PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. Blue Corp.'s December 31, 1991, balance sheet contained the following items in the long-term
liabilities section:

9 3/4% registered debentures, callable in 2002, due in 2007 700,000

9 1/2% collateral trust bonds, convertible into common stock beginning in 2000, due in 2010
600,000

10% subordinated debentures (P30,000 maturing annually beginning in 1997) 300,000

What is the total amount of Blue's term bonds?

a. 600,000

b. 700,000

c. 1,000,000

d. 1,300,000

2. On January 2, 2001, West Co. issued 9% bonds in the amount of P500,000, which mature on January
2, 2011. The bonds were issued for P469,500 to yield 10%. Interest is payable annually on December 31.
West uses the effective interest method of amortizing bond discount. In its June 30, 2001, balance
sheet, what amount should West report as bonds payable?

a. 469,500

b. 470,475

c. 471,025

d. 500,000

3. On January 1, 20x1, Yoga Co. issued 1,000, P4,000 face amount bonds for P3,807,852. The bonds
mature on December 31, 20x3. Interest of 10% is due annually every year-end. The effective interest
rate is 12%. How much is the unamortized discount on bonds payable on December 31, 20x1?

a. 147,908

b. 135,206

c. 134,987

d. 143,134

4. On January 1, 20x1, Silent Co. issued 1,000 bonds with face amount of P4,000 each for a total of
P3,807,852. Silent Co. paid transaction costs of P179,316 on the issuance. The bonds mature on
December 31, 20x3 but 10% interest is due every year-end. The effective interest rate adjusted for the
transaction costs is 14%. How much is the carrying amount of the bonds on December 31, 20x1?

a. 3,288,776

b. 3,391,580

c. 3,401,832

d. 3,736 ,531

5. On April 1, 20x9, Hill Corp. issued 200 of its P1,000 face value bonds at 101 plus accrued interest. The
bonds were dated November 1, 20x8, and bear interest at an annual rate of 9% payable semiannually on
November 1 and May 1. What amount did Hill receive from the bond issuance?

a. 194,500

b. 200,000

c. 202,000

d. 209,500

6. Tuck Co. plans on issuing three-year, 12% term bonds with face amount of P2,000,000. If the current
rate on issuance date is 10%, the estimated issue price of the bonds would be

a. 2,099,474.

b. 2,123,649

c. 2,230,713.

d. 1,979,365

7. On June 30, 20x9, King Co. had outstanding 9%, P5,000,000 face value bonds maturing on June 30,
2x14. Interest was payable semiannually every June 30 and December 31. On June 30, 20x9, after
amortization was recorded for the period, the unamortized bond premium and bond issue costs were
P30,000 and P50,000, respectively. On that date, King acquired all its outstanding bonds on the open
market at 98 and retired them. At June 30, 20x9, what amount should King recognize as gain on
redemption of bonds?

a. 20,000

b. 80,000

c. 120,000
d. 180,000

8. On December 31, 20x0, Arnold, Inc., issued P200,000, 8% serial bonds, to be repaid in the amount of
P40,000 each year. Interest is payable annually on December 31. The bonds were issued to yield 10% a
year. The bond proceeds were P190,280 based on the present values at December 31, 20x0, of the five
annual payments as follows:

Due date Amounts due Present value at 12/31/x0

Principal Interest

12/31/x1 40,000 16,000 50,900

12/31/x2 40,000 12,800 43,610

12/31/x3 40,000 9,600 37,250

12/31/x4 40,000 6,400 31,690

12/31/x5 40,000 3,200 26,830

190,280

Arnold amortizes the bond discount by the effective interest method. In its December 31, 20x1, balance
sheet, at what amount should Arnold report the carrying value of the bonds?

a. 139,380 b. 149,100 c. 150,280 d. 153,308

9. On January 1, 20x1, NESCIENCE IGNORANCE Co. issued 10%, P6,000,000 zero-coupon bonds at a price
that reflects a yield to maturity rate of 18%. Both the principal and accrued interests are due on
December 31, 20x3. What amounts are reported in NESCIENCE CO.'s December 31, financial statements
for the following?

Bonds payable Interest payable

a. 5,135,421 600,000

b. 5,268,944 600,000

c. 5,735,421 600,000

d. 5,735,421 0

10. Ray Corp. issued bonds with a face amount of P200,000. Each P1,000 bond contained detachable
stock warrants for 100 shares of Ray's common stock. Total proceeds from the issue amounted to
P240,000. The fair value of each warrant was P2,196,000. The bonds were issued at a discount of
a. 0

b. 678

c. 4,000

d. 33,898

11. On July 1, 2003, after recording interest and amortization, York Co. converted P1,000,000 of its 12%
convertible bonds into 50,000 shares of P1 par value ordinary share. On the conversion date the carrying
amount of the bonds was P1,300,000, the fair value of the bonds was P1,400,000, and York's ordinary
share was publicly trading at P30 per share. What amount of share premium should York record as a
result of the conversion?

a. 950,000

b. 1,250,000

c. 1,350,000

d. 1,500,000

12. On January 1, 20x1, Melancholic Co. issued 10%, convertible bonds for P2,200,000. The bonds, which
are due on December 31, 20x3, are convertible into 10,000 ordinary shares with par value of P100. The
annual interest payments are due at each year-end. The prevailing market rate of interest for similar
debt without conversion feature on January 1, 20x1 was 12%. On December 31, 20x2, half of the bonds
were retired for P1,000,000. The prevailing interest rate for similar debt without conversion feature on
December 31, 20x2 was 11%. How much are the (1) gain (loss) on the retirement and (2) net amount of
“share premium – conversion feature” reclassified within equity on December 31, 20x2?

a. 9,724; 152,760 c. (8,849); 139,028

b. (9,724); 152,670 d. 8,849; 139,208

13. During 20x4 Peterson Company experienced financial difficulties and is likely to default on a
P500,000, 15%, three-year note dated January 1, 20X2, payable to Forest National Bank. On December
31, 20X4, the bank agreed to settle the note and unpaid interest of P75,000 for 20X4 for P50,000 cash
and marketable securities with carrying amount of P375,000. Peterson's acquisition cost of the securities
is P385,000. What amount should Peterson report as a gain from the debt restructuring in its 20x4
income statement?

a. 65,000

b. 75,000

c. 140,000
d. 150,000

14. Wood Corp., a debtor undergoing financial difficulties granted an equity interest to a creditor in full
settlement of a P28,000 debt owed to the creditor. At the date of this transaction, the equity interest
had a fair value of P25,000 and par value of P20,000. What amount should Wood recognize as gain on
restructuring of debt?

a. 0

b. 3,000

c. 5,000

d. 8,000

15. In 20X2, May Corp. acquired land by paying P75,000 down and signing a note with a maturity value
of P1,000,000. On the note's due date, December 31, 20X7, May owed P40,000 of accrued interest and
P1,000,000 principal on the note. May was in financial difficulty and was unable to make any payments.
May and the bank agreed to amend the note as follows:

• The P40,000 of interest due on December 31, 20X7, was forgiven.

• The principal of the note was reduced from P1,000,000 to P950,000 and the maturity date extended 1
year to December 31, 20X8.

• May would be required to make one interest payment totaling P30,000 on December 31, 20X8.

• The original effective interest rate is 10% while the current market rate on December 31, 20X7 is 12%.

As a result of the troubled debt restructuring, May should report a gain before taxes, in its 20x7 income
statement of

a. 0

b. 165,000

c. 60,000

d. 149,092