ACCOUNTING FOR BONDS

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Problem 1

Downing Company issues P5,000,000, 6%. 5-year bonds dated January 1, 2019 on January 1, 2019. The bonds pay
interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the
bond issue?

2.5% 3.0% 5.0% 6.0%

Present value of a single sum for 5 periods .88385 .86261 .78353 .74726

Present value of a single sum for 10 periods .78120 .74409 .61391 .55839

Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236

Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

A. P5,000,000
B. P5,216,494
C. P5,217,308
D. P5,218,809

Problem 2

On July 1, 2020, Glamorous Corporation issued 11% bonds in the face amount P2,000,000 that mature on June
30,2024. The bonds were issued to yield 5% and interest is payable every January 1 and July 1. Glamorous Corporation
uses the effective interest method of amortizing bond premium or discount. The following are the present value factors:
PV of 5% for an ordinary annuity of P1 after 8 periods 6.463
PV of 5% after 8 interest periods 0. 677

What is the carrying value of the debt instruments as of December 31, 2020?
A. P2,043,640
B. P2,051,086
C. P2,058,176
D. P2,064,930

Problem 3

On January 1, 2018, Trader Company issued its 8%, 4-year convertible debt instrument with a face amount of
P6,000,000 for P5,900,000. Interest is payable every December 31 of each year. The debt instrument is convertible
into 50,000 ordinary shares with a par value of P100. When the debt instruments were issued, the prevailing market
rate of interest for similar debt without conversion options is 10%.
PV of 10% for an ordinary annuity of P1 after 4 periods 3.169865

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 PV of 10% after 4 interest periods 0.683013
Q1. What is the amortized cost of the debt as of December 31, 2020?
A. P5,619,616
B. P5,701,578
C. P5,791,735
D. P5,890,909

Q2. What is the amount of interest expense for the year ended December 31,2019?
A. P561,962
B. P570,158
C. P579,173
D. P589,091

Problem 4

On January 1, 2017, Shredder Company issued its 10%, 4-year convertible debt instrument with a face amount of
P3,000,000 for P3,500,000. Interest is payable every December 31 of each year. The debt instrument is convertible
into 30,000 ordinary shares with a par value of P100. The debt instrument is convertible into equity from the time of
issue until maturity. When the debt instruments were issued, the prevailing market rate of interest for similar debt
without conversion option is 18%.
PV of 8% for an ordinary annuity of P1 after 4 periods 3.3121268
PV of 8% after 4 interest periods 0.7350298
On December 31, 2019, Shredder Company converted all the debt instruments by issuing 30,000 ordinary shares.

What is the carrying value of the compound instruments as of December 31, 2019?
A. P3,356,829
B. P3,408,269
C. P3,455,899
D. P3,500,000

Problem 5

On March 1, 2020, an entity issued 5,000 of P1,000 face value bonds at 110 plus accrued interest. The entity paid
bond issue cost of P400,000. The bonds were dated November 1, 2019, mature on November 1,2029, and earn interest
at 12% payable semiannually on May 1 and November 1. What net amount was received from the bond issuance?
A. 5,500,000
B. 5,700,000
C. 5,300,000
D. 5,100,000

Problem 6

On January 1, 2020, an entity issued 9% bonds in the face amount of P5,000,000 which mature on January 1, 2030.
The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on December 31. The entity used the
interest method of amortizing bond discount.

Q1. What is the interest expense for 2020?

A. 469,500
B. 500,000

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 C. 450,000
D. 422,500

Q2. What is the carrying amount of the bonds payable on December 31, 2020?
A. 4,695,000
B. 4,704,750
C. 4,714,500
D. 5,000,000

Problem 7

On January 1, 2020, an entity issued 10-year bonds with face amount of P5,000,000 for P5,775,000. The entity paid
bond issue cost of P100,000 on the same date. The stated interest rate on the bonds is 10% payable annually every
December 31. The bonds have an 8% yield per annum after considering the bond issue cost. The entity used the
effective interest method of amortizing bond premium.

Q1. What is the interest expense for 2021?

A. 454,000
B. 458,960
C. 500,000
D. 450,320

Q2. What is the carrying amount of the bonds payable on December 31, 2021?
A. 5,695,960
B. 5,579,320
C. 5,629,000
D. 5,737,000

Problem 8
An entity issued 5,000 of 8% 10-year P1,000 face amount bonds with detachable warrants at 110. Each bond carried
a detachable warrant for 10 ordinary shares of P100 par value at a specified option price of P120. Immediately after
issuance, the market value of the bonds without warrants was P4,800,000 and the market value of the warrants was
P1,200,000.

Q1. What is the initial carrying amount of the bonds payable?

A. 5,500,000
B. 4,800,000
C. 4,400,000
D. 5,000,000

Q2. What is the increase in equality as a result of the bond issuance?

A. 1,200,000
B. 1,100,000
C. 500,000
D. 700,000

Q3. What is the share premium from the subsequent exercise of all share warrants?
A. 1,700,000
B. 1,000,000

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 C. 2,100,000
D. 0

Problem 9

An entity issued 5,000 convertible bonds with P1,000 face amount per bond. The bonds mature I three years and are
issued at 110. Interest is payable annually every December 21 at a nominal 6% interest rate. Each bond is convertible
at anytime up to maturity into 100 shares with per value of par value of P5. It is reliably determined that the bonds
would sell only at P4,600,000 without the conversion privilege. What is the equity component of the original issuance
of the convertible bonds?
A. 500,000
B. 400,000
C. 900,000
D. 0

Problem 10

After recording interest and amortization, an entity converted P5,000,000 of 12% convertible bonds into 50,000 shares
of P50 par value. On the conversion date, the carrying amount of the bonds payable was P6,000,000, the market value
of the bonds was P6,500,000, and the share was publicity trading at P150. The entity incurred P100,000 in connection
with the conversion. When the bonds were originally issued, the equity component was recorded at P1,500,000. What
amount of share premium should be recorded as a result of the conversion?
A. 5,000,000
B. 3,500,000
C. 4,900,000
D. 3,400,000

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