HOMEWORK ON LONG-TERM FINANCIAL LIABILITIES

PART 1: NOTES PAYABLE

Journalize the transactions for the year ended December 31, 2022:

1. Interest bearing: principal – lump sum, interest – annual; effective rate higher than the nominal
rate

Diaz Company constructed for Cruz Distributors a warehouse that was completed and ready
for occupancy on January 1, 2022. Cruz paid for the warehouse by issuing a P1,000,000 four–
year note that required 7% interest to be paid on December 31 of each year. The warehouse
was custom–built for Cruz, so its cash price was not known. By comparison with similar
transactions, it was determined that an appropriate interest rate was 10%.

2. Interest bearing: principal – installment, interest – annual; effective rate same as the nominal
rate Santos

Company acquired a packaging machine from Reyes Corporation. Reyes completed the
construction of the machine on January 1, 2022. In payment for the P3 million machine,
Santos issued a 4–year interest–bearing note to be paid in four equal payments at the end of
each year. Interest is 10% of the unpaid balance to be paid at the end of each year. Assume
prevailing interest rate is 10%.

3. Non-interest bearing: principal – installment

On January 1, 2022, Dela Cruz Company purchased land for P500,000 by issuing a 5–year
non–interest bearing promissory note payable in five equal annual payments every December
31. The prevailing market rate for a note of this kind is 11%.

4. Non-interest bearing: principal – lump sum

On January 1, 2022, Lopez Company purchased equipment for P375,000. The company paid
P75,000 and signed a non–interest bearing note for the balance which is due after 3 years.
Prevailing interest rate is 11%.

PART 2: BONDS PAYABLE

1. During 2022, DeGeneres Company incurred the following costs in connection with the
issuance of bonds:

Printing and engraving P 85,000

Legal expenses 425,000
Fees paid to independent accountants for registration 65,000
information
Commissions paid to underwriters 320,000

How much should be recorded as bond issue cost to be amortized over the term of the
bonds?
2. On February 1, 2022, Gates Company issued a P3,000,000 of 12% bonds at 104 which are
due on January 31, 2025. In addition, each P1,000 bond was issued 15 warrants, each of
which entitles the bondholder to purchase for P50 one ordinary share (P25 par value) of the
company. On February 1, 2022, the fair market value of the ordinary share was P40 per share;
the fair market value of the warrant was P4; and the fair market value of the bond ex-warrant
was 101.

(a) How much should the company record on February 1, 2022 as carrying value of the
bonds?
(b) How much of the amount received on the date of issuance is attributable to the
equity component?
(c) How much is the premium on bonds payable at the date of issuance?

3. The records of Xiu Company show the following information on December 31, 2022:

Bonds Payable P 3,000,000

Discount on Bonds Payable 150,000
Ordinary Share Capital – 100,000 shares authorized ; 40,000
shares issued, P120 par 4,000,000
Accumulated Profits 1,000,000
Share Premium – Bond Conversion Privilege 500,000

The bonds are convertible into 7 ordinary shares for every P1,000 bond. On December 31,
2022, the entire bond issue was converted and on this date, the market value of the share is
P120 and the bonds P102.

(a) How much is the gain or loss on conversion?

(b) How much is the increase in total shareholders’ equity as a result of the
conversion?

4. On January 1, 2022, Sanberg Company sold 12% bonds with a face value of P500,000. The
bonds mature in 5 years and interest is paid semi-annually on June 30 and December 31. The
bonds were sold for P538,600 to yield 10%.

(a) How much is interest expense for 2022?

(b) How much is the unamortized premium as of December 31, 2023?

5. On July 1, 2022, Geisha Company issued for P938,514 its 9% P1,000,000 face value bonds
to mature on July 1, 2031. The bonds were issued to yield 10%. The company uses the
effective interest method of amortizing bond discount. Interest is payable annually on June
30.

(a) How much is the company’s adjusted unamortized bond discount at June 30, 2024?
(b) How much is the interest expense for the year 2024?

6. On June 1, 2022, Welch Company issued 1,000 of its 10% P1,000 bonds at a price that will
yield a 12% effective interest plus accrued interest. The bonds are dated April 1, 2022 and
mature on April 1, 2030. Interest is payable semi-annually on April 1 and October 1.

(a) How much did the company receive from the bond issuance?
(b) How much is the interest expense for 2022?
(c) How much is the total discount amortization for 2022?

Updated August 2022