FAR: 15 Long-Term Liability

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PAS 39 Financial Instruments: Recognition and Measurement
PFRS 9 Financial Instruments
IMPORTANT NOTES
BONDS
1. As to maturity: serial bonds mature by installments while term bonds have a single maturity date.
2. Debenture bonds are those without collateral security.
3. As to registration: registered bonds require that the bondholder be named in the books of the issuing
corporation while coupon or bearer bonds do not.
4. Junk bonds are high risk and high yield bonds issued by corporations in financial distress.
5. Treasury bonds are bonds issued by a corporation and reacquired by the same corporation. They are
presented as deduction from the balance of bonds payable.
6. Bond issuance costs:
A. are transaction costs directly attributable to the issue of bonds.
B. are treated in the same way as discount on bonds
C. are amortized through interest expense
D. Include printing and engraving cost, promotion cost, legal and accounting fee, registration fee,
commissions
7. Measurements:

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A. Bonds not designated at FV through profit or loss are measured

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- initially at fair value (present value) minus the issuance costs
- subsequently at AMORTIZED COST using the effective interest method

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B. Bonds designated at FV through profit or loss (either trading or under the fair value option) are

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measured
- initially at fair value and the bonds issuance costs are expensed outright

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- subsequently at FAIR VALUE with changes presented in profit or loss
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COMPOUND FINANCIAL INSTRUMENTS
1. A compound financial instrument contains both a liability and an equity element from the perspective of the
issuer.
2. Examples of CFI are bonds issued with share warrants and convertible bonds.
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3. Accounting for the instruments:

A. The liability and equity components are accounted for separately
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B. The price shall be allocated first to the liability component at an amount equal to the liability’s fair value
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C. The excess of the price over the amount to the liability shall be allocated to the equity component

QUESTIONS
INITIAL RECOGNITION OF BONDS PAYABLE
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Consider the following bond issuance of 5-year bonded instruments of Marjorie Company:
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Date of the bonds January 1, 2018

Semi-annual interest January 1 and July 1
payments
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Date of issuance of the March 1, 2018

bonds
Face value of bonds issued 12%, P 1,000 per unit (5,000
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units)
Issuance price 102 plus accrued interest

On March 1, 2018, Marjorie incurred P 42,000 in broker’s fees and taxes connected to the issuance of the
bonds. Use SLM of amortization for practical reasons.

1. Net proceeds from the issuance of the bonds is

A. P 5,058,000 B. P 5,100,000 C. P 5,158,000 D. P 5,200,000
2. The net premium is
A. P 42,000 B. P 142,000 C. P 158,000 D. P 58,000
3. Measurement of the bonds payable on March 1, 2018 is
A. P 5,058,000 B. P 5,100,000 C. P 5,158,000 D. P 5,200,000
4. What is entry upon initial recognition?

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5. If bonds are issued between interest dates, the entry on the books of the issuing corporation could include
a
A. Debit to Interest Payable C. Credit to Interest Expense
B. Credit to Interest Receivable D. Credit to Unearned Interest

6. Number of months to use for interest payable as of December 31, 2018 is

A. 12 months B. 10 months C. 4 months D. 2 months
7. Interest payable as of December 31, 2018
A. P 300,000 B. P 500,000 C. P 200,000 D. P 100,000

8. Amortization of net premium on the bonds for 2018 is

A. P 12,000 B. P 6,000 C. P 10,000 D. P 2,000
9. Number of months to use for interest expense in 2018
A. 12 months B. 10 months C. 6 months D. 2 months
10. Interest expense for 2018
A. P 490,000 B. P 588,000 C. P 600,000 D. P 500,000

11. What should be the bonds’ carrying value at December 31, 2018?
A. P 5,068,000 B. P 5,046,000 C. P 5,070,000 D. P 5,048,000

SELF-TEST QUESTIONS
12. Perk, Inc. issued P 500,000, 10% bonds to yield 8%. Bond issuance costs were P 10,000. How should Perk
calculate the net proceeds to be received from the issuance? Discount the bonds at the
A. Stated rate of interest
B. Market rate of interest

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C. Stated rate of interest and deduct the bond issuance costs
D. Market rate of interest and deduct the bond issuance costs

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13. 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

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A. Less the present value of all future interest payments at the market (effective) rate of interest
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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
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D. Plus the present value of all future interest payments at the rate of interest stated on the bond

14. Pippen Co. issued ten-year, 10% bonds that pay interest semiannually. The bonds are issued to yield 8%.
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One step in calculating the issue price of the bonds is to multiply the principal by the table value for
A. 10 periods and 10% from the present value of 1 table
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B. 10 periods and 8% from the present value of 1 table

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C. 20 periods and 4% from the present value of 1 table

D. 20 periods and 5% from the present value of 1 table

15. On July 1, 2018, Risen Co. issued 500 of its 10%, P 1,000 bonds at 99 plus accrued interest. The bonds are
dated April 1, 2018 and mature on April 1, 2028. Interest is payable semiannually on April 1 and October 1.
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What amount did Risen receive from the bond issuance?

A. P 507,500 B. P 500,000 C. P 495,000 D. P 482,500
(500K x 99%) + accrued interest for 3 months

16. Transaction costs include all of the following, except

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A. Fees and commissions paid to agents, advisers, brokers and dealers

B. Levies by regulatory agencies
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C. Transfer taxes and duties

D. Debt premiums or discounts
(note: review notes on PAS 41/PFRS 13 handout, don’t be lazy)

17. Which of the following costs constitutes transaction costs?

A. Financing costs C. Amortization of debt premiums
B. Holding costs D. Levies by security exchanges

18. Transaction costs shall be included in the initial measurement of financial assets or liabilities. For bonds
payable of the issuer, included means
A. Added to the CV of the bonds payable C. Presented as current liability
B. Deducted from the CV of the bonds payable D. Presented as current asset

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19. When the financial liabilities are held for trading purposes, bonds issue costs are
A. Added to the value of the bonds payable C. Expensed outright
B. Deducted from the value of the bonds payable D. Presented as part of OCI

20. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1,
the amount of cash received by the issuer will be
A. Decreased by accrued interest from June 1 to November 1
B. Decreased by accrued interest from May 1 to June 1
C. Increased by accrued interest from June 1 to November 1
D. Increased by accrued interest from May 1 to June 1

During year 1, Grand Co. issued 3,000 of its 9%, P 1,000 face value bonds at 101 1/2. In connection with the sale
of these bonds, Grand paid the following expenses:

Promotion costs P 20,000

Engraving and printing 25,000
Underwriters’ commissions 200,000

21. What amount should Grand record as bond issue costs to be expensed outright?
A. P0 B. P 220,000 C. P 225,000 D. P 245,000

22. What amount should Grand record as bond issue costs to be amortized over the term of the bonds?
A. P0 B. P 220,000 C. P 225,000 D. P 245,000

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SUBSEQUENT MEASUREMENT

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23. Which of the following measurements for bonds payable is correct?
Held for trading Under the FV option Cash flow model

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A. At FV, with changes to P/L At FV, with changes to OCI At FV, with changes to P/L

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B. At FV, with changes to P/L At FV, with changes to P/L At amortized cost
C. At FV, with changes to OCI At FV, with changes to P/L At amortized cost

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D. At FV, with changes to OCI rs e At FV, with changes to OCI At FV, with changes to P/L
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Paul issued P 1,000,000, 10%, 5-year bonds on January 1, 2018 for P 917,000. Face value of the 5-year bonds
was P 1,000,000 at a nominal rate of 10%. Paul incurred P 5,000 in bond issue costs. Effective rate of the bonds
on the issuance date is 12.5%. On December 31, 2018, interest has declined to 11.5% and the bonds would be
sold for P 954,000.
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The bonds are carried at amortized cost.

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24. What is the interest expense in 2018?

A. P 114,000 B. P 112,500 C. P 100,000 D. P 91,200
25. What is measurement of the bonds at December 31, 2018?
A. P 926,000 B. P 924,500 C. P 912,000 D. P 1,012,000
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Assume that Paul elected the FV option for the bonds.

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26. What is the interest expense in 2018?

A. P 114,000 B. P 112,500 C. P 100,000 D. P 91,200
27. What is the unrealized gain or loss in the 2018 income statement?
A. P 37,000 gain B. P 42,000 loss C. P 37,000 loss D. P 42,000 gain
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28. Jane Co. incurred costs of P 3,300,000 when it issued, on August 31, year 1, 5-year debenture bonds dated
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April 1, year 1.

What amount of bond issue expense should Jane report in its income statement for the year ended
December 31, year 1?
A. P 220,000 B. P 240,000 C. P 495,000 D. P 3,300,000

29. On January 1, 2018, Polite Co. sold 12% bonds with a face value of P 1,000,000. The bonds mature in five
years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for P 1,077,000
to yield 10%.

Using the effective interest method of amortization, interest expense for 2018 is
A. P 100,000 B. P 107,392 C. P 107,700 D. P 120,000

30. On January 1, 2018, Fritz received net proceeds of P 180,000 for the issuance of 12%, P 200,000 face value,
4-year bonds. SLM of amortizing discount is used. What is the interest expense for 2018?
A. P 19,000 B. P 29,000 C. P 25,000 D. P 24,000

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31. Lovah Co. has outstanding a 7%, ten-year P 500,000 face value bond. The bond was originally sold to yield
6% annual interest. Lovah uses the effective interest rate method to amortize bond premium, and does not
elect the fair value option for reporting financial liabilities. On June 30, year 1, the carrying amount of the
outstanding bond was P 525,000.

What amount of unamortized premium on bond should Lovah report in its June 30, year 2 statement of
financial position?
A. P 5,250 B. P 19,750 C. P 421,500 D. P 22,500

32. Which one of the following is a true statement for a firm electing the fair value option for valuing its bonds
payable?
A. The effective interest method of amortization must be used to calculate interest expense
B. Discount or premium is disclosed in the notes to the financial statements
C. The fair value of the bond and the principal obligation value must be disclosed
D. If the fair value option is elected, it must be applied to all bonds

33. Stone, Inc. issued bonds with a maturity amount of P 200,000 and a maturity ten years from date of issue. If
the bonds were issued at a premium, this indicates that
A. The effective yield or market rate of interest exceeded the stated (nominal) rate
B. The nominal rate of interest exceeded the market rate
C. The market and nominal rates coincided
D. No necessary relationship exists between the two rates

SELF-TEST QUESTIONS
On January 1, 2016, Hover, Inc. issued P 5,000,000, 10%, 10 year bonds that pay annual interest every January 1

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starting January 1, 2017. The bonds mature on January 1, 2026 and were issued to impute an interest of 8%
which is the prevailing interest on such date. Hover does not use FV option.

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Present values, 8%:
Annuity in arrears, 10 periods 6.71 Lumpsum, 10 periods 0.46

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Annuity in advance, 10 periods rs e 7.25
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Determine the following:
34. PV of the bonds on January 1, 2016
A. P 5,000,000 B. P 5,655,000 C. P 5,925,000 D. P 7,575,000
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35. Interest expense for 2016

A. P 500,000 B. P 452,400 C. P 565,500 D. P 400,000
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36. Interest payable as of December 31, 2016

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A. P 500,000 B. P 452,400 C. P 565,500 D. P 400,000

37. Amortized costs of the bonds on December 31, 2016
A. P 5,607,400 B. P 4,952,400 C. P 5,877,400 D. P 5,702,600

38. On November 1, 2018, Mason Corp. issued P 800,000 of its ten-year, 8% term bonds dated October 1, 2018.
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The bonds were sold to yield 10%, with total proceeds of P 700,000 plus accrued interest. Interest is paid
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every April 1 and October 1. Mason does not elect the fair value option for reporting financial liabilities.

What amount should Mason report for interest payable in its December 31, 2018 balance sheet?
A. P 17,500 B. P 11,667 C. P 16,000 D. P 10,667
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39. On July 1, 2018, Absent Co. received P 103,288 for P 100,000 face amount, 12% bonds, a price that yields
10%. What is the interest expense for 2018?
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A. P 6,197 B. P 6,000 C. P 5,164 D. P 5,000

40. On January 1, year 2, Melanie Corporation received P 107,720 for a P 100,000 face amount, 12% bond, a
price that yields 10%. The bonds pay interest semi-annually. Melanie elects the fair value option for valuing
its financial liabilities. On December 31, year 2, the fair value of the bond is determined to be P 106,460.
Melanie recognized interest expense of P 12,000 in its year 2 income statement.

What was the gain or loss recognized on the year 2 income statement to report this bond at fair value?
A. P 1,260 gain B. P 6,460 gain C. P 12,000 loss D. P 13,260 loss

41. The credit risk changes to financial liabilities designated at fair value through profit or loss shall be presented
in
A. Profit or loss C. Retained earnings
B. Other comprehensive income D. Share premium

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DERECOGNITION OF BONDS PAYABLE

42. When the bonds had P 500,000 in face value and P 20,000 in unexpired bonds issue costs, Nigel retired P
200,000 of them at a call premium of P 2,000. What is the gain or loss on extinguishing the bonds?
A. P 10,000 loss B. P 8,000 loss C. P 2,000 gain D. P 12,000 gain

43. On January 1, 2015, Tyrone Co. redeemed its 15-year bonds of P 1,500,000 par value for 102 . They were
originally issued on January 1, 2003 at 98 with a maturity date of January 1, 2018. The bond issue costs to
this transaction were P 90,000. Tyrone amortizes discounts, premiums, and bond issue costs using the
straight-line method.

What amount of loss should Tyrone recognize on the redemption of these bonds (ignore taxes)?
A. P 54,000 B. P 36,000 C. P 30,000 D. P 0

44. On January 1, 2013, Jockey Corp. issued 1,000 of its 10%, P 1,000 bonds for P 1,040,000. These bonds were
to mature on January 1, 2023 but were callable at 101 any time after December 31, 2016. Interest was
payable semi-annually on July 1 and January 1. On July 1, 2018, Jockey called all of the bonds and retired
them. Bond premium was amortized on a straight-line basis.

Jockey’s gain or loss in 2018 on this early extinguishment of debt was

A. P 30,000 gain B. P 12,000 gain C. P 10,000 loss D. P 8,000 gain

45. On January 1, 2012, Sally Corporation issued P 1,800,000 of 10% 10-year bonds at 103. The bonds are
callable at the option of Sally at 105. Sally has recorded amortization of the bond premium on the straight-
line method (which was not materially different from the effective interest method). On December 31, 2018,
when the fair market value of the bonds was 96, Sally repurchased P 400,000 of the bonds in the open

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market at 96. Sally has recorded interest and amortization for 2018.

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Gain or loss on reacquisition is
A. P 19,600 loss B. P 19,600 gain C. P 24,400 loss D. P 24,400 gain

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46. For a total amount of P 51,000, on July 1, 2018, Daenery’s retired P 50,000, 6%, 4-year bonds dated January
1, 2015. Interest is payable annually every January 1 and the bonds were originally issued at face value.
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What is the gain or loss on extinguishment of the liability?
A. P 1,000 loss B. P 500 gain C. P 2,000 gain D. P 1,500 loss
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47. What is the entry to record the extinguishment?

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48. The December 31, 2017, balance sheet of Dodge Corporation includes the following items:

9% bonds payable due December 31, 2026 P 1,400,000

Unamortized premium on bonds payable 37,800
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The bonds were issued on December 31, 2016, at 103, with interest payable on July 1 and December 31 of
each year. Dodge uses straight-line amortization. On March 1, 2018, Dodge retired P 560,000 of these bonds
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at 98 plus accrued interest.

What should Dodge record as a gain on retirement of these bonds?

A. P 26,320 B. P 15,120 C. P 28,000 D. P 26,040
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49.The 12% bonds payable of Lynn Co. had a carrying amount of P 936,000 on December 31, 2017. The bonds,
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which had a face value of P 900,000, were issued at a premium to yield 10%. Lynn uses the effective interest
method of amortization. Interest is paid on June 30 and December 31. On June 30, 201 8, several years before
their maturity, Lynn retired the bonds at 104 plus accrued interest.

The loss on retirement, ignoring taxes, is

A. P0 B. P 36,000 C. P 11,160 D. P 7,200

50. Treasury bonds should be shown on the balance sheet as

A. An asset
B. A deduction from bonds payable issued to arrive at net bonds payable and outstanding
C. A reduction of stockholders' equity
D. Both an asset and a liability

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51. A ten-year bond was issued in 2016 at a discount with a call provision to retire the bonds. When the bond
issuer exercised the call provision on an interest date in 2018, the carrying amount of the bond was less than
the call price. The amount of bond liability removed from the accounts in 2018 should have equaled the
A. Call price C. Face amount less unamortized discount
B. Call price less unamortized discount D. Face amount plus unamortized discount

COMPOUND FINANCIAL INSTRUMENTS

52. Transaction costs incurred on the issue of compound financial instrument are
A. Allocated in proportion to the allocation of proceeds
B. Allocated in proportion to the fair value of the liability and equity components
C. Expensed outright
D. Included in full in the measurement of the financial liability component

For the year, a total of P 600,000 is received for a P 500,000, 12%, 5-year convertible bonds. Without the
conversion feature, the bonds value at P 450,000, while the warrants value at P 300,000. For this issuance, P
40,000 transaction costs are incurred.

Determine the following:

53. Measurement of the liability component
A. P 500,000 B. P 450,000 C. P 410,000 D. P 420,000
54. Measurement of the equity component
A. P 300,000 B. P 50,000 C. P 150,000 D. P 140,000

The following relates to Channing’s issuance of its 8%, 5,000, P 1,000 face value, 5-year bonds with detachable
share warrants:

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Date of issuance December 31, 2017

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Warrant per bond 1 warrant = 10 ordinary

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shares
Option/exercise price of warrant P 120 per share

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Ordinary share per unit rs e P 100 par

The bonds were issued at 110.

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Market value of bonds ex- P 4,800,000
warrants
Market value of warrants 1,200,000
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On December 31, 2018, the holders exercised all the warrants. Channing incurred P 10,000 in issuing the
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shares.

Determine the following:

55. Entry to recognize the issuance on December 31, 2017
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56. Entry to recognize the exercise of the warrants on December 31, 2018
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57. The net effect to equity upon the exercise of the warrants
A. P 5,990,000 B. P 6,700,000 C. P 5,000,000 D. P 6,000,000

The following relates to Dwayne’s issuance of its 6%, 5,000, P 1,000 face value, 4-year bonds convertible into
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ordinary shares at the option of the holders:

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Date of issuance January 1, 2017

Share conversion per bond 1 bond = 100 ordinary
shares
Ordinary share per unit P 5 par

The bonds were issued at 110. For simplicity, premiums are amortized on straight line basis.

Market value of bonds ex-conversion P 4,600,000

option
Market value of conversion option 1,400,000

Determine the following:

58. Entry to issue the bonds on January 1, 2017

59. Entry to convert the bonds on December 31, 2018

60. The net increase to equity upon conversion of the bonds

A. P 5,700,000 B. P 3,200,000 C. P 4,800,000 D. P 5,000,000

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On July 1, year 1, after recording interest and amortization, Faith Co. converted P 1,000,000 of its 12% convertible
bonds into 50,000 shares of P 1 par value ordinary shares. On the conversion date the carrying amount of the
bonds was P 1,300,000, the market value of the bonds was P 1,400,000, and Faith’s ordinary shares was
publicly trading at P 30 per share.

Determine the:
61. Additional paid-in capital (share premium) as a result of the conversion
A. P 950,000 B. P 1,250,000 C. P 1,350,000 D. P 1,500,000

62. Net increase to equity as a result of the conversion

A. P 1,300,000 B. P 1,400,000 C. P 1,000,000 D. P 1,250,000

63. On March 31, 2016, Ashley, Inc.’s bondholders exchanged their convertible bonds for ordinary shares. The
carrying amount of these bonds on Ashley’s books was less than the market value but greater than the par
value of the ordinary shares issued.

Which of the following statements correctly states an effect of this conversion?

A. Stockholders’ equity is increased C. Retained earnings is increased
B. Share premium is increased D. An extraordinary loss is recognized

CLASSIFICATION OF BONDS
64. Heim Co.’s December 31, 2016 statement of financial position contained the following items:

Unsecured

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9.375% registered bonds (P 25,000 maturing annually beginning in P 275,000

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2018)
11.5% convertible bonds, callable beginning in 2022, due 2034 125,000

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Secured
9.875% guaranty security bonds, due 2025 275,000

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10.0% commodity backed bonds (P 50,000 maturing annually
rs e 200,000
beginning in 2019)
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What are the total amounts of serial bonds and debenture bonds, respectively?
A. P 475,000; P 400,000 C. P 450,000; P 400,000
B. P 475,000; P 125,000 D. P 200,000; P 650,000
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65. Blue Corp.’s December 31, year 1 financial statements contained the following items in the long-term
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liabilities section:
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9 3/4% registered debentures, callable in year 12, due in year 17 P 700,000

9 1/2% collateral trust bonds, convertible into ordinary shares beginning in year 10 due 600,000
in year 20
10% subordinated debentures (P 30,000 maturing annually beginning in year 7) 300,000
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What is the total amount of Blue’s term bonds?

A. P 600,000 B. P 700,000 C. P 1,000,000 D. P 1,300,000

A P 50,000, 5-year, 12% bond mature in 5 equal annual installments at the end of each year. At the time of
issuance, the bonds are trading at 10%. The effective interest method is used.
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PV schedule:
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PV of 1 at 10% for 1 period 0.9091 PV of 1 at 10% for 4 periods 0.6830

PV of 1 at 10% for 2 periods 0.8264 PV of 1 at 10% for 5 periods 0.6209
PV of 1 at 10% for 3 periods 0.7513

66. What is the issue price of the bonds?

A. P 54,115 B. P 51,364 C. P 50,925 D. P 52,417
67. What is the amortized cost of the bonds at the end of the first year?
A. P 40,408 B. P 42,293 C. P 43,591 D. P 41,659
68. What is the amortized cost of the bonds at the end of the second year?
A. P 32,078 B. P 31,026 C. P 30,091 D. P 29,052

69. Complete the following partial amortization table:

Date Principal 12% 10% Amortization Amortized cost
Y1, beg
Y1 end.
Y2 end.

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70. A P 1,000,000, 4-year, 12% bond mature in 4 equal annual installments at the end of each year. The bonds
were issued at face, except that the issuer incurred P 50,000 in bond issue costs. Any discount or premium
would be amortized on a straight-line basis, using the bond outstanding method.

What is the interest expense in year 2?

A. P 90,000 B. P 120,000 C. P 75,000 D. P 105,000
What is the interest expense in year 3?
A. P 60,000 B. P 72,500 C. P 50,000 D. P 70,000

SELF-TEST QUESTIONS
71. Bonds held for trading are measured at
A. Amortized cost B. Face value C. Fair value D. Arbitrary amounts

72. Debentures are

A. Unsecured bonds (as to principal) C. Fully-secured bonds
B. Unsecured bonds (as to principal and interest) D. Bonds with very high interest rate

73. On its December 31, 2017, Doris Corporation reported bonds payable of P 3,600,000 and related unamortized
bond issue costs of P 192,000. The bonds had been issued at par. On January 2, 201 8, Doris retired P
1,800,000 of the outstanding bonds at par plus a call premium of P 42,000.

What amount should Doris report in its 2018 profit or loss as loss on extinguishment of debt?
A. P0 B. P 42,000 C. P 96,000 D. P 138,000

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74. Bright issued 2,000 P 1,000 convertible bonds at par, with an annual interest rate of 6% when the market was
8%. The bonds are due in 5 years and each P 1,000 bond is convertible into 3 shares of ordinary shares.

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At what amount would Bright record the liability component of the bond?
A. P 479,125 B. 1,840,285 C. P 2,000,000 D. P 2,006,000

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Compute for the PV of the bonds rs e
75. Share warrants outstanding and conversion option on bonds payable are presented preferably as part of
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A. Equity - retained earnings C. Equity - share premium
B. Liability - premium on bonds payable D. Profit or loss

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15 - OCTOBER 2018
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