Comprehensive Exam Review BONDS SY, 2010-2011 How should the issue price of bonds with non-detachable share warrants be accounted for? a. The proceeds are considered fully assigned to bonds. b. The proceeds shall be assigned first to warrants, at thelr market value and the remainder to the bonds © The proceeds shall be assigned first to the bonds, at their market value if sold without the warrants; then the remainder of the issue price is assigned to the warrants as part of equity. St 4d. The proceeds shall be allocated to the bonds and to the warrants based on relative market value. 2. Bond issue costs, such as printing fees, legal fees, commissions, etc. are most appropriately accounted for by Charging them to an expense account in the year the bonds are actually sold. Debiting them to unamortized bond issue costs, setting them as a deferred charge on the statement of financial position and amortizing them in a manner similar to bond discount over the life of the bond. Charging them to an expense account in the year the bonds are originally dated whether ur not they are sold In that year. 4. Considering them in the measurement ofthe bonds payable. 3, How would the carrying value of a bond payable be affected by amortization of each of the following? Discount Premium a. Noeffect No effect Increase No effect 4 Increase Decrease ., Decrease Increase {C Company failed to amortize discount on outstanding 10-year bonds payable. What isthe effect of the failure record amortization on interest expense, net income and bond carrying value, respectively? Understate, oyerstate, understate = . ‘ Overstate, understate, overstate Understate, overstate, overstate Overstate, understate, understate 5. On January 4, 2009, London Company issued if 9% borlds h the face amount of 22nilon which mature on January 1, 2019. The bonds were issued for Pi, 878,000 to yield 10% resulting In a bond discount of P1.22,000. London Company uses the interest method of amortizing bond discount. Interest is payable annuallyon December 31. " What ‘the carrying value of the bonds at December 31, 2069? y { Ob @ 7,205,200 17s bor 407 = SE 700 oo —— vente yoo, c P1,896,780 “ag 4. P1, 898,0006. Which ofthe following is true when the effective interest method of amortizing bond premium is used? a. Interest expense remains the same for each period. es Interest rate varies from period to period. c._ Interest expense increases each period Gi Interest expense decreases each period. (On January 1, 2009, Alabama, Inc. issued 10-year bonds with a face amo rate of 8% payable annually on January 1. The bonds were priced to, 1 million and a stated interest resent value factors are as, follows: AL8% At10% ©. Present value of Pi for 10 periods 0.46319 (0.38554 Present value of an ordinary ‘annuity of P1 for 10 periods 6.71008 6.14457 The total issue price (rounded to nearest P100) of the bonds was yooe 200 ¥ 0, OFsse a. P1, 000,000. " eSs4o odie OT IMMST b. P 980,000. gaysuse c P 965,800. Sesion P 877,100. 77 105-4 ‘April 1, 2009, Florida Corporation issued at 97 plus accrued interest, 2,000 of its 10%, P21, 000 bonds. The ds are dated January 1, 2009 and mature on January 1, 2019. Interest is payable semi-annually on January 1 d July 1. From the bohd issuance, Florida would receive net cash of S0000 (40 @-v 455--— (790 cow ey —— 1, 2009, Marine Company issued P2 million, 20-year, 10% bonds for P2, 120,000. Each P1, 000 bond had ible for the purchase of one share of Maine's P50 par ordinary share for P60. _ x the bonds were issued, Maine's sécurities had the following market values: ayo oe it warrant Pa, 0407 20 O par 56 ould Maine credit to premium on bonds payable? zoyoor Leow FebDecember 31, 2008, the liability section of Texas Company's statement of financial position included bonds ‘of PIOM and unamortized premium on bonds payable of P 180,000. Further verification revealed that bonds were issued on December 31, 2007 and will become due on December 31, 2017. Interest of 1296 is sble on June 30 and December 31 of each year. . ‘April 1, 2009, Texas retired P4, 000,000 of theses bonds at 97 plus accrued interest, The total amount of cash ‘paid for the retirement of bonds on April 1, 2009 was 3, 950,000. 4, 040,000. d. P4, 180,000. 11. Inthe statement of financial position of Kansas, Inc. as of D Payable, due January 1, 2010 —_P1, 000,000 Bonds Payable 70,000 on Bonds Payable 90,000 semi-annually on January 1 and July 1. On. Jed interest. 10%, P1 million face value ds maturing on December 31, 2011 on d December 31. 0, 2009, the {balance interns tc com 308) sion privilege had balance of 40,000 ordinary with P20 par value. At that time, ifornid incurred expenses of P 10,000 in = P50,000, On that'd ‘each share of Califo connection with the conver F —_—_—__ = ‘The conversion of the bonds CS] a premium on bond should Fresh rope amass =F onc P86,000 bs Lge oy Qrmce te . P126,000 ane 1ejO d.P140,000 ie a1 Fel