PROBLEM 5: CLASSROOM ACTIVITY

You are the accountant of B-Cull co. on July 1, 20x1, company issued 1,000 pieces of the document
shown below with serial numbers SR/213-2 (shown below) to SR/213-1001 (not shown to save space).
The total issue price is P922,782, net of transaction costs.

Requirements:

a. Compute for the effective interest rate on the bond issued

b. Prepare the amortization table (you may round-off centavos)

c. Prepare the journal entries for 20x1 only.

PROBLEM 6: FOR CLASSROOM DISCUSSION

Bonds issued at a discount — with Transaction costs

1. On January 1, 20x1, an entity issues bonds with face amount of P5,000,000 for P4,800,000. The bonds
mature on December 31, 20x3 and pay annual interest of 10% every December 31. The entity incurs
bond issue costs of P473,767. The interest rate adjusted for bond issue costs is 16%.

Requirements:

a. Compute for the initial carrying amount of the bonds.

b. Compute for net discount or a net premium (including the effect of the bond issue cost) from
the issuance on initial recognition.

c. Are the periodic interest payments greater than or less than the periodic interest expenses?

d. Prepare all the journal entries during the term of the bonds.

Issuance of bonds between interest payment dates

2. On April 1, 20x1, an entity issues bonds with face amount of P5,000,000 for P5,415,183, including
accrued interest. The bonds are dated January 1, 20x1 and pay annual interest of 14% every December
31. The effective interest rate is 12%.

Requirements:

a. Compute for the initial carrying amount of the bonds.

b. Provide the entry on April 1, 20x1 to record the issuance of the bonds.

c. Compute for the interest expense in 20x1.

Issue price of bonds

3. On January 1, 20x1, Vale Co. issues 14%, 3-year, P5,000,000 bonds at a price that reflects a yield rate
of 8%.

Requirement: Compute for the issue price of the bonds.

Retirement of bonds prior to maturity

4. On January for 1, 20x1, an entity issues bonds with face amount of P5,000,000 for P5,773,129. The
bonds mature on face December 31, 20x3 and pay annual interest of 14%. The effective interest rate is
8%. On December 31, 20x2, after paying the annual interest, the entity retires the bonds at a call
premium of P400,000.

Requirement: Provide the entry on December 31, 20x2 to record the retirement of the bonds.

Convertible bonds — Conversion

5. On January 1, 20x1, an entity issues bonds with face amount of P5,000,000 for P5,200,000. The bonds
mature on December 31, 20x3 and pay annual interest of 12%. The bonds can be converted into 10,000
ordinary shares of the entity with par value per share of P200. On January 1, 20x1, the bonds are selling
at 101 without the conversion feature. The effective interest rate on the bonds is 11.59%. All of the
bonds are converted into ordinary shares on January 1, 20x3.

Requirement: Provide the entries to record the following:

a. issuance of the convertible bonds.

b. conversion of the bonds.

Convertible bonds — Retirement

6. Use the facts in the immediately preceding problem. However, in this case, the entity retires the
bonds on January 1, 20x3 at a call premium of P200,000. Without the conversion feature, the bonds are
selling on this date at 102.

Requirement: Provide the entry to record the retirement of the bonds.

Asset swap

7. On January 1, 20x1, an entity transfers a piece of equipment with historical cost of P1,800,000,
accumulated depreciation of P900,000 and fair value of P850,000 as full settlement of a note payable
with a carrying amount of P1.000.000. How much is the gain or loss on the derecognition of the note?

Equity swap
8. On January 1, 20x1, an entity issues 10,000 of its own shares with par value per share of P10 and fair
value per share of P75 as full settlement of a note payable with a carrying amount of P600,000. How
much is the gain or loss on the derecognition of the note?

Modification of terms

9. On December 31, 20x1, an entity enters into a restructuring agreement to modify the terms of its
existing loan as follows:

-The principal is reduced from P2,800,000 to P2,500,000.

-The lender waived the accrued interest of P400,000.

-The nominal rate is decreased from 14% to 9%.

-The maturity date is extended from December 31, 20x1 to January 1, 20x6.

The principal is due in lump sum at maturity date but interest is payable annually at each year-end. The
original effective interest rate is 14%. The prevailing rate on December 31, 20x1 is 12%.