CHAPTER 5: BONDS PAYABLE

Problem 5-9 (AICPA Adapted)

Blue Company reported the following financial liabilities on December 31, 2020:

9% debentures, callable in 2021, due in 2022 3,500,000

11% collateral trust bonds, convertible into share
capital beginning in 2021, due in 2022 3,000,000
10% debentures, P300,000 maturing annually 1,500,000

What is the total amount of term bonds?

a. 3,000,000
b. 3,500,000
c. 5,000,000
d. 6,500,000

9% Debentures 3,500,000
11% Collateral trust bonds 3,000,000
Total amount of terms bonds 6,500,000

Term bonds are bonds that mature on a single date.

Problem 5-10 (AICPA Adapted)
Hancock Company reported the following noncurrent liabilities on December 31, 2020:

Unsecured

9% registered bond, P250,000 maturing annually

beginning in 2021 2,750,000
11% convertible bonds, callable
beginning in 2021, due 2022 1,250,000

Secured

12% guaranty security bonds, due 2022 2,500,000

10% commodity backed bonds, P500,000
maturing annually beginning in 2021 2,000,000

1. What total amount of serial bonds should be reported?

a. 4,750,000
b. 3,750,000
c. 4,500,000
d. 2,000,000

2. What is the total amount of debenture bonds?

a. 4,000,000
b. 1,250,000
c. 6,500,000
d. 6,000,000

Solution:
Serial Bonds Debenture Bonds
9% Registered bonds 2,750,000 2,750,000
11% Convertible bonds 1,250,000
10% Commodity backed bonds 2,000,000
Total 4,750,000 4,000,000

Serial bonds are bonds that mature in a series or by installments. In this case, serial bonds total
P4,750,000 (2,750,000 + 2,000,000). On the other hand, debenture bonds are unsecured bonds
or bonds without collateral security. Thus, the unsecured bonds total P4,000,000 (2,750,000 +
1,250,000).
Problem 5-11 (AICPA Adapted)
Glen Company had the following long-term debt:

Sinking fund bonds, maturing in installments 2,200,000

Industrial revenue bonds, maturing in installments 1,800,000
Subordinated bonds, maturing on a single date 3,000,000

What is the total amount of serial bonds?

a. 3,000,000
b. 4,000,000
c. 4,800,000
d. 7,000,000

Solution:
Sinking fund bonds, maturing in installments 2,200,000
Industrial revenue bonds, maturing in installments 1,800,000
Total serial bonds 4,000,000

Subordinated bonds are bonds that rank below the amounts owing to general creditors.

Problem 5-12 (AICPA Adapted)

Zola Company had the following long-term debt:

Bonds maturing in installments, secured by machinery 1,000,000

Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000

1. What is the total amount of debenture bonds?

a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 0

Solution:
A debenture bond is a type of bond that is unsecured by collateral. All the bonds of Zola
Company are secured. Thus, there is no debenture bonds.

2. What is the total amount of secured bonds?

a. 4,800,000
b. 2,800,000
c. 3,800,000
d. 3,000,000
Solution:
Bonds maturing in installments, secured by machinery 1,000,000
Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000
Total secured bonds 4,800,000

Problem 5-13 (AICPA Adapted)

On October 1, 2020, Shane Company issued 5,000 12% bonds with face amount of P1,000 per
bond at 110. The bonds which mature on January 1, 2025 pay interest semi-annually on January
1 and July 1. The entity paid bond issue cost of P200,000.

How much cash was received from the bond issuance?

a. 5,450,000
b. 5,650,000
c. 5,300,000
d. 5,550,000

Solution:
Issue price (5,000,000 x 110%) 5,500,000
Accrued interest from July 1 to October 1, 2020 (5,000,000 x 12% x 3/12) 150,000
Total 5,650,000
Bond issue cost (
200,000)
Net cash received from bond issuance 5,450,000

Problem 5-14 (AICPA Adapted)

On April 1, 2020, Greg Company issued, at 99 plus accrued interest, 4,000 8% bonds with face
amount of P1,000 per bond. The bonds are dated January 1, 2020, mature on January 1, 2030,
and pay interest on January 1 and July 1. The entity paid bond issue cost of P140,000.

How much cash was received from the bond issuance?

a. 4,040,000
b. 3,960,000
c. 3,900,000
d. 3,820,000

Solution:
Issue price (4,000,000 x 99%) 3,960,000
Accrued interest from January 1 to April 1, 2020 (4,000,000 x 8% x 3/12) 80,000
Total 4,040,000
Bond issue cost
( 140,000)
Net cash received from bond issuance 3,900,000
Problem 5-15 (AICPA Adapted)
On July 1, 2020, Carol Company issued at 104, five thousand 10% bonds with face amount of
P1,000 per bond. The bonds were issued through an underwriter to whom the entity paid bond
issue cost of P125,000.

On July 1, 2020, what is the carrying amount of the bonds payable?

a. 4,875,000
b. 5,075,000
c. 5,200,000
d. 5,325,000

Solution:
Face amount of bonds payable (5,000 x P1,000) 5,000,000
Multiplied by issue price 104%
Issue price 5,200,000
Bond issue cost
( 125,000)
Bond liability - carrying amount 5,075,000

Problem 5-16 (AICPA Adapted)

During the current year, Cain Company incurred the following costs in connection with the
issuance of bonds:

Promotion cost 200,000

Printing and engraving 150,000
Legal fees 800,000
Fees paid independent accountants
for registration information 100,000
Commission paid to underwriter 900,000

What total amount should be recorded as bond issue cost?

a. 1,950,000
b. 2,150,000
c. 1,800,000
d. 2,000,000

Solution:
Promotion cost 200,000
Printing and engraving 150,000
Legal fees 800,000
Fees paid independent accountants for registration information 100,000
Commission paid to underwriter 900,000
Total bond issue costs 2,150,000

Bond issue costs are those costs incurred to facilitate the issuance of the bonds. All five listed
costs are included in bond issue costs and are amortized over the term of the bonds.

Problem 5-17 (IAA)

Aye Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2020 with
interest payments on June 30 and December 31. When the bonds are issued on November 1,
2020, the entity received cash of P5,150,000 including accrued interest.

What is the discount or premium from the issuance of the bonds?

a. 150,000 bond premium

b. 50,000 bond premium
c. 150,000 bond discount
d. No bond premium and discount

Solution:
Cash received 5,150,000
Interest accrued for 4 months - June 30 - November 1, 2020 (5,000,000 x 6% x 4/12)
( 100,000)
Issue price 5,050,000
Face value 5,000,000
Premium on bonds payable 50,000

Problem 5-18 (AICPA Adapted)

On November 1, 2020, Mason Company issued P4,000,000 of 10-year, 8% term bonds dated
October 1, 2020. The bonds were sold to yield 10% with total proceeds of P3,500,000 plus
accrued interest. Interest is paid every April 1 and October 1.

What amount should be reported as accrued interest payable on December 31, 2020?

a. 100,000
b. 80,000
c. 53,333
d. 87,500

Solution:
Interest accrued for 3 months from October 1 to December 31, 2020
(4,000,000 x 8% 3/12) 80,000

Problem 5-19 (AICPA Adapted)

On January 31, 2020, Beau Company issued P3,000,000 maturity value, 12% bonds for
P3,000,000 cash. The bonds are dated December 31, 2019, and mature on December 31, 2029.
Interest will be paid semi-annually on June 30 and December 31.
What amount of accrued interest payable should be reported on September 30, 2020?

a. 270,000
b. 240,000
c. 180,000
d. 90,000

Solution:
Interest accrued for 3 months from July 1 to September 30, 2020
(3,000,000 x 12% x 3/12) 90,000

Problem 5-20 (AICPA Adapted)

On June 30, 2020, King Company had outstanding 9%, P5,000,000 face value bonds maturing
on June 30, 2025. Interest is payable semi-annually every June 30 and December 31. On June 30,
2020, after amortization was recorded for the period, the unamortized bond premium and
unamortized bond discount were P30,000 and P50,000, respectively. On that date, the entity
acquired all outstanding bonds on the open market at 98 and retired them.

On June 30, 2020, what amount should be recognized as gain on redemption of bonds?

a. 20,000
b. 80,000
c. 120,000
d. 180,000

Solution:
Face amount of the bonds payable 5,000,000
Add: Unamortized bond premium 30,000
Total 5,030,000
Less: Unamortized bond discount 50,000
Carrying amount 4,980,000
Less: Retirement price (5,000,000 x 98%) 4,900,000
Gain on retirement 80,000

If the retirement price is less than the carrying amount of the bonds, there is a gain.

Problem 5-21 (AICPA Adaption)

On January 1, 2020, Nilo Company reported bonds payable of P8,000,000 and related
unamortized discount of P430,000.

On January 1, 2020, the entity retired P4,000,000 of the outstanding bonds at face amount plus a
call premium of P100,000.
What amount should be reported in the 2020 income statement as loss on early extinguishment
of debt?

a. 0
b. 100,000
c. 215,000
d. 315,000

Solution:
Face amount of the bonds payable 8,000,000
Less: Unamortized bond discount 430,000
Carrying amount 7,570,000

Carrying amount retired (4,000,000/8,000,000 x 7,570,000) 3,785,000

Less: Retirement price (4,000,000 + 100,000) 4,100,000
Loss on early extinguishment of debt
( 315,000)

Problem 5-22 (AICPA Adapted)

On January 1, 2020, Davao Company issued 6% bonds with face amount of P4,000,000 for net
proceeds of P3,677,600, a price that yields 8%. Interest is payable annually every December 31.

The entity elected the fair value option. On December 31, 2020, the bonds are quoted at 95.

1. What amount should be reported as interest expense for 2020?

a. 240,000
b. 120,000
c. 294,208
d. 220,656

Solution:
Interest expense (4,000,000 x 6%) 240,000

December 31, 2020 Interest expense 240,000

Cash 240,000

2. What amount should be reported as gain or loss from change in fair value for 2020?

a. 322,400 gain
b. 322,400 loss
c. 122,400 gain
 d. 122,400 loss

Solution:
Bonds payable - January 1, 2020 3,677,600
Fair value – December 31, 2020 (4,000,000 x 95%) 3,800,000
Increase in fair value of bonds payable – loss (
122,400)

December 31, 2020 Loss from change in fair value 122,400

Bonds payable 122,400

3. What is the carrying amount of the bonds payable on December 31, 2020?

a. 3,677,000
b. 3,800,000
c. 3493,720
d. 4,000,000

Solution:
Carrying amount of the bonds payable (4,000,000 x 95%) 3,800,000

Problem 5-23 (AICPA Adapted)

On January 1, 2020, Carmina Company received P5,385,000 for a P5,000,000 face amount 12%
bond, a price that yields 10%. The bond pays interest semi-annually on June 30 and December
31.

The entity elected the fair value option. On December 31, 2020, the fair value of the bond is
determined to be P5,125,000 based on market and interest factors.

1. What amount should be reported as interest expense for 2020?

a. 600,000
b. 500,000
c. 646,200
d. 538,500

Solution:
Interest expense (5,000,000 x 12%) 600,000

June 30, 2020 Interest expense 300,000

Cash 3000,000
December 31, 2020 Interest expense 300,000
Cash 300,000

2. What is the gain or loss that should be recognized in 2019 to report the bond at fair value?

a. 260,000 gain
b. 260,000 loss
c. 600,000 loss
d. 340,000 loss

Solution:
Bonds payable - January 1, 2020 5,385,000
Fair value – December 31, 2020 5,125,000
Decrease in fair value of bonds payable – gain 260,000

December 31, 2020 Bonds payable 260,000

Gain from change in fair value 260,000

3. What is the carrying amount of the bonds payable on December 31, 2020?

a. 5,385,000
b. 5,125,000
c. 5,000,000
d. 5,250,000

Solution:
Carrying amount of the bonds payable - based on market and interest factors 5,125,000

Problem 5-24 (IFRS)

On January 1, 2020, Mariel Company issued bonds payable with face amount of P8,000,000 and
10% stated interest rate at 95. The entity paid bond issue cost of P150,000. The bonds have a 5-
year term and interest is payable annually every December 31.

The entity elected the fair value option. On December 31, 2020, the fair value of the bonds is
105.

It is reliably determined that the fair value increase comprised P150,000 attributable to credit risk
and the remainder attributable to change in the market interest rate.

1. What is the interest expense for 2020?

a. 800,000
b. 760,000
 c. 840,000
d. 880,000

Solution:
Interest expense (8,000,000 x 10%) 800,000

December 31, 2020 Interest expense 800,000

Cash 800,000

2. What amount of gain or loss should be recognized in profit or loss for 2020 to confirm with
the fair value option?

a. 650,000 gain
b. 650,000 loss
c. 800,000 gain
d. 800,000 loss

Solution:
Bonds payable - January 1, 2020 (8,000,000 x 95%) 7,600,000
Fair value – December 31, 2020 (8,000,000 x 105%) 8,400,000
Increase in fair value of bonds payable – loss 800,000
Loss on credit risk
(150,000)
Loss from change in fair value 650,000

December 31, 2020 Loss on credit risk 150,000

Loss from change in fair value 650,000
Bonds payable 800,000

The loss on credit risk is presented as component of other comprehensive income while the loss
from change in fair value is recognized in profit or loss.

3. What is the carrying amount of the bonds payable on December 31, 2020?

a. 8,000,000
b. 7,600,000
c. 8,400,000
d. 7,640,000

Solution:
Carrying amount of the bonds payable (8,000,000 x 105%) 8,400,000

Problem 5-25 (AICPA Adapted)

On January 1, 2020, Trisha Company received P1,077,200 for 12% bonds with face amount of
P1,000,000. The bonds were sold to yield 10%. Interest is payable semi-annually every January 1
and July 1.

The entity elected the fair value option for measuring financial liabilities.

On December 31, 2020, the fair value of the bonds is P1,064,600. The change in fair value of the
bonds is attributable to market factors.
1. What is the carrying amount of the bonds payable on January 1, 2020?

a. 1,000,000
b. 1,077,200
c. 500,000
d. 538,600

Solution:
Carrying amount of the bonds payable - January 1, 2020 1,077,200

January 1, 2020 Cash 1,077,200

Bonds payable 1,077,200

2. What is the interest expense for 2020?

a. 120,000
b. 100,000
c. 107,720
d. 129,264

Solution:
Interest expense (1,000,000 x 12%) 120,000

July 1, 2020 Interest expense 60,000

Cash 60,000

December 31, 2020 Interest expense 60,000

Interest payable 60,000

Interest expense is recognized using the nominal or stated rate.

3. What is the gain or loss from change in fair value of the bonds payable for 2020?

a. 64,600 gain
b. 64,600 loss
 c. 12,600 gain
d. 12,600 loss

Solution:
Bonds payable - January 1, 2020 1,077,200
Fair value – December 31, 2020 1,064,600
Decrease in fair value of bonds payable – gain 12,600

December 31, 2020 Bonds payable 12,600

Gain from change in fair value 12,600

Under the fair value option, the bonds payable shall be measured initially at fair value and
remeasured at every year-end with any change in fair value generally recognized in profit or loss.

4. What is the carrying amount of the bonds payable on December 31, 2020?

a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920

Solution:
Carrying amount of the bonds payable - December 31, 2020 1,064,600