MARI

Part I. Issuance of Bonds

Instruction: Determine the bond price for the following scenarios.
A. Premium Situation
On January 1, 2015, a company issues a 5-year, P1,000,000, 15% bonds. The effective interest rate for
similar bonds is 12%. Interest on the bonds is payable semi-annually on June 30 and December 31. The
issue price of the bonds is equal to the present value of the maturity value plus the present value of the
periodic interest payment, both discounted at the market rate of interest at the date the bonds are
issued.

The bond price upon issuance is ______________________

B. Discount Situation
Assume, a reverse scenario regarding interest rates. On January 1. 2015, a company issues a 5-year,
P1,000,000,
12% bonds. The effective interest rate for similar bonds is 15%. Interest on the bonds is payable semi-
annually on June 30 and December 31. The bond price upon issuance is ______________________

Part II. Accrued Interest on Bonds Issued Instruction: Complete the entries.
Assume that 1,000 bonds of P1,000 face value, dated January 1, 2015 were sold on March 1, 2015 at 112
plus accrued interest - The 151 bonds pay interest at 15% semi-annually on June 30 and December 31.

The issuance of the bonds on March 1, 2015 is recorded as

Dr. Cash __________

Cr. Premium on Bonds Payable __________
Cr. Bonds Payable __________
Cr. Interest Payable __________

The payment of accrued interest on June 30 (the first periodic interest payment) is then recorded as
follows:

Dr. Interest Expense __________

Dr. Interest Payable __________
Cr. Cash __________

Part III. Transaction Costs on Issue of Bonds

Instruction: Determine the effective interest rate using approximation method and trial and error.
To illustrate accounting for bond issue costs, assume that XYZ sells its P1,000,000 face value, five year,
12% bonds on the bond date, January 1, 2015. The bonds were sold at 110. Bond issue costs of P15,000,
consisting of promotions, engraving, printing and underwriter's commission, were incurred and paid by
the company. The entries for the issuance of the bonds and the payment of bond issue costs are as
follows:
Dr. Cash 1,100,000
Cr. Premium on Bonds Payable 100,000
Cr. Bonds Payable 1,000,000

Dr. Premium on Bonds Payable 15,000

Cr. Cash 15,000

After recording the payment of bond issue costs, the premium on bonds payable is reduced to P85,000.
The carrying amount of the liability on issue date is, therefore, P1,085,000, which is the basis for the
computation of the bond yield. The effective interest rate is ______________________.

Part IV. Premium Situation

Instruction: Complete the table.
Use the information on Part I. To recall, P1,000,000, 5-year, 15% bonds were issued on January 1, 2015
for P1,110,401, an issue price that provides a yield of 12%. Interest on the bonds is payable semi-
annually on June 30 and December 31.

For the years 2015 and 2016, the statement of financial position on December 31, 2015 and December
31, 2016 would show bonds payable supported by ledger balances as follows:
12/31/15 12/31/16
Bonds Payable
Premium on Bonds Payable
Carrying amount

The profit or loss section of the statement of comprehensive income for the years ended December 31,
2015 and 2016 will show interest expense as follows:

12/31/15 12/31/16
January 1 to June 30
July 1 to December 31
Total interest expense

Part V. Discount Situation

Instruction: Complete the table.
Assume that 12% bonds were sold for P917,039, dated January 1, 2015. The issuer incurred transaction
costs (bond issue costs) of P20,000. Interest is payable semi-annually. The yield on the net proceeds is
computed at 15%. The table below shows the amortization of bond discount under the effective interest
method for the entire life of the bonds.

For the years 2015 and 2016, the statement of financial position on December 31, 2015 and December
31, 2016 would show bonds payable at carrying amounts as follows:
 12/31/15 12/31/16
Bonds Payable
Less: Discount on Bonds Payable
Carrying amount

The profit or loss section of the statement of comprehensive income for the years ended December 31,
2015 and 2016 shall show interest expense of as follows:
2015 2016
January 1 to June 30
July 1 to December 31
Total interest expense

In contrast to the effect of premium amortization, discount amortization increases the carrying value of
the bonds, such that on maturity date, the carrying value will equal the face value.

Notice the following trends using the effective interest method when bonds are sold at a discount:

1. Interest expense increases each period, because the carrying value also increases as the
discount is amortized.
2. The amount of the discount amortization increases each period as the difference between the
nominal interest and the effective interest becomes wider.

Part VI. When the Bond Year Does Not Coincide with the Accounting Year
Instruction: Fill the required details.
Assume that 12% bonds were sold for P917,039, dated March 1, 2015. The issuer incurred transaction
costs (bond issue costs) of P20,000. Interest is payable semi-annually. The yield on the net proceeds is
computed at 15%. The table below shows the amortization of bond discount under the effective interest
method for the entire life of the bonds.
A. The total interest expense for the year 2015 is _____________________.
B. The interest expense for the year 2016 is _____________________.
C. The carrying amount of the bonds at December 31, 2016 _____________________.

Part VII. Retirement of Bonds

Instruction: Fill the required details.
Continuing the details in Part IV, the bonds have face value of P1,000,000 and bear annual interest rate
of 15%, with interest payable semi-annually every June 30 and December 31. The bonds were sold at a
price that yield 12%.

Assume that these bonds were retired by the issuer on October 31, 2018 @ 102 plus accrued interest
Assume further that the company prepared appropriate entries every interest payment dates until June
30, 2018.

Since the last payment of interest and amortization of premium are made on June 30, 2018, a
proportionate interest expense should be recorded from July 1 through October 31, 2018.
A. The carrying amount of the bonds on October 31, 2018 is _________________.
B. To retire the bonds, the amount to be paid by the issuer is _________________.
C. The gain on retirement of the bonds results is _________________.

Part VIII. Bonds with Non-Detachable Share Warrants Issued

Instruction: Fill the required details.

A. Market Price of the Bonds is readily available

On December 31, 2015, ABC Corporation issued 1.000 of its 10%, 10-year, P1,000 face value bonds with
non-detachable share warrants at 103. Each bond carried two detachable warrants, each warrant
entitling the holder for one share of ABC's P20 par value ordinary share at a specified option price of P25
per share. Immediately after issuance, the bond without warrant sells at 97 and each ordinary share sells
at 575.

A. The price assigned to warrants upon issuance is _________________.

B. When all the share warrants are subsequently exercised, the following entry will be made:

Cash ___________
Warrants Outstanding ___________
Ordinary Share Capital ___________
Share Premium - Ordinary ___________

The account Share Warrants Outstanding is reported as part of additional paid in capital in the equity
section of the statement of financial position.

B. Market Price of the Bonds is not readily available

Instruction: Fill the required details.
When the market price of the bonds without the warrants is not readily determinable, it shall be
computed by discounting the maturity value and periodic interest at the market rate of interest for
similar debt instruments without the equity component.

Assume that P5,000,000, 8% ten-year bonds were issued on bond issue date at 105. Each P1,000 bond
carried two non-detachable share warrants, each warrant entitling the holder to purchase one share of
the company's P200 par value ordinary share capital at P250 per share. Similar instruments without any
equity component are being traded at prices that yield 10%. Interest is payable annually.

A. The price assigned to warrants upon issuance is _________________.

Part IX. Convertible Bonds

Instruction: Fill the required details.
To illustrate, assume that XYZ Corporation issued P5,000,000, 14% bonds at 105 an bond issue date.
Each P1,000 bond is convertible into 5 shares of P100 par value ordinary shares. Without the conversion
feature, the bonds would have sold at 102.
Before maturity date of the bonds, holders of 2,000,000 face value bonds exercised their conversion
privilege when each ordinary share sells for P130. Further assume that on this date, the balance of
premium on bonds payable is P30,000.

A. The paid in capital arising from bond conversion privilege upon issuance is _________________.

B. The conversion of bonds is recorded as follows:

Bonds Payable _________

Premium on Bonds Payable _________
Share Premium – Bond Conversion Privilege _________
Ordinary Share Capital _________
Share Premium - Ordinary _________

Part X. Retirement of Convertible Bonds

Instruction: Fill the required details.
Assume that P1,000,000 of the bonds issued in Part IX were retired when the total unamortized
premium was
P40.000. Further assume that interest payment and premium amortization have been recorded
properly. The P1,000,000 bonds were retired at 105. Without the conversion privilege, these bonds
would have sold at this date at 103.

A. The gain or loss on retirement of bonds is _________________.

B. The additional credit to equity (additional paid in capital) from unexercised bond conversion
privilege is _________________.
C. The following entry records the retirement of the convertible bonds:
Bonds Payable _________
Premium on Bonds Payable _________
Loss on Retirement of Bonds _________
Share Premium – Bond Conversion Privilege _________
Cash _________
Share Premium – Unexercised Bond Conversion Privilege _________

Part XI. Convertible Bonds (Not readily quoted in the market)

Instruction: Fill the required details.
Assume that on January 1, 2015, DEF issued 10-year, P2,000,000 convertible bonds for total
consideration of P2,400,000. The bonds pay interest at 10% annually every December 31. Each P1,000
bond is convertible into 4 shares of P100 par ordinary share. Similar instruments without the conversion
feature would have sold to yield 8%.

A. The price assigned to conversion feature is _________________.

B. The entry to record the issuance is

Cash _________
Bonds Payable _________
Premium on Bonds Payable _________
Share Premium – Bond Conversion Privilege _________
Part XII. Serial Bonds
Instruction: Complete the entries.
P5,000,000, 12% bonds were issued on bond issue date, January 1, 2015. The principal of the bonds is
paid in series of P1,000,000 annually, together with any accrued interest on the outstanding bonds, each
December 31, starting December 31, 2015. The bonds were issued for P5,241,834, a price that yields
10%.

The following are the entries for years 2015 and 2016:
2015
Jan. 1 Cash _________
Bonds Payable ________
_
Premium on Bonds Payable ________
_
Issuance of serial bonds

Dec. 31 Interest Expense _________

Premium on Bonds Payable _________
Cash ________
_
Periodic interest

Dec. 31 Bonds Payable _________

Cash ________
_
First installment on principal

2016
Dec. 31 Interest Expense _________
Premium on Bonds Payable _________
Cash ________
_
Periodic interest
 Dec.31 Bonds Payable _________
Cash ________
_
Second installment on principal

Similar entries shall be prepared for years 2017 through 2019. At December 31, 2019, after recording
the last installment payment of the bond liability, both the bonds payable account and the related
premium shall have been brought to zero balances.

Part XIII. Interest-Bearing Notes Payable

Instruction: Complete the entries and tables.

Case 1. Principal matures in Lump sum, interest is payable periodically

Assume that on March 31, 2015, the MNO Corporation issued a three-year P4,000,000 12% promissory
note for a machinery purchased. The interest on this note is payable annually on its anniversary date.
The company reports on a calendar year. The following are the entries for years 2015 through 2018.
2015
Mar. 31 Machinery _________
Notes Payable ________
_

Dec. 31 Interest Expense _________

Interest Payable ________
_

2016
Mar. 31 Interest Expense _________
Interest Payable _________
Cash ________
_

Dec. 31 Interest Expense _________

Interest Payable ________
_
 2017
Mar. 31 Interest Expense _________
Interest Payable _________
Cash ________
_

Dec. 31 Interest Expense _________

Interest Payable ________
_

2018
Mar.31 Interest Expense _________
Interest Payable _________
Notes Payable _________
Cash ________
_

On December 31, 2015 and 2016, the balance of the Notes Payable is classified as non-current liability.
The balance of Interest Payable is classified as current liability since the interest is payable periodically.
On December 31, 2017, both the Notes Payable and Interest Payable accounts are classified as current
liabilities since the promissory note matures three months from the end of the reporting period.

Case 2. Interest-bearing Notes Payable (Principal and Interest are Payable Periodically)
On March 31, 2015, the ABC Corporation issued a P3,000,000 12% promissory note for a machinery
purchased. Equal principal amount of P1,000,000 plus interest on the unpaid balance of the principal are
payable annually every March 31 starting March 31, 2016. Thus, the following are the amounts to be
paid during 2016 through 2018.
Due Date Principal Due Interest Due Total Amount Due
March 31, 2016 1,000,000 3M x 12% = P360.000 1,360,000
March 31, 2017 1,000,000 2M x 12% = 240,000 1,240,000
March 31, 2018 1,000,000 1M x 12% = 120,000 1,120,000

Assuming that the company reports on a calendar year basis, the following are the entries for years
2015 through 2018.

2015
Mar. 31 Machinery _________
Notes Payable _________
 Dec. 31 Interest Expense _________
Interest Payable _________
360,000 x 9/12 = 270,000

2016
Mar. 31 Notes Payable _________
Interest Expense _________
Interest Payable _________
Cash ________
_

Dec. 31 Interest Expense _________

Interest Payable ________
_
240,000 x 9/12 - 180,000

2017
Mar. 31 Notes Payable _________
Interest Expense _________
Interest Payable _________
Cash ________
_

Dec. 31 Interest Expense _________

Interest Payable ________
_

2018
Mar.31 Notes Payable _________
Interest Expense _________
Interest Payable _________
Cash ________
_

At the end of each reporting period, the amount of Interest Payable and the portion of the Notes
Payable that is due within the succeeding year shall be classified as current liabilities.
Thus, the statement of financial position at December 31, 2015, 2016, and 2017, the Notes Payable and
Interest Payable shall be classified as follows:

2015 2016 2017

Current Liabilities
Notes Payable _________ _________ _________
Interest Payable _________ _________ _________
Non-current Liabilities
Notes Payable _________ _________ _________