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Quiz on Bonds EI, Compound Financial Instruments, Notes Payable Carl Vincent L. Alaan, CPA
True or False. Write True if the statement is True. If the statement is False, write False and encircle the word or phrase that made the statement false.
1. The market price or issue price of the bond payable is equal to the present value of the principal bond liability plus the present value of future interest
payment discounted using the nominal or stated rate. (False, effective rate)
2. Bond issue costs are expensed immediately for bonds recognized using the effective interest method. (False, fair value through profit or loss)
3. Under the effective interest method, interest expense is equal to the effective interest rate multiplied by the outstanding face amount. (False, carrying
amount)
4. The proceeds of a compound financial instrument are allocated to the liability and equity component using the stand-alone selling price. (False, split
accounting)
5. The total consideration for shares converted on convertible bonds on the date of conversion is equal to the carrying amount plus the share premium on
conversion privilege. True
6. The expired portion of share warrants outstanding are credited to share premium. True
7. Notes payable are initially measured at fair value plus transaction cost. (False, minus/less)
8. The fair value of the note payable is equal to the present value of future cash payments. (True)
9. If an interest-bearing note payable is issued for a property, the initial carrying amount of the note is the cash price. (True)
10. Transaction cost in relation to the note payable irrevocably designated at fair value through profit or loss is expensed immediately. (True)
Problem-Solving
Problem 1
On June 1, 2020, Malupa Company issued 10% bonds with face Amount of P6,000,000 to yield 12%. Interest is payable annually on June 1 of each year. The bonds
mature in 6 years. The entity follows calendar year.
a. Determine the market price or issue price of the bonds. (Compute present value factors at 2 decimal places) 5,580,000.00
Problem 2
On January 1, 2020, Pradilla Company issued 10% bonds in the face amount of P5,000,000 that mature on December 31, 2029. The bonds were issued for P4,430,000
to yield 12%, resulting in bond discount of P570,000. The entity used the interest method. Interest is payable semiannually on June 30 and December 31.
b. What is the carrying amount of the bonds payable on December 31, 2020? 4,462,548
Problem 3
Manalo Company issued P5,000,000 face amount, 5-year bonds at 109. Each P1,000 bond was issued with 10 share warrants, each of which entitled the bondholder
to purchase one share of P100 par value at P120. Immediately after issuance, the market value of each warrant was P5. The stated interest rate on the bonds is 11%
payable annually at the end of the year. However, the prevailing market rate of interest for similar bonds without warrants is 12%.
a. What is the carrying amount of the bonds payable on the date of issuance? Use 2 decimals in computing for the present value factor. 4,830,000
b What amount should be recorded initially as a discount or premium on bonds payable? 170,000
c. What is the equity component arising from the issuance of bonds payable? 620,000
d. Assuming at year-end, 20,000 warrants were exercised, what is the entry to record the exercise? (see solutions)
e. Continuing letter E, the 30,000 were expired, what is the entry to record expired warrants? (see solutions)
Problem 4
On January 1, Efren Company issued 4,000 convertible bonds with P1,000 face amount per bond. The bonds have a three-year life and are issued at 105 or total
proceeds of P4,200,000. Interest is payable annually at 6% every December 31. Each bond is convertible into 20 ordinary shares with P50 par value. When the bonds
are issued, the market rate of interest for similar bonds without a conversion option is 8%.
a. What is the equity component attributable to conversion privilege on issuance? (Use 2 decimal places in computing PV factor) 420,800
c. Assuming the bonds were converted on December 31, what is the journal entry to record the conversion? (see solutions)
Problem 5
On January 1, 2020, Medrano Company sold land to Barayan Company. There was no established market price for the land. Barayan gave Medrano a P2,100,000
noninterest-bearing note payable in three equal annual installments of P800,000 with the first payment due December 31, 2020. The note has no ready market. The
prevailing rate of interest for a note of this type is 10%. The present value of a P2,400,000 note payable in three equal annual installments of P800,000 at a 10% rate
of interest is P1,989,600.
a. What is the journal entry to record the issuance of the note? (see solutions)
b. What is the carrying amount of the note payable on December 31, 2020? 1,338,560
Problem 1
Problem 2
5,000,000x5% 6%
Int Paid Int Exp Discount Amort Carrying Amount
4,430,000
30-Jun 250000 265800 15800 4,445,800
31-Dec 250000 266748 16748 4,462,548 #2
532548 #1
Problem 3
Problem 5
#1 Land 1,989,600
Discount on Note Payable 410,400
Note Payable 2,400,000