CATAN, SELINA MARI T.

INTACC 3 – 099
UNIT 2 ACTIVITY WORKSHEETS

I. ESSAY QUESTION

1. Define Bond.
A bond is a debt contract in which one party, known as the issuer, borrows funds
from another party, known as the investor. This is typically issued by corporations and
governments to entice investors. Later on, the investors receive income in the form of
interest from the debt instrument.
A bond is represented by a certificate, and the contractual agreement between the
issuer and the investor is contained in a document called a "bond indenture."
3. Explain some features of a bond.

All bonds share certain characteristics. They include the following:

 Face value: The worth of the bond upon maturity. It is also the base amount
on which interest is calculated.
 Coupon rate: The interest rate on the bond paid by the issuers of the bond to
the investors. Coupon payments are made annually or semi-annually.
 Coupon dates: The dates on which the investors receive the coupon
payment.
 Maturity date: The date on which the bond issuer pays back the face value of
the bond to the investor. It indicates repayment of the loan taken.
 Issue price: The price at which the bond is initially sold to the investor by the
issuer. In other words, it is the price at which investors buy them. When the
interest rate rises, the issue price will go down. Similarly, the issue price will
go up when the bond rates (interest rates) fall.
 Bond duration: Duration measures the sensitivity of a bond‘s price to the
interest rate changes. It is not an indicator of the length of time until maturity.

4. Explain the acceptable method(s) of recording the issuance of bonds.

The memorandum approach is the most acceptable method in recording for the
issuance of bonds. In this approach, there is no journal entry to record upon the
authorization of the company to issue bonds, only a memorandum entry. The authorized
bonds payable account is not maintained.

5. Explain the measurement of bonds payable.

As stated in PFRS 9, paragraph 5.1.1, bonds payable not designated at fair value
through profit or loss shall be measured initially at fair value minus transaction cost that are
directly attributable to its issuance. The fair value of the bonds payable is equal to the
present value of the future cash payments to settle the bond liability. Bond issue cost shall
be deducted from the fair value or issue price of the bonds payable in measuring initially the
bonds payable.
 However, if the bonds are designated and accounted for at fair value through profit
or loss, the bond issue cost are expensed immediately. The fair value of the bonds payable
is the same as the issue price or net proceeds from the issue of the bonds, excluding
accrued interest.

As stated in PFRS 9, paragraph 5.3.1, bonds payable are subsequently measured

either at:
a. Amortized cost using the effective interest method
b. Fair value through profit or loss

6. What is compound financial instrument?

According to PAS 32, paragraph 28, a compound financial instrument is a financial
instrument that contains both a liability and an equity element from the perspective of the
issuer. In simple words, one component of the financial instrument meets the definition of a
financial liability and the other component meets the definition of an equity instrument.
An example of a compound financial instrument are:

 Bonds payable issued with share warrants

 Convertible bonds payable

7. How is compound financial instrument accounted for?

The issuer of a financial instrument shall evaluate the terms of the instrument
whether it contains both a liability and an equity component. If the financial instrument
contains both a liability an equity component, PAS 32 mandates that such components
shall be accounted for separately.

Split accounting is the approach used in accounting for compound financial

instrument. This means that the consideration received from the issuance of the financial
instrument shall be allocated between the liability and equity components.

The fair value of the liability component is first determined and then deducted form
the total consideration received from the issuance of the compound financial instrument.

The residual amount is then allocated to the equity component.

8. What is a promissory note?

A promissory note is an unconditional written promise made by one person to
another, signed by the maker, engaging to pay a sum certain in money to order or to bearer
on demand or at a fixed or determinable future time.
9. Explain the initial measurement of note payable.

As stated in PFRS 9, paragraph 5.1.1, a note payable not designated at FVTPL

shall be measured initially at fair value minus transaction costs that are directly attributable
to its issuance. Transaction costs are included in the measurement of the note payable.

However, if the note payable is irrevocably designated at FVTPL, the transaction

costs are immediately treated as expenses.
 The fair value of the note payable is equal to the present value of the future cash
payment to settle the note payable using market rate of interest.

10. Explain how the amortized cost of note payable determined.

The amortized cost of note payable is the amount at which the note payable is
measured initially:

 Minus principal repayment

 Plus or minus the cumulative amortization using the effective interest method
of any difference between the face amount and present value of the note
payable.
Actually, the difference between the face amount and present value is either a
discount or a premium on the issue of note payable.

11. Explain the subsequent measurement of note payable.

As stated in PFRS 9, paragraph 5.3.1, a note payable shall be measured

subsequently at:
 Amortized cost using the effective interest metho
 FVTPL if the note payable is designated irrevocably as measured at FVTPL

II. PROBLEM SOLVING

Problem 2-1
Requirements:
January 1, 2018
Equipment ₱ 600,000
Notes payable ₱ 600,000
To record the purchase of equipment for note.

December 31, 2018

Notes payable ₱ 300,000
Interest expense 72,000
Cash ₱ 372,000
To record the payment of first installment and interest accrued.

December 31, 2019

Notes payable ₱ 300,000
Interest expense 36,000
Cash ₱ 336,000
To record the payment of second installment and interest accrued.
Solution:
First installment Second installment
Principal amount ₱ 600,000 Principal amount ₱ 300,000
Interest rate x 12% Interest rate x 12%
Interest expense ₱ 72,000 Interest expense ₱ 36,000
Problem 2-2
Requirements:
January 1, 2018
Land ₱ 1,000,000
Cash ₱ 100,000
Notes payable 900,000
To record the purchase of land with a down payment and note.

December 31, 2018

Interest expense ₱ 90,000
Interest payable ₱ 90,000
To record interest.

December 31, 2019

Interest expense ₱ 99,000
Interest payable ₱ 99,000
To record interest.

January 1, 2020
Notes payable ₱ 900,000
Interest payable 189,000
Cash ₱ 1,089,000
To record the payment of note and interest.
Solution:
December 31, 2018 December 31, 2019
Principal amount ₱ 900,000 Principal amount ₱ 990,000
Interest rate x 10% Interest rate x 10%
Interest expense ₱ 90,000 Interest expense ₱ 99,000

( )
nt
r
A=P 1+
n

A=900,000 (1+
1 )
1(2)
10 %
=1,089,000

Problem 2-3
Requirements:
January 1, 2018
Machinery ₱ 1,000,000
Discount on notes payable 250,000
Cash ₱ 400,000
Notes payable 850,000
To record the purchase of land with a down payment and note.

Solution:
January 1, 2018
Purchase price ₱ 1,250,000
Down payment (250,000)
Notes payable ₱ 850,000
Purchase price ₱ 1,250,000
Cash price (1,000,000)
Discount on notes payable ₱ 250,000

December 31, 2018

Notes payable ₱ 212,500
Cash ₱ 212,500
To record the first installment payment on notes payable.

Interest expense ₱ 100,000

Discount on notes payable ₱ 100,000
To record the amortization of discount on notes payable.

Notes payable Interest Amortization

2018 850,000 40% 100,000
2019 637,500 30% 75,000
2020 425,000 20% 50,000
2021 212,500 10% 25,000
2,125,000 250,000

December 31, 2019

Notes payable ₱ 212,500
Cash ₱ 212,500
To record the second installment payment on notes payable.

Interest expense ₱ 75,000

Discount on notes payable ₱ 75,000
To record the amortization of discount on notes payable.

December 31, 2020

Notes payable ₱ 212,500
Cash ₱ 212,500
To record the third installment payment on notes payable.

Interest expense ₱ 50,000

Discount on notes payable ₱ 50,000
To record the amortization of discount on notes payable.

December 31, 2021

Notes payable ₱ 212,500
Cash ₱ 212,500
To record the fourth installment payment on notes payable.

Interest expense ₱ 25,000

Discount on notes payable ₱ 25,000
To record the amortization of discount on notes payable.
Problem 2-4
Requirements:
January 1, 2018
Building ₱ 8,205,400
Discount on notes payable 1,794,600
Cash ₱ 1,000,000
Notes payable 9,000,000
To record the purchase of building with a down payment and note.

Solution:
January 1, 2018
Purchase price ₱ 10,000,000
Down payment (1,000,000)
Notes payable ₱ 9,000,000
Installment ÷ 3
Installment payment ₱ 3,000,000
Present value factor x 2.4018
Present value of note ₱ 7,205,400

Notes payable ₱ 9,000,000

Present value of note (7,205,400)
Discount on notes payable ₱ 1,796,600

Present value of note ₱ 7,205,400

Down payment 1,000,000
Building ₱ 8,205,400

December 31, 2018

Notes payable ₱ 3,000,000
Cash ₱ 3,000,000
To record the first installment payment on notes payable.

Interest expense ₱ 864,648

Discount on notes payable ₱ 864,648
To record the amortization of discount on notes payable.

Payment Interest Principal Present value

(12%)
01/01/2018 7,205,400.00
12/31/2018 3,000,000 864,648.00 2,135,352.00 5,070,048.00
12/31/2019 3,000,000 608,405.76 2,391,594.24 2,678,453.76
12/31/2020 3,000,000 321,546.24 2,678,453.76 0

December 31, 2019

Notes payable ₱ 3,000,000
Cash ₱ 3,000,000
To record the second installment payment on notes payable.
 Interest expense ₱ 608,405.76
Discount on notes payable ₱ 608,405.76
To record the amortization of discount on notes payable.

December 31, 2020

Notes payable ₱ 3,000,000
Cash ₱ 3,000,000
To record the third installment payment on notes payable.

Interest expense ₱ 321,456.24

Discount on notes payable ₱ 321,456.24
To record the amortization of discount on notes payable.

Problem 2-5
Requirements:
January 1, 2018
Land ₱ 4,097,200
Discount on notes payable 1,152,800
Cash ₱ 1,250,000
Notes payable 4,000,000
To record the purchase of land with a down payment and note.

Solution:
January 1, 2018
Purchase price ₱ 5,250,000
Down payment (1,250,000)
Notes payable ₱ 4,000,000
Present value factor x 0.7118
Present value of note ₱ 2,847,200

Notes payable ₱ 4,000,000

Present value of note (2,847,200)
Discount on notes payable ₱ 1,152,800

Present value of note ₱ 2,847,200

Down payment 1,250,000
Land ₱ 4,097,200

December 31, 2018

Interest expense ₱ 341,664
Discount on notes payable ₱ 341,664
To record the amortization of discount on notes payable.
 Interest Discount Present value
Expense (12%)

01/01/2018 1,152,800.00 2,847,200.00

12/31/2018 341,664.00 811,136.00 3,118,864.00
12/31/2019 382,663.68 428,472.32 3,571,527.68
12/31/2020 428,472.32 0 4,000,000.00

December 31, 2019

Interest expense ₱ 382,663.68
Discount on notes payable ₱ 382,663.68
To record the amortization of discount on notes payable.

December 31, 2020

Interest expense ₱ 428,472.32
Discount on notes payable ₱ 428,472.32
To record the amortization of discount on notes payable.

January 1, 2020
Notes payable ₱ 4,000,000
Cash ₱ 4,000,000
To record the payment of notes payable on maturity.

Problem 2-6
Requirements:
Interest Interest paid Discount Present value
Expense (6%/2)
(8%/2)
01/01/2020 4,818,500.00
6/30/2020 192,740.00 150,000 42,740.00 4,861,240.00
12/31/2020 194,449.60 150,000 44,449.60 4,905,689.60
06/30/2021 196,227.58 150,000 46,227.58 4,951,917.18
12/31/2021 198,082.82 150,000 48,082.82 5,000,000.00

January 1, 2020
Land ₱ 4,818,500
Discount on notes payable 181,500
Notes payable ₱ 5,000,000
To record the purchase of land with a note.

Solution:
January 1, 2020
Notes payable ₱ 5,000,000
Present value of note (4,818,500)
Discount on notes payable ₱ 181,500
 June 30, 2020
Interest expense ₱ 192,740.00
Discount on notes payable ₱ 42,740.00
Cash 150,000.00
To record the payment of interest and amortization of discount on notes
payable.

December 31, 2020

Interest expense ₱ 194,449.60
Discount on notes payable ₱ 44,449.60
Cash 150,000.00
To record the payment of interest and amortization of discount on notes
payable.

June 30, 2021

Interest expense ₱ 196,227.58
Discount on notes payable ₱ 46,227.58
Cash 150,000.00
To record the payment of interest and amortization of notes payable.

December 31, 2021

Interest expense ₱ 198,082.82
Discount on notes payable ₱ 48,082.82
Cash 150,000.00
To record the payment of interest and amortization of notes payable.

Notes payable ₱ 5,000,000.00

Cash 5,000,000.00
To record the payment of notes payable on maturity.

Problem 2-7

NO ANSWER. Because the effective market interest rate is not given.

Problem 2-8
Requirements:
January 1, 2020
Cash ₱ 5,000,000
Bonds payable ₱ 5,000,000
To record the issuance of bonds.

December 31, 2020

Interest expense ₱ 500,000
Cash ₱ 500,000
To record the payment of interest.

Bonds payable ₱ 31,820

Gain on change in fair value ₱ 31,820
To record the change in fair value.
Solution:
Face amount of bonds payable ₱ 5,000,000
Installment ÷  5
Installment payment ₱ 1,000,000
Present value factor of 8% for 4 years annuity x 3.31212
Present value of principal ₱ 3,312,120

Annual interest ₱ 500,000

Present value factor of 8% for 4 years annuity x 3.31212
Present value of interest ₱ 1,656,060

Present value of principal ₱ 3,312,120

Present value of interest 1,656,060
Fair value - December 31, 2020 ₱ 4,968,180

Issue price ₱ 5,000,000

Fair value (4,968,180)
Gain on decrease of fair value ₱ 31,820

December 31, 2021

Interest expense ₱ 500,000
Cash ₱ 500,000
To record the payment of interest.

Bonds payable ₱ 1,365,435

Gain on change in fair value ₱ 1,365,435
To record the change in fair value.
Solution:
Face amount of bonds payable ₱ 5,000,000
Installment ÷  5
Installment payment ₱ 1,000,000
Present value factor of 12% for 3 years annuity x 2.40183
Present value of principal ₱ 2,401,830

Annual interest ₱ 500,000

Present value factor of 12% for 3 years annuity x 2.40183
Present value of interest ₱ 1,200,915

Present value of principal ₱ 2,401,830

Present value of interest 1,200,915
Fair value - December 31, 2020 ₱ 3,602,745

Carrying value ₱ 4,968,180

Fair value (3,602,745)
Gain on decrease of fair value ₱ 1,365,435
Problem 2-9
Requirements:
Face amount of bonds payable ₱ 7,000,000.00
Present value factor of 4% for 20 periods x 0.45639
Present value of principal ₱ 3,194,708.30

Annual interest ₱ 350,000.00

Present value factor of 4% for 20 periods x 13.59033
Present value of interest ₱ 4,756,614.22

Present value of principal ₱ 3,194,708.30

Present value of interest 4,756,614.22
Issue price – March 1, 2020 ₱ 7,951,322.52

Issue price ₱ 7,951,322.52

Face amount of bonds payable (7,000,000.00)
Premium on bonds payable ₱ 951,322.52

Interest Interest paid Premium Present value

Expense (10%/2) amortization
(8%/2)
03/01/2020 7,951,322.52
09/01/2020 318,052.90 350,000 31,947.10 7,919,375.42
03/01/2021 316,775.02 350,000 33,224.98 7,886,150.44
09/01/2021 315,446.02 350,000 34,553.98 7,851,596.45
03/01/2022 314,063.86 350,000 35,936.14 7,815,660.31

March 1, 2020
Cash ₱ 7,951,322.52
Bonds payable ₱ 7,000,000.00
Premium on bonds payable 951,322.52
To record the issuance of bonds at premium.

September 1, 2020
Interest expense ₱ 318,052.90
Premium on bonds payable 31,947.10
Cash ₱ 350,000.00
To record the payment of interest and amortization of premium on bonds.

December 31, 2020

Interest expense ₱ 211,183.34
Premium on bonds payable 22,149.99
Accrued interest payable ₱ 233,333.33
To record the adjustment of interest expense and amortization of premium on
bonds.

January 1, 2021
Accrued interest payable ₱ 233,333.33
Interest expense ₱ 211,183.34
Premium on bonds payable 22,149.99
 To record the reversal of the December 31, 2020 adjusting entry

March 1, 2021
Interest expense ₱ 316,775.02
Premium on bonds payable 33,224.98
Cash ₱ 350,000.00
To record the payment of interest and amortization of premium on bonds.

September 1, 2021
Interest expense ₱ 315,446.02
Premium on bonds payable 34,553.98
Cash ₱ 350,000.00
To record the payment of interest and amortization of premium on bonds.

December 31, 2021

Interest expense ₱ 209,375.91
Premium on bonds payable 23,957.43
Accrued interest payable ₱ 233,333.33
To record the adjustment of interest expense and amortization of premium on
bonds.