Since 1977

FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2829-Bonds Payable MAY 2020

DISCUSSION PROBLEMS
Use the following information for the next two questions. SOLUTION GUIDE:
On March 1, 2020, Tiaong Company issued 10,000 of its Bond Period
P1,000 face value bonds at 95 plus accrued interest. year covered Outs. Fraction Amortization
Tiaong Company paid bond issue cost of P1,000,000. The
bonds were dated November 1, 2019, mature on 1 10/2/18- P 5M 5/20 P25,000
November 1, 2029, and bear interest at 12% payable 9/30/19
semiannually on November 1 and May 1.
2 10/1/19- 5M 5/20 25,000
1. The net amount that Tiaong receive from the bond 9/30/20
issuance is
3 10/1/20- 4M 4/20 20,000
a. P8,500,000 c. P9,500,000
9/30/21
b. P8,900,000 d. P9,900,000
4 10/1/21- 3M 3/20 15,000
2. The entry on the books of Tiaong could include a 9/30/22
a. Debit to Interest Payable.
b. Credit to Interest Receivable. 5 10/1/22- 2M 2/20 10,000
c. Credit to Interest Expense. 9/30/23
d. Credit to Unearned Interest.
6 10/1/23- 1M 1/20 5,000
9/30/24
3. On January 1, 2020, Marimar Company issued 10,000 P20M P100,000
of its 12%, P1,000 face value 5-year bonds at 105.
Interest on the bonds is payable annually every
December 31. In connection with the sale of these 6. On March 1, 2020, Pyne Furniture Co. issued P700,000
bonds, Marimar paid the following expenses: of 10 percent bonds to yield 8 percent. Interest is
payable semiannually on February 28 and August 31.
Promotion costs P100,000 The bonds mature in ten years. Pyne Furniture Co. is
Engraving and printing 400,000 a calendar-year corporation. The interest expense to
Underwriter’s commissions 500,000 be recognized in 2020 profit or loss is
Using the straight line method, what amount should a. P52,925 c. P58,333
Marimar report as bond interest expense for the year b. P53,000 d. P58,933
2020?
a. P1,100,000 c. P1,300,000 SOLUTION GUIDE:
b. P1,200,000 d. P1,600,000
NI EI Prem.
4. Straight-line amortization of bond discount or Date (5%) (4%) Amort. A.C.
premium:
3/1/20 795,141
a. Can be used for amortization of discount or
premium in all cases and circumstances. 8/31/20 35,000 31,806 3,194 791,947
b. Provides the same amount of interest expense
each period as does the effective interest method. 2/28/21 35,000 31,678 3,322 788,625
c. Is appropriate for deep discount bonds.
d. Provides the same total amount of interest 7. On June 1, 2020, Jefferson Controls, Inc. issued
expense over the life of the bond issue as does the P12,000,000 of 10 percent bonds at P10,348,080.
effective interest method. Interest is payable semiannually on May 31 and
November 30. The bonds mature in 15 years.
Jefferson Controls, Inc. is a calendar-year corporation.
5. Thunder Company floated a serial bond issue in 2018.
Details of the issue are as follows: Determine the carrying amount of the bonds as of
December 31, 2020.
Total amount P5,000,000
a. P12,000,000 c. P10,372,655
Date of issue October 2, 2018
b. P10,391,103 d. P10,368,965
Proceeds from issue P4,900,000
Interest rate 5% per annum
SOLUTION GUIDE:
Interest payment date October 1
Maturity date P1,000,000 annually, EI NI Disc.
starting October 1, 2020 Date (6%) (5%) Amort. A.C.
Using the bond outstanding method of amortizing
discount, compute the interest expense to be 6/1/20 10,348,080
recognized for the year ended December 31, 2020.
a. P237,500 c. P261,250 11/30/20 620,885 600,000 20,885 10,368,965
b. P257,500 d. P273,750
5/31/21 622,138 600,000 22,138 10,391,103

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EXCEL PROFESSIONAL SERVICES, INC.
8. Which statement is correct when the effective-interest
method is used to amortize bond premium or discount?
a. The carrying amount at the end of the first year
would be highest if the bonds were issued at a
discount.
b. The interest expense increases each period if the
bonds were issued at a premium.
c. The periodic amortization will increase or decrease
depending on whether the bonds were issued at a
premium or at a discount.
d. The periodic amortization will increase regardless
of whether the bonds were issued at either a
discount or a premium.
9. On December 31, 2019, Ulster Co. issued P200,000 of
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, 2019 of the five
annual payments. In its December 31, 2020
statement of financial position, at what amount should
Ulster report the carrying amount of the bonds?
a. P139,380 c. P150,280
b. P149,100 d. P153,308
10. On July 1, 2014 Ecclesiastes Corporation issued for
P960,000 one thousand of its 9 percent, P1,000 bonds.
The bonds are dated July 1, 2014, and mature on July
1, 2024. Interest is payable semiannually on January
1 and July 1. Ecclesiastes uses the straight-line
method of amortizing bond discount. On July 1, 2020,
Ecclesiastes reacquired all of the bonds at 101 and
retired them. How much loss should Ecclesiastes
report on this early extinguishment of debt for the year
ended December 31, 2020?
a. P50,000 c. P26,000
b. P34,000 d. P10,000
11. Which statement is incorrect regarding compound
financial instruments?
a. Compound financial instruments have both a
liability and an equity component from the issuer's
perspective.
b. PAS 32 requires that the component parts be
accounted for and presented separately.
c. The split of the components is made at initial
recognition.
d. The liability component is assigned the residual
amount.
12. Atimonan Company issued 8,000 of its 8%, 10-year
P1,000 face value bonds with detachable share
warrants at 120. Each bond carried a detachable
warrant for two shares of Atimonan’s P100 par value
ordinary shares at a specified option price of P150.
Immediately after issuance, the market value of the
bonds ex-warrants was P8,100,000 and the market
value of the warrants was P900,000. The issuance of
the bonds increased Atimonan’s equity by
a. P1,500,000 c. P900,000
b. P 960,000 d. Nil
Use the following information for the next two questions.
On January 2, 2015, Picard Enterprises issued P2,400,000
of 8 percent, 15-year semiannual coupon bonds. Each
bond is convertible into 40, P15 par, ordinary shares,
which was trading at P20 per share on the date of the
bond issue. The bonds were issued at 106. Without the
conversion feature, the bonds would have been issued for
104.5.
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On January 2, 2020, all of the bonds were converted into
ordinary shares. The market price of the shares was P28
per share on the date of conversion. The issue premium is
amortized using the straight-line method.
13. The issuance of the bonds increased the entity’s equity
by
a. P144,000 c. P36,000
b. P108,000 d. Nil
14. The conversion of the bonds increased the entity’s
equity by
a. P2,496,000 c. P1,068,000
b. P2,472,000 d. P1,032,000
Use the following information for the next two questions.
On 1 January 2015, Entity A issued a 10 per cent
convertible debenture with a face value of P10,000,000
maturing on 31 December 2024. The debenture is
convertible into ordinary shares of Entity A at a conversion
price of P25 per share. Interest is payable half-yearly in
cash. At the date of issue, Entity A could have issued
nonconvertible debt with a ten-year term bearing a coupon
interest rate of 11 per cent.
On 1 January 2020, the convertible debenture has a fair
value of P11,200,000. Entity A makes a tender offer to
the holder of the debenture to repurchase the debenture
for P11,200,000, which the holder accepts. At the date of
repurchase, Entity A could have issued non-convertible
debt with a five-year term bearing a coupon interest rate
of 8 per cent.
15. Compute the amount to be recognized in profit or loss
as a result of the repurchase of the debenture.
a. P1,577,200 c. P1,188,650
b. P1,200,000 d. Nil
16. Compute the amount to be recognized in equity as a
result of the repurchase of the debenture.
a. P10,000,000 c. P388,550
b. P 1,200,000 d. Nil
17. On 1 January 2015, Entity A issued a 10 per cent
convertible debenture with a face value of P1,000,000
maturing on 31 December 2024. The debenture is
convertible into ordinary shares of Entity A at a
conversion price of P25 per share. Interest is payable
half-yearly in cash.
On 1 January 2020, to induce the holder to convert the
convertible debenture promptly, Entity A reduces the
conversion price to P20 if the debenture is converted
before 1 March 2020. The market price of Entity A’s
ordinary shares on the date the terms are amended is
P40 per share.
Compute the amount to be recognized in profit or loss
as a result of the amendment of the terms.
a. P400,000 c. P50,000
b. P200,000 d. P 0
18. The net amount of a bond liability that appears on the
balance sheet is the
a. Call price of the bond plus bond discount or minus
bond premium.
b. Face value of the bond plus related premium or
minus related discount.
c. Face value of the bond plus related discount or
minus related premium.
d. Maturity value of the bond plus related discount or
minus related premium.
- now do the DIY drill -
FAR.2829
EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

1. The printing costs and legal fees associated with the a. P430,000 c. P570,000
issuance of bonds should b. P450,000 d. P550,000
a. Be expensed when incurred.
b. Be reported as a deduction from the face amount
of bonds payable. 7. On January 1, 2020, Entity A issues a debt instrument
c. Be recorded as a reduction of the bond issue for a price of P1,250,000. The principal amount is
amount and then amortized over the life of the P1,250,000 and the debt instrument is repayable on
bonds. December 31, 2024. The rate of interest is specified in
d. Not be reported as an expense until the period the the debt agreement as a percentage of the principal
bonds mature or are retired. amount as follows: 6% in 2020, 8% in 2021, 10% in
2022, 12% in 2023, and 16.4% in 2024. The interest
2. The issuance price of a bond does not depend on the expense to be recognized in 2020 is
a. Face value of the bond. a. P 75,000 c. P125,000
b. Riskiness of the bond. b. P131,000 d. P130,000
c. Effective interest rate.
d. Method used to amortize the bond discount or 8. The December 31, 2020, statement of financial
premium. position of Dodge Corporation includes the following
items:
3. Which statement is correct regarding bonds payable? 9% bonds payable due December
a. Periodic interest expense is the stated interest rate 31, 2028 P1,400,000
times the amount of debt outstanding during the Unamortized premium on bonds
period. payable 37,800
b. Bonds will sell for a premium when the market rate
of interest exceeds their stated rate. The bonds were issued on December 31, 2018, at 103,
c. The initial selling price of bonds represents the with interest payable on July 1 and December 31 of
sum of all the future cash outflows required by the each year. Dodge uses straight-line amortization.
obligation.
On March 1, 2020, Dodge retired P560,000 of these
d. The carrying value of zero-coupon bonds increases
bonds at 98 plus accrued interest. What should Dodge
by the periodic amount of interest recognized.
record as a gain on retirement of these bonds?
a. P26,320 c. P15,120
4. JR Company showed the following balances in
b. P26,040 d. P28,000
connection with its noncurrent liabilities on December
31, 2020.
Bonds payable – 10%, maturing P10,000,000 9. An entity issued 2,000 convertible bonds. The bonds
December 31, 2025 have a three-year term, and are issued at par with a
Bonds payable – 12%, maturing 8,000,000 face value of P1,000 per bond. Interest is payable
December 31, 2030 annually in arrears at a nominal annual interest rate of
Discount on bonds payable 800,000 6 per cent. Each bond is convertible at any time up to
Premium on bonds payable 500,000 maturity into 250 ordinary shares. The entity has an
Bond issue costs 200,000 option to settle the principal amount of the convertible
bonds in ordinary shares or in cash. When the bonds
The discount is related to the 10% bonds payable and are issued, the prevailing market interest rate for
the premium and bond issue costs are applicable to the similar debt without a conversion option is 9 per cent.
12% bonds payable. No bonds were retired during At the issue date, the market price of one ordinary
2020. How much interest expense on the bonds share is P3. The issuance of convertible bonds
payable should JR report in its 2020 income increased the entity’s equity by
statement? (Use straight line amortization method) a. P 0 c. P896,025
a. P2,090,000 c. P2,070,000 b. P151,878 d. P134,872
b. P1,870,000 d. P1,890,000

5. On January 2, 2020, Lucban Company issued 9% 10. On January 1, 2020, Entity A issues convertible bonds
bonds in the amount of P10,000,000 which mature on with a maturity of five years. The issue is for a total of
January 2, 2030. The bonds were issued for 1,000 convertible bonds. Each bond has a par value of
P9,390,000 to yield 10% resulting in a bond discount P1,000, a stated interest rate is 5% per year, and is
of P610,000. Interest is payable annually on convertible into 5 ordinary shares of Entity A. The
December 31. Lucban uses the interest method of convertible bonds were issued to Entity O at par. The
amortizing bond discount. In its December 31, 2020 per-share price for an Entity A share is P15. Quotes
statement of financial position, what amount should for similar bonds issued by Entity A without a
Lucban report as bonds payable? conversion option (i.e., bonds with similar principal
a. P10,000,000 c. P9,390,000 and interest cash flows) suggest that they can be sold
b. P 9,451,000 d. P9,429,000 for P900,000.

6. Mauban Company has outstanding a 7%, 10-year The carrying amount of bonds payable on Entity A’s
P10,000,000 face value bond. The bond was originally books as of December 31, 2020 is
sold to yield 6% annual interest. Mauban uses the a. P1,000,000 c. P882,680
effective interest method to amortize bond premium. b. P 917,320 d. P938,085
On January 1, 2020, the carrying amount of the
outstanding bond was P10,500,000. What amount of
unamortized premium on bond should Mauban report
in its December 31, 2020, statement of financial
position? J - end of FAR.2829 - J

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