Intermediate Accounting 2

Chapter 3

Chapter 3 Bonds Payable and Other Concepts

Marriette Joy L. Abad
BS Accountancy, 3rd year

3. Solution:

Cash flows PV factors Issue price

Principal 5,000,000 0.79383 3,969,161
Interest 700,000 2.57710 1,803,968
5,773,129

4. Solution:

12/31/x2
Bonds payable 5,000,000
Premium on bonds payable 277,777
Loss on derecognition 122,223
Cash (5M + 400,000) 5,400,000

Interest Interest Amortizatio Present

Date paid expense n value
1/1/x1 5,773,129
12/31/
461,850 238,150 5,534,979
x1 700,000
12/31/
442,798 257,202 5,277,777
x2 700,000
12/31/
422,223 277,777 5,000,000
x3 700,000
5. Solution:

Requirement (a):

1/1/x1
Cash 5,200,000
Bonds payable 5,000,000
Premium on bonds payable [(5M x 101%) – 5M] 50,000
Share premium – conversion feature (squeeze) 150,000

Requirement (b):

Interest Interest Amortizati Present

Date paid expense on value
1/1/x1 5,050,000
12/31/
585,295 14,705 5,035,295
x1 600,000
12/31/
583,591 16,409 5,018,886
x2 600,000
12/31/
581,689 18,311 5,000,575
x3 600,000

1/1/x3
Bonds payable 5,000,000
Premium on bonds payable 18,886
Ordinary share capital (10,000 sh. x ₱200) 2,000,000
Share premium 3,018,886

Share premium – conversion feature 150,000

Share premium 150,000
6. Solution:

Total retirement price (5M + 200K)

5,200,000
Fair value of bonds (5M x 102)
(5,100,000)
Retirement price allocated to equity component
100,000

Interest Interest Amortizatio Present

Date paid expense n value
1/1/x1 5,050,000
12/31/
585,295 14,705 5,035,295
x1 600,000
12/31/
583,591 16,409 5,018,886
x2 600,000
12/31/
581,689 18,311 5,000,575
x3 600,000

1/1/x3
Bonds payable 5,000,000
Premium on bonds payable 18,886
Loss on derecognition (squeeze) 81,114
Cash (allocation to debt component) 5,100,000

Share premium – conversion feature 150,000

Cash (allocation to equity component) 100,000
Share premium 50,000

7. Solution:
Note payable (liability being settled) 1,000,000
Carrying amount of equipment (settlement) 900,000
Gain on derecognition (settlement less than liability) 100,000
8. Solution:

Note payable (liability being settled) 600,000

Fair value of shares (settlement) 750,000
Loss on derecognition (settlement exceeds liability) (150,000)

9. Solution:

  Original terms Modified terms

Principal 2,800,000 2,500,000
Accrued interest 400,000 -
Nominal rate 14% 9%
Maturity already due 4 yrs.

Present value of new liability

(Principal: 2.5M x PV of 1 @14%, n=4) + 2,135,786
(Interest: 2.5M x 9% x PV ordinary annuity @14%, n=4)
Carrying amount of old liability (2.8M + 400K) 3,200,000
Difference 1,064,214

Difference 1,064,214
Divide by: Carrying amount of old liability 3,200,000
Change in liability - Substantial 33%

Dec. 31, 20x1

Loan payable (old) 2,800,000
Interest payable 400,000
Discount on loan payable (new) 364,214
(2.5M – 2,135,786)
Loan payable (new) 2,500,000
Gain on modification 1,064,214