PROBLEM

1. Two companies are financed as follows:

X Co. Y Co.
Bonds payable, 9% issued at face P5,000,000 P3,000,000
Common stock, P20 par 3,000,000 3,000,000

Income tax is estimated at 40% of income.

Determine for each company the earnings per share of common stock, assuming that the income
before bond interest and income taxes is P1,500,000 each.
ANS:
X Co. Y Co.
Earnings before interest and taxes P1,500,000 P1,500,000
Deduct interest on bonds      450,000      270,000
Income before income tax P1,050,000 P1,230,000
Deduct income tax      420,000      492,000
Net income P   630,000 P   738,000
Earnings per share on common stock P         4.20 P  4.92

DIF: Easy OBJ: 13-01

NAT: AACSB Analytic | AICPA FN-Measurement

2.
(a) Prepare the journal entry to issue P200,000 bonds which sold for P195,000.
(b) Prepare the journal entry to issue P200,000 bonds which sold for P204,000.

ANS:
(a)
Cash 195,000
Discount on Bonds Payable 5,000
Bonds Payable 200,000

(b)
Cash 204,000
Premium on Bonds Payable 4,000
Bonds Payable 200,000

DIF: Easy OBJ: 13-03

NAT: AACSB Analytic | AICPA FN-Measurement

631
 Chapter 13/Bonds Payable and Investments in Bonds  632

3. Doe Co. issued P10,000,000 of 30-year, 8% bonds on May 1 of the current year, with interest
payable on May 1 and November 1. The fiscal year of the company is the calendar year. Journalize
the entries to record the following selected transactions for the current year:

May 1 Issued the bonds for cash at their face amount.

Nov. 1 Paid the interest on the bonds.
Dec. 31 Recorded accrued interest for two months.

ANS:
May 1 Cash 10,000,000
  Bonds Payable 10,000,000

Nov. 1 Interest Expense 400,000

  Cash 400,000

Dec. 31 Interest Expense 133,333

  Interest Payable 133,333

DIF: Moderate OBJ: 13-03

NAT: AACSB Analytic | AICPA FN-Measurement

4. On the first day of the current fiscal year, P1,500,000 of 10-year, 8% bonds, with interest payable
semiannually, were sold for P1,225,000. Present entries to record the following transactions for the
current fiscal year:

(a) Issuance of the bonds.

(b) First semiannual interest payment.
(c) Amortization of bond discount for the year, using the straight-line method of amortization.

ANS:
(a)
Cash 1,225,000
Discount on Bonds Payable 275,000
Bonds Payable 1,500,000

(b)
Interest Expense 60,000
Interest Payable 60,000

(c)
Interest Expense 27,500
Discount on Bonds Payable 27,500

DIF: Moderate OBJ: 13-03

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  633

5. On the first day of the current fiscal year, P2,000,000 of 10-year, 7% bonds, with interest payable
annually, were sold for P2,125,000. Present entries to record the following transactions for the
current fiscal year:

(a) Issuance of the bonds.

(b) First annual interest payment.
(c) Amortization of bond premium for the year, using the straight-line method of amortization.

ANS:
(a)
Cash 2,125,000
Premium on Bonds Payable 125,000
Bond Payable 2,000,000

(b)
Interest Expense 140,000
Cash 140,000

(c)
Premium on Bonds Payable 12,500
Interest Expense 12,500

DIF: Moderate OBJ: 13-03

NAT: AACSB Analytic | AICPA FN-Measurement

6. On August 1, Stuart Co. issued P1,300,000 of 20-year, 9% bonds, dated August 1, for P1,225,000.
Interest is payable semiannually on February 1 and August 1. Present the entries to record the
following transactions for the current year:

(a) Issuance of the bonds.

(b) Accrual of interest and amortization of bond discount for the year, on December 31, using
the straight-line method.

ANS:
(a)
Cash 1,225,000
Discount on Bonds Payable 75,000
Bonds Payable 1,300,000

(b)
Interest Expense 48,750
Interest Payable 48,750

Interest Expense 1,562.50

Discount on Bonds Payable 1,562.50

DIF: Moderate OBJ: 13-03

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  634

7.

On the first day of the current fiscal year, P1,000,000 of 10-year, 7% bonds, with interest payable
semiannually, were sold for P1,050,000. Present entries to record the following transactions for the
current fiscal year:

(a) Issuance of the bonds.

(b) First semiannual interest payment.
(c) Amortization of bond premium for the year, using the straight-line method of amortization.

ANS:
(a)
Cash 1,050,000
Premium on Bonds Payable 50,000
Bonds Payable 1,000,000

(b)
Interest Expense 35,000
Cash 35,000

(c)
Premium on Bonds Payable 5,000
Interest Expense 5,000

DIF: Moderate OBJ: 13-03

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  635

8. Present entries to record the selected transactions described below:

(a) Issued P3,250,000 of 10-year, 8% bonds at 97.

(b) Amortized bond discount for a full year, using the straight-line method.
(c) Called bonds at 98. The bonds were carried at P3,175,500 at the time of the redemption.

ANS:
(a)
Cash 3,152,500
Discount on Bonds Payable 97,500
Bonds Payable 3,250,000

(b)
Interest Expense 9,750
Discount on Bonds Payable 9,750

(c)
Bonds Payable 3,250,000
Loss on Redemption of Bonds 9,500
Discount on Bonds Payable 74,500
Cash 3,185,000

DIF: Moderate OBJ: 13-03 | 13-04

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  636

9.

A company issued P2,000,000 of 30-year, 8% callable bonds on April 1, 2015, with interest payable
on April 1 and October 1. The fiscal year of the company is the calendar year. Journalize the entries
to record the following selected transactions:

2015
Apr. 1 Issued the bonds for cash at their face amount.
Oct. 1 Paid the interest on the bonds.

2019
Oct. 1 Called the bond issue at 103, the rate provided in the bond indenture. (Omit entry for
payment of interest.)

ANS:
2005
Apr. 1 Cash 2,000,000
  Bonds Payable 2,000,000

Oct. 1 Interest Expense 80,000

  Cash 80,000

2009
Oct. 1 Bonds Payable 2,000,000
Loss on Redemption of Bonds 60,000
  Cash 2,060,000

DIF: Moderate OBJ: 13-03 | 13-05

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  637

10. Arthur Corp. issued P2,500,000 of 20-year, 9% callable bonds on July 1, 2005, with interest payable
on June 30 and December 31. The fiscal year of the company is the calendar year. Journalize the
entries to record the following selected transactions:

2005
July 1 Issued the bonds for cash at their face amount.
Dec. 31 Paid the interest on the bonds.

2011
Dec. 31 Called the bond issue at 97, the rate provided in the bond indenture. (Omit entry for
payment of interest.)

ANS:
2005
July 1 Cash 2,500,000
  Bonds Payable 2,500,000

Dec. 31 Interest Expense 112,500

  Cash 112,500

2011
Dec. 31 Bonds Payable 2,500,000
  Gain on Redemption of Bonds 75,000
  Cash 2,425,000

DIF: Moderate OBJ: 13-03 | 13-05

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  638

11. On June 30, 2007, Athens Company issued P1,500,000 of 10-year, 8% bonds, dated June 30, for
P1,540,000. The bonds were purchased by Palermo Co. on the issue date at the issue price. Present
entries to record the following transactions:

(a)
Athens Company
(1) Issuance of bonds.
(2) Payment of first semiannual interest on December 31, 2007.
(3) Amortization by straight-line method of bond premium on December 31, 2007.

(b)
Palermo Company
(1) Purchase of bonds.
(2) Receipt of first semiannual interest amount on December 31, 2007.
(3) Amortization by straight-line method of bond premium on December 31, 2007.

ANS:
(a)
(1) Cash 1,540,000
  Premium on Bonds Payable 40,000
  Bonds Payable 1,500,000

(2) Interest Expense 60,000

  Cash 60,000

(3) Premium on Bonds Payable 2,000

  Interest Expense 2,000

(b)
(1) Investment in Athens Co. Bonds 1,540,000
  Cash 1,540,000

(2) Cash 60,000

  Interest Revenue 60,000

(3) Interest Revenue 2,000

  Investment in Athens Co. Bonds 2,000

DIF: Difficult OBJ: 13-03 | 13-05

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  639

12.
(a) Prepare the journal entry to issue P100,000 bonds which sold for P94,000.
(b) Prepare the journal entry to issue P100,000 bonds which sold for P104,000.

ANS:
(a)
Cash 94,000
Discount on Bonds Payable 6,000
Bonds Payable 100,000

(b)
Cash 104,000
Premium on Bonds Payable 4,000
Bonds Payable 100,000

DIF: Easy OBJ: 13-04

NAT: AACSB Analytic | AICPA FN-Measurement

13. Journalize the entries to record the following selected transactions of Owens Co.:

(a) Purchased P100,000 of Kelly Co. 8% bonds at 102 plus accrued interest of P2,000.
(b) Received first semiannual interest payment.
(c) Amortized P40 on the bond investment at the end of the first year.
(d) Sold the bonds at 97 plus accrued interest of P1,500. The bonds were carried at P101,500
at the time of the sale.

ANS:
(a)
Investment in Kelly Co. Bonds 102,000
Interest Revenue 2,000
Cash 104,000

(b)
Cash 4,000
Interest Revenue 4,000

(c)
Interest Revenue 40
Investment in Kelly Co. Bonds 40

(d)
Cash 98,500
Loss on Sale of Investments 4,500
Investment in Kelly Co. Bonds 101,500
Interest Revenue 1,500

DIF: Difficult OBJ: 13-05

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  640

14. Ace Company purchased as a long-term investment P500,000 of Blue Corporation 10-year, 9%
bonds. Present entries to record the following selected transactions:

(a) Purchased bonds for P475,000.

(b) Amortized P1,800 of discount on bonds for the year.
(c) Sold bonds at 98 plus accrued interest of P8,000. The broker deducted P400 for brokerage
fees and taxes, remitting the balance. The bonds were carried at P489,000 at the time of the
sale.

ANS:
(a)
Investment in Blue Corporation Bonds 475,000
Cash 475,000

(b)
Investment in Blue Corporation Bonds 1,800
Interest Revenue 1,800

(c)
Cash 497,600
Interest Revenue 8,000
Investment in Blue Corp. Bonds 489,000
Gain on Sale of Investments 600

DIF: Moderate OBJ: 13-05

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  641

15. Indicate the section where each of the following items would be reported on the corporation balance
sheet:

Use the following abbreviations to report the relevant balance sheet section:

CA = Current Assets
I = Investments
PPE = Property, Plant, and Equipment
IA = Intangible Assets
CL = Current Liabilities
LTL = Long-Term Liabilities
PIC = Paid-In Capital
RE = Retained Earnings

(a) Deferred income tax payable (due after current year)

(b) Marketable securities
(c) Bond sinking fund
(d) Excess of issue price over par of common stock
(e) Investment in Adkins Co. bonds
(f) Unamortized bond discount (on bonds due in 2008)

ANS:
(a) LTL
(b) CA
(c) I
(d) PIC
(e) I
(f) LTL

DIF: Moderate OBJ: 13-06

NAT: AACSB Analytic | AICPA FN-Measurement
 Chapter 13/Bonds Payable and Investments in Bonds  642

16. Balance sheet and income statement data indicate the following:

Company A Company B
Bonds payable, 8% (issued 1985, due 2009) P1,200,000 P  900,000
Preferred 5% stock, P100 par
(no change during year) 300,000 400,000
Common stock, P50 par
(no change during year) 1,000,000 1,000,000
Income before income tax for year 495,000 130,000
Income tax for year 75,000 12,000
Common dividends paid 50,000 0
Preferred dividends paid 21,000 28,000

(a) For each company, what is the number of times bond interest charges were earned (round to
one decimal place)?
(b) Which company gives potential creditors the most protection?

ANS:
(a) Company A 6.2 Company B 2.8

(b) Company A offers potential creditors the most protection.

DIF: Moderate OBJ: 13-06

NAT: AACSB Analytic | AICPA FN-Measurement