Lobrigas, Claudine L.

BSIA-IV

Intermediate Accounting 2

Unit 3 – Topic 2

Problem #1:

On January 1, 2021, Orange Company was authorized to issue 6% bonds with face
amount of P5,000,000 maturing on December 31, 2022. Interest is payable semiannually on June
30 and December 31. On January 1, 202, the entity issued all the bonds for P4,818,500 with the
effective rate of 8%. The fiscal year of the entity is the calendar year and the effective interest
method of amortization is used.

Required:

1. Prepare a table of amortization for the discount

Interest paid = Face amount x semiannual nominal rate 5,000,000 x 3%

= 150,000

Interest expense = Carrying amount x semiannual effective rate 4,818,500

= 192,740

Date Interest paid Interest Premium Carrying

expense amortization amount

Jan. 1, 2021 4,818,500

June 30, 2021 150,000 192,740 42,740 4,861,240

Dec. 31, 2021 150,000 194,450 44,450 4,905,690

June 30, 2022 150,000 196,228 46,228 4,951,918

Dec. 31, 2022 150,000 198,082 48,082 5,000,000

2. Prepare journal entries for 2021 and 2022

Journal entries 2021

Jan. 1 Cash 4,818,500

Discount on bonds payable 181,500
 Bonds payable 5,000,000

June 30 Interest expense 192,740

Cash 150,000
Discount on bonds payable 42,740

Dec. 31 Interest expense 194,450

Cash 150,000
Discount on bonds payable 44,450

Journal entries 2022

June 30 Interest expense 196,228

Cash 150,000
Discount on bonds payable 46,228

Dec. 31 Interest expense 198,082

Cash 150,000
Discount on bonds payable 48,082

Problem #2:
Clan Company issued 3-year 12% bonds with face amount of P2,000,000. Interest is
payable semiannually April 1 and October 1. The bonds were issued on April 1, 2021 for
P2,101,520 which represents an effective interest cost of 10% per year.
Requirement 1: Prepare amortization table using the effective interest

Interest paid = Face amount x semiannual nominal rate 2,000,000 x 6%

= 120,000

Interest expense = Carrying amount x semiannual effective rate 2,101,520 x 5%

= 105,076

Date Interest paid Interest Premium Carrying

expense amortization amount

April 1, 2021 2,101,520

Oct. 31, 2021 120,000 105,076 14,924 2,086,596

April 1, 2022 120,000 104,330 15,670 2,070,926

 Oct. 31, 2022 120,000 103,546 16,454 2,054,472

April 1, 2023 120,000 102,724 17,276 2,037,196

Oct. 31, 2023 120,000 101,860 18,140 2,019,056

April 1, 2024 120,000 100,944 19,056 2,000,000

Requirement 2: Prepare journal entries for 2021 and 2022

Journal entries 2021

April 1 Cash 2,101,520

Premium on bonds payable 101,520
Bonds payable 2,000,000

Oct. 31 Interest expense 105,076

14,924
Premium on bonds payable 120,000
Cash

Journal entries 2022

April 1 Interest income 104,330

Premium bonds payable 15,670
Cash 120,000

Oct. 31 Interest income 103,546

Premium bonds payable 16,454
Cash 120,000

Problem #3:
On June 1, 2021, Java Company issued 10% bonds with face amount of P6,000,000
to yield 12%. Interest is payable annually on June 1 of each year. The bonds mature in 5
years. The entity follows calendar year.
PV of 1 at 10% for 5 periods. .62
PV of 1 at 12% for 5 periods .57
PV of an ordinary annuity of 1 at 10% for 5 periods 3.79
PV of an ordinary annuity of 1 at 12% for 5 periods 3.60
Requirement 1: Determine the market price or the issue price
PV of principal (6M x 0.57) 3,420,000
PV of annual interest payment (600,000 x 3.60) 2,160,000

Total Present value 5,580,000

*(6,000,000 x .10) = 600,000

Face amount 6,000,000

Market price/issue price (5,580,000)

Discount on bonds payable 420,000

Requirement 2: Prepare an effective interest amortization table

Interest paid = Face amount x annual nominal rate 6,000,000 x .10

= 600,000

Interest expense = Carrying amount x annual effective rate 5,580,000 x .12

= 669,600

Date Interest paid Interest expense Premium Carrying

amortization amount

June 1, 2021 5,580,000

June 30, 2022 600,000 669,600 69,600 5,649,600

June 30, 2023 600,000 677,952 77,952 5,727,552

June 30, 2024 600,000 687,306 87,306 5,814,858

June 30, 2025 600,000 697,783 97,783 5,912,641

June 30, 2026 600,000 709,517 109,517 6,022,158

Problem #4:
On March 1, 2021, Pyramid Company issued 10% bonds with face amount of
P7,000,000 to yield 8%. Interest is payable semiannually on March 1 and September 1.
The bonds mature in 10 years. The entity follows the calendar year.
PV of 1 at 5% for 20 periods .377
PV of 1 at 4% for 20 periods .456
PV of an ordinary annuity of 1 at 5% for 20 periods 12.462
 PV of an ordinary annuity of 1 at 4% for 20 periods 13.590
Requirement 1: Determine the market price or issue price

PV of principal (7,000,000 x 0.465) 3,192,000

PV of semiannual interest payment (350,000 x 13.590) 4,756,500

Total Present value 7,948,500

*(7,000,000 x 0.05) = 350,000

Market price 7,948,500

Face amount (7,000,000)

Premium on bonds payable 948,500

Requirement 2: Prepare an effective interest amortization table

Interest paid = Face amount x annual nominal rate 7,000,000 x 0.05

= 350,000

Interest expense = Carrying amount x annual effective rate 7,948,500 x .04

= 317,940

Date Interest paid Interest expense Premium Carrying

amortization amount

March 1, 2021 7,948,500

Sept. 30, 2021 350,000 317,940 32,060 7,916,440

Mar. 1, 2022 350,000 316,658 33,342 7,883,098

Sept. 30, 2022 350,000 315,324 34,676 7,848,422

Mar. 1, 2023 350,000 313,937 36,063 7,812,358

Sept. 30, 2023 350,000 312,494 37,506 7,774,853

Mar. 1, 2024 350,000 310,994 39,006 7,735,847

Sept. 30, 2024 350,000 309,434 40,566 7,695,281

Mar. 1, 2025 350,000 307,811 42,189 7,653,092

Sept. 30, 2025 350,000 306,124 43,876 7,609,216

Mar. 1, 2026 350,000 304,369 45,631 7,563,584

Sept. 30, 2026 350,000 302,543 47,457 7,516,128

Mar. 1, 2027 350,000 300,645 49,355 7,466,773

Sept. 30, 2027 350,000 298,671 51,329 7,415,444

Mar. 1, 2028 350,000 296,618 53,382 7,362,061

Sept. 30, 2028 350,000 294,482 55,518 7,306,544

Mar. 1, 2029 350,000 292,262 57,738 7,248,806

Sept. 30, 2029 350,000 289,952 60,048 7,188,758

Mar. 1, 2030 350,000 287,550 62,450 7,126,308

Sept. 30, 2030 350,000 285,052 64,948 7,061,360

Mar. 1, 2031 350,000 288,640 61,360 7,000,000