Assessment Task 3

PROBLEM SOLVING
Instructions: Solve for the following problems. Provide your solutions.

1. On December 31, 2021, Extract Company issued a P40,000,000 5-year of P1 per value each at an
issue price of P0.90 per unit. The bond carries a coupon interest of 6% and interest is payable on
December 31 each year. Cost of issuing the bond, which included underwriting fees, totaled
P2,000,000. The prevailing market rate interest for similar risk class bonds on December 31, 2021 was
10%.

Question 1. What is the initial carrying value of the bond on December 31, 2021 assuming Extract
Company has the policy to measure the bond at fair value to profit or loss?

Initial carrying value at amortized cost

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Bonds Payable P40,000,000

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Less: Discounts on Bonds Payable (P40,000,000 x 10 %) 4,000,000

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Carrying Value at Fair Value P36,000,000

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Question 2. What is the initial carrying value of the bond on December 31, 2021 assuming Extract
Company has the policy to measure the bond at amortized cost model?
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Initial Carrying Value at Amortized Cost

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Carrying Amount at Fair Value P36,000,000

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Less: Cost of issuing bonds 2,000,000

Initial Carrying Value at Amortized Cost P34,000,000

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2. Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2021. The bonds pay
interest semi-annually on June 30 and December 31. The bonds are issued to yield5%. What are the
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proceeds from the bond issue?

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2.5% 3.0% 5.0% 6.0%

Present value of
a single sum for 5 .88385 .86261 .78353 .74726
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periods

Present value of
a single sum for .78120 .74409 .61391 .55839
10 periods

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 Present value of
annuity for 5
periods 4.64583 4.57971 4.32948 4.21236

Present value of
annuity for 10 8.75206 8.53020 7.72173 7.36009
periods

PV Factor Present Value

Principal P5,000,000 x .78120 P3,906,000

Interest 150,000 x 8.75206 1,312,809

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Proceeds from the issue P5,218,809

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Interest: P5,000,000 x 6% x ½ = P150,000

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3. On July 1, 2021, Glamorous Corporation issued 11% bonds in the face amount of P2,000,000 that
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mature on June 30, 2025. The bonds were issued to yield 5% and interest is payable every January 1
and July 1. Glamorous Corporation uses the effective interest method of amortizing bond premium or
discount. The following are the present value factors.
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PV of 5% for an ordinary annuity of P1 after 8 periods 6.463

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PV of 5% after 8 interest period .677

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Present Value of Face Amount (P2,000,000 x .677) P1,354,000

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Present Value of the Interest (P2,000,000 x 5.5% x 6.436) 710,930

Carrying Value of the Debt, 12/31/21 P2,064,930

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Bonds Interest 11% / 2 = 5.5 % for semi-annually

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4. At the beginning of 2020. Wallace Corporation issued 10% bonds with a face value of P900,000.
These bonds mature in the five years, and interest is paid semi-annually on June 30 and December 31.
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The bonds were sold for P833,760 to yield 12%. Wallace uses a calendar-year reporting period. Using
the effective – interest method of amortization, what amount of interest expense should be reported
for 2020? (Round your answer in the nearest peso).

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 Interest Received (P900,000 x 10% x 6/12) P45,000

Interest Income (P833,760 x 12% x 6/12) P50,026

Date Interest Received Interest Income/Expense Discount Amortization Carrying Amount

1/1/20 - - - P833,760

6/30/20 P45,000 P50,026 P5,026 838,786

12/31/20 45,000 P50,327 5,327 844,113

Interest Expense, 12/31/2020 P100,453

5. On January 1, 2020, Monterey Company issues 100 million unsecured bonds at an issue price 95
cents per unit. Transaction costs, that include underwriting fee, amount to P500,000. The bonds pay
interest of 4% at the end of the first year and thereafter interest payment increases at 1% per year. The

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bond mature on December 31, 2024 are redeemable at the nominal value of P1 each. At the date of

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issue, Monterey Company has a credit rating of “ABB” and its market interest rate is 7.09%. But due to

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the imputation of the transaction cost the effective rate of the debt is 7.21%. What is the amortized

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cost of the debt as of December 31, 2022?

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Date Interest Received Interest Income Discount Amortization Carrying Amount

1/1/20 - - - P94,500,000
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12/31/20 P4,000,000 P6,813,450 P2,813,450 97,313,450

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12/31/21 5,000,000 7,016,300 2,016,300 99,329.000

12/31/22 6,000,000 7,161,675 1,161,675 P100,491,425

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6. On January 1, 2020, Trader Company issued its 8%, 4 year convertible debt instrument with a face
amount of P6,000,000 for P5,900,000. Interest is payable every December 31 of each year. The debt
instruments is convertible into 50,000 ordinary shares a par value of P100. When the debt instruments
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were issued, the prevailing market rate of interest for similar debt without conversion option is 10%.
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PV of 10% for ordinary annuity of P1 after 4 periods 3.169865

PV of 10% after 4 interest period .683013
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1. What is the amortized cost of the debt as of December 31, 2022?

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 Present Value of Face Amount (P6,000,000 x .683013) P4,098,078

Present Value of the Interest (P6,000,000 x 8% x 3.169865) 1,521,535

Bad Debt, 12/31/22 P5,619,613

2. What is the amount of interest expense for the year ended December 31, 2021?

Subsequent 8% 10%

Date Interest Received Interest Expense Discount Amortization Carrying Amount

1/1/20 - - - P5,900,000

12/31/20 P480,000 P590,000 P110,000 6,010,000

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12/31/21 480,000 P601,000 121,000 6,131,000

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Interest Expense, 12/31/2021 P1,191,000

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7. On January 1, 2020, Shredder Company Issued its 10%, 4-year convertible debt instrument with a
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face amount of P3,000,000 for P3,500,000. Interest is payable every December 31 of each year. The
debt instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt
instrument is convertible into equity from the time of issue until maturity. When debt instruments
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were issued, the prevailing market rate of interest for similar debt without conversion option is 8%.
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PV of 8% for an ordinary annuity of P1 after 4 periods 3.3121268

PV of 8% after 4 interest periods .7350298
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On December 31, 2022, Shredder Company converted all the debt instruments by issuing 30,000
ordinary shares.
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1. What is the carrying value of the compound instruments as of December 31, 2022?
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Present Value of Face Amount (P3,000,000 x .7350298) P2,205,089

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Present Value of the Interest (P3,000,000 x 10% x 3.3121268) 993,638

Carrying Value of the Compound Intrument, 12/31/22 P3,198,727

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 2. What is the amount of interest expense should the company report in the Dec. 31, 2021 profit or
loss?

Interest Received (P3,000,000 x 10% x 12/12) P300,000

Interest Income (P3,500,000 x 8% x 12/12) P280,000

Subsequent 10% 8%

Date Interest Received Interest Expense Discount Amortization Carrying Amount

1/1/20 - - - P3,500,000

12/31/20 P300,000 P280,000 P20,000 3,520,000

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12/31/21 300,000 P281,600 18,400 3,584,400

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Interest Expense, 12/31/2021 P561,600

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