CONCEPTUAL FRAMEWORKS AND ACCOUNTING

STANDARDS
(BONDS PAYABLE)

1. On January 1, 2019, Silverfox Co. issued it 9% bonds in the face amount of P4,000,000 which

mature on January 1, 2029. The bonds were issued for P3,755,000 to yield 105. Silverfox uses the

interest method of amortizing bond discount. Interest is payable annually on December 31. At

December 31, 2020, how much should be Silverfox’s unamortized bond discount?

a. P212,420 c. P221,410
b. P241,120 d. P211,240

Solution:

Interest Interest Discount Carrying

Date paid expense amortization value
01.01.19 -------- ---------- --------- 3,756,000
12.31.19 360,000 375,000 15,500 3,771,600
12.31.20 360,000 377,160 17,160 3,788,760

Face value P4,000,000

Carrying value, Dec. 31, 2020 ( 3,788,760)
Accounts payable, December 31, 2019 P 211,240

2. On January 1, 2016, Metallica Corp. issued its 5-year, 12% P5,000,000 face value convertib le

bond for P4,800,000. The bond is convertible into 80,000 ordinary shares with a par value of P50

per share and can be converted anytime from January 2017 to maturity. At the time of issue, the

market rate of interest for a similar instrument is 14%. Interest is payable every six months on

January 1 and July 1.

On July 1, 2017, the entire bond was converted into equity instrument by the issuance of 80,000

ordinary shares of the enterprise. Transaction cost of P50,000 were incurred in relation to the issue

of new shares.

PV of 7% for an ordinary annuity of 1 after 10 periods 7.024

PV of 7% after 10 interest period

What amount should be credited to the share premium account as a result of the conversion?

a. P343,819 c. P831,349

b. P418,339 d. P943,831

Solution:

Carrying value, Dec. 31, 2017 P4,728,549

Equity component 152,800
Total P4,881,349
Less: Par value of ordinary shares (80,000@P50) ( 4,000,000)
Excess P 881,349
Less: transaction cost ( 50,000)
Share Premium P 831,349

3. On June 30, 2014, Ibarra Company had outstanding 8%, P3,000,000 face value, 15-year bonds

maturing on June 30, 2021. Interest is payable on June 30 and December 31. The unamortized

balances on June 30, 104 in the bond discount and deferred bond issue costs accounts were

P105,000 and P30,00, respectively. Ibarra re-acquired all of these bonds at 94 on June 30, 2014,

and retired them. Ignoring income taxes, how much gain should Ibarra report on this early

extinguishments of debt?

a. P45,000 c. P75,000

b. P105,000 d. P180,000
Solution:

Retirement price P2,820,000

Less: Carrying value
Face value P3,000,000
Unamortized bond discount ( 105,000)
Unamortized bond issue cost ( 30,0000 2,865,000
Share Premium P 45,000

4. On January 1, 2020, Star Forming Nebula issued 3-year, 125, P1,000,000 bonds for P1,100,000.

Each P1,000 bond has two detachable warrants entitling the holder to purchase one share of Star

Forming Nebula with par value of P500 for P520. Without the warrants the bonds are selling at a

yield to maturity rate of 10%. On September 21, 2020, all of the share warrants were exercised.

How much of the issue price should be allocated to equity components?

a. P52,630 c. P53,620

b. P50,263 d. P56.230

Solution:
PV of Principal (P1,000,000*0751315) P 751,315
PV of Interest (P120,000*2.486852) 298,422
FV of Bonds without share warrants P1,049,737

Issue price P1,100,000

FV of Bonds without share warrants (1,049,737)
Equity component P 50,263

5. On January 1, 2013, Akabane Co. issued 10%, P3,000,000 bonds at a yield to maturity interest

of 18%. Principal and interest are due on December 31, 2016. The present value of bonds (issue

price) is
 a. P52,630 c. P53,620

b. P50,263 d. P56.230

Solution:

Face value P3,000,000

FV of an ordinary annuity of 1 at 10%, n=3 1.331
Maturity value of the bonds (future cash flow) P3,993,000

Future cash flows P1,100,000

PV of 1 at 18%, n=3 (1,049,737)
Present value bonds (issue price) P 50,263