 , while
interest is due annually every year-end. Faith Co. incurred
transaction costs of P106,694 on the issuance. The effective
interest rates are 8% before adjustment for transaction costs and
10% after adjustment for transaction costs.

Requirement: Provide the journal entries over the life of the bonds.

3. On January 1, 20x1, Hope Co. issued 5-year, 12%,

P2,000,000 bonds for P2,151,632. Principal is due at
maturity, while interest is due annually every year-end. The
effective interest rate is 10%. On July 1, 20x3, Hope Co.
retired all the bonds at 102. The retirement price includes
payment for the accrued interest.

Requirement: Provide the entries on July 1, 20x3.

4. On January 1, 20x1, Patience Co. issued 10%, 3-year,

P2,000,000 convertible bonds at 105. Each P1,000 bond is
convertible into 8 shares with par value per share of P100.
Principal is due on December 31, 20x3, while interest is due
annually every year-end. On issuance date, the bonds were selling at
a yield to maturity market rate of 12% without the conversion
option. All the bonds were converted into equity on December 31,
20x2. Patience Co. incurred stock issuance costs of P20,000.
Requirement: Provide all the journal entries in 20x1 and 20x2.

5. On January 1, 20x1, Kindness Co. issued 3-year, 10%,

P2,000,000 convertible bonds for P2,200,000. Principal is
due at maturity but interest is payable every year-end. The
bonds are convertible into 6,000 ordinary shares with par
value per share of P200. On issuance date, the prevailing
market rate of interest for similar debt without a conversion
feature was 12%. On December 31, 20x2, Kindness Co.
retired all the bonds for P2,000,000. On retirement date, the
current rate for similar debt instrument without a conversion
feature was 11%.

Requirement: Provide all the entries in 20x1 and 20x2.

PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL

1. Blue Corp.'s December 31, 1991, balance sheet contained the
following items in the long-term liabilities section:
9 ¾% registered debentures, callable in 2002, due in 2007 700,000
9 1/2% collateral trust bonds, convertible into common stock
beginning in 2000, due in 2010 600,000
10% subordinated debentures (P30,000 maturing annually
beginning in 1997) 300,000

What is the total amount of Blue's term bonds?

a. 600,000
b. 700,000
c. 1,000,000
d. 1,300,000

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2. On January 2, 2001, West Co. issued 9% bonds in the amount
of P500,000, which mature on January 2, 2011. The bonds
were issued for P469,500 to yield 10%. Interest is payable
annually on December 31. West uses the effective interest method
of amortizing bond discount. In its June 30, 2001, balance sheet,
what amount should West report as bonds payable?

a. 469,500
b. 470,475
c. 471,025
d. 500,000

3. On January 1, 20x1, Yoga Co. issued 1,000, P4,000

face amount bonds for P3,807,852. The bonds mature on
December 31, 20x3. Interest of 10% is due annually every
year-end. The effective interest rate is 12%. How much is
the unamortized discount on bonds payable on December
31, 20x1?
a. 147,908
b. 135,206

c. 134,987

d. 143,134

4. On January 1, 20x1, Silent Co. issued 1,000 bonds with face amount
of P4,000 each for a total of P3,807,852. Silent Co. paid transaction
costs of P179,316 on the issuance. The bonds mature on December
31, 20x3 but 10% interest is due every year-end. The effective
interest rate adjusted for the transaction costs is 14%. How much is
the carrying amount of the bonds on December 31, 20x1?
b. 3,391,580 c. 3,401,832 d. 3,736 ,531

5. On April 1, 20x9, Hill Corp. issued 200 of its P1,000 face value
bonds at 101 plus accrued interest. The bonds were dated
November 1, 20x8, and bear interest at an annual rate of 9%
payable semiannually on November 1 and May 1. What amount
did Hill receive from the bond issuance?

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 a. 194,500 b. 200,000 c. 202,000 d. 209,500

6. Tuck Co. plans on issuing three-year, 12% term bonds

with face amount of P2,000,000. If the current rate on issuance
date is 10%, the estimated issue price of the bonds would be
a. 2,099,474. b. 2,123,649 c. 2,230,713. d. 1,979,365

On June 30, 20x9, King Co. had outstanding 9%, P5,000,000

face value bonds maturing on June 30, 2x14. Interest was
payable semiannually every June 30 and December 31. on
June 30, 20x9, after amortization was recorded for the
period, the unamortized bond premium and bond issue costs
were P30,000 and P50,000, respectively. On that date, King
acquired all its outstanding bonds on the open market at 98
and retired them. At June 30, 20x9, what amount should King
recognize as gain on redemption of bonds?
a. 20,000 b. 80,000 c. 120,000 d. 180,000
On December 31, 20x0, Arnold, Inc., issued P200,000, 8% serial
bonds, to be repaid in the amount of P40,000 each year.

Interest is payable annually on December 31. The bonds

were issued to yield 10% a year. The bond proceeds were
P190,280 based on the present values at December 31, 20x0,
of the five annual payments as follows:
Amounts due Present value
43,610
37,250
31,690

26,830

190,280
Princi al Interest
40,000 16,000
12/31/x1
12/31/x2 40,000 12,800
12/31/x3 40,000 9,600
12/31/x4 40,000 6,400

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12/31/x5 40,000 3,200
Due date

Arnold?
(AICPA)

9. Ray Corp. issued bonds with a face amount of P1,000 bond

contained detachable stock warrants for shares of Ray's
common stock. Total proceeds from th • amounted to The
fair value of each warrant
h
, and the fair value of the bonds without the warrants
P196,000. The bonds were issued at a discount of
b. 678.c. 4,000. d. 33,898.
(AICPA)

11. On July 1, 2003, after recording interest and amortization,

York Co. converted P1,000,000 of its 12% convertible bonds into

50,000 shares of P1 par value ordinary share. On the conversion date
the carrying amount of the bonds was P1,300,000, the fair value of
the bonds was P1,400,000, and York's ordinary share was publicly
trading at P30 per share. What amount of share premium should
York record as a result of the conversion?
a. 950,000
(AICPA)

12. On January 1, 20x1, Melancholic Co. issued 10%,

convertible bonds for P2,200,000. The bonds, which are
due on December 31, 20x3, are convertible into 10,000
ordinary shares with par value of P100. The annual interest
payments are due at each year-end. The prevailing market
rate of interest for similar debt without conversion feature
on January 1, 20x1 was 12%. On December 31, 20x2, half
of the bonds were retired for P1,000,000. The prevailing
interest rate for similar debt without conversion feature on
December 31, 20x2 was 11%. How much are the (1) gain
(loss) on the retirement and (2) net amount of “share

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 premium – conversion feature” reclassified within equity
on December 31, 20x2?
payable

antotl'tt of "share premium conversion feature" reclassified tvitlli'i

equity on December 31, 20x2?
9,724; 152,760 c. (8,849); 139,028
b. (9,724); 152,670 d. 8,849; 139,208

13. During 20x4 Peterson Company experienced financial

difficulties and is likely to default on a P500,000, 15%, three-year
note dated January 1, 20X2, payable to Forest National Bank. On
December 31, 20X4, the bank agreed to settle the note and unpaid
interest of P75,000 for 20X4 for P50,000 cash and marketable
securities with carrying amount of P375,000. Peterson's
acquisition cost of the securities is P385,000. What amount
should Peterson report as a gain from the debt restructuring in its
20x4 income statement?
a. 65,000 b. 75,000 c. 140,000 d. 150,000

14. Wood Corp., a debtor undergoing financial difficulties

granted an equity interest to a creditor in full settlement of a
P28,000 debt owed to the creditor. At the date of this
transaction, the equity interest had a fair value of P25,000
and par value of P20,000. What amount should Wood
recognize as gain on restructuring of debt?
a. 0 b. 3,000 c. 5,000 d. 8,000
(AICPA)

15. In 20X2, May Corp. acquired land by paying P75,000 down

and signing a note with a maturity value of P1,000,000. On
the note's due date, December 31, 20X7, May owed P40,000
of accrued interest and P1,000,000 principal on the note. May
was in financial difficulty and was unable to make any

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payments. May and the bank agreed to amend the note as
follows:
• The P40,000 of interest due on December 31, 20X7, was
forgiven.
• The principal of the note was reduced from P1,000,000 to
P950,000 and the maturity date extended 1 year to
December 31, 20X8.

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 apter 3

• May would be required to make one interest payment

totaling P30,000 on December 31, 20X8.
• The original effective interest rate is 10% while the current
market rate on December 31, 20X7 is 12%.

As a result of the troubled debt restructuring, May should

b. 149,092
(AICPA)

PROBLEM 5: CLASSROOM ACTIVITY

You are the accountant of B-Cull co. on July 1, 20x1,
company issued 1,000 pieces of the document shown below
with serial numbers SR/213-2 (shown below) to SR/213-
1001 (not shown to save space). The total issue price is
P922,782, net of transaction costs.

a. Compute for the effective interest rate on the bond issue

b. Prepare the amortization table (you may round-off the
journal entries for 20x1 only. centav

c. Prepare

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 PROBLEM 6: FOR CLASSROOM DISCUSSION

Bonds issued at a discount — with Transaction costs

1. On January 1, 20x1, an entity issues bonds with face amount
of P5,000,000 for P4,800,000. The bonds mature on
December 31, 20x3 and pay annual interest of 10% every
December 31. The entity incurs bond issue costs of
P473,767. The interest rate adjusted for bond issue costs is
16%.
Requirements:
a. Compute for the initial carrying amount of the bonds.
b. Compute for net discount or a net premium (including the effect of the
bond issue cost) from the issuance on initial recognition.
c. Are the periodic interest payments greater than or less than the periodic
interest expenses?
d. Prepare all the journal entries during the term of the bonds.

Issuance of bonds between interest payment dates

2. On April 1, 20x1, an entity issues bonds with face amount of
P5,000,000 for P5,415,183, including accrued interest. The bonds are
dated January 1, 20x1 and pay annual interest of 14% every
December 31. The effective interest rate is 12%.

Requirements:
a. Compute for the initial carrying amount of the bonds.
b. Provide the entry on April 1, 20x1 to record the issuance of the bonds.
c. Compute for the interest expense in 20x1.
Issue price of bonds
On January 1, 20x1, Vale Co. issues 14%, 3-year, P5,000,000
bonds at a price that reflects a yield rate of 8%.

Requirement: Compute for the issue price of the bonds.

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 otherConcepts

Retirement of bonds prior to maturity

4. On January for 1, 20x1, an entity issues bonds with face amount of P5,000,000 for
P5,773,129. The bonds mature on face December 31, 20x3 and pay annual interest of
14%. The effective interest rate is 8%. On December 31, 20x2, after paying the annual
interest, the entity retires the bonds at a call premium of P400,000.

Requirement: Provide the entry on December 31, 20x2 to record the

retirement of the bonds.

Convertible bonds — Conversion

5. On January 1, 20x1, an entity issues bonds with face
amount of P5,000,000 for P5,200,000. The bonds mature
on December 31, 20x3 and pay annual interest of 12%.
The bonds can be converted into 10,000 ordinary shares
of the entity with par value per share of P200. On January
1, 20x1, the bonds are selling at 101 without the
conversion feature. The effective interest rate on the
bonds is 11.59%. All of the bonds are converted into
ordinary shares on January 1, 20x3.

Requirement: Provide the entries to record the

following: a, issuance of the convertible bonds.
b. conversion of the bonds.

Convertible bonds — Retirement

6. Use the facts in the immediately preceding problem.
However, in this case, the entity retires the bonds on
January 1, 20x3 at a call premium of P200,000.
Without the conversion feature, the bonds are selling on
this date at 102.

Provide the entry

to record
the retirement
Rcquirctnent:

bonds.

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Asset swap
7. On January 1, 20x1, an entity transfers a piece of equipment
with historical cost of P1,800,000, accumulated
depreciation of P900,000 and fair value of P850,000 as full
settlement of a note payable with a carrying amount of
P1.000.000. How much is the gain or loss on the
derecognition of the note?

Equity swap
8. On January 1, 20x1, an entity issues 10,000 of its own
shares with par value per share of P10 and fair value
per share of P75 as full settlement of a note payable
with a carrying amount of P600,000. How much is the
gain or loss on the derecognition of the note?

Modification of terms
9. On December 31, 20x1, an entity enters into a restructuring
agreement to modify the terms of its existing loan as follows:
-The principal is reduced from P2,800,000 to P2,500,000.
-The lender waived the accrued interest of P400,000.
-The nominal rate is decreased from 14% to 9%.
-The maturity date is extended from December 31, 20x1 to
January 1, 20x6.

The principal is due in lump sum at maturity date but interest

is payable annually at each year-end. The original effective
interest rate is 14%. The prevailing rate on December 31,
20x1 is 12%.

Requirement: Provide the entry to record the modification of the loan

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