BONDS PAYABLE

COMPOUND FINANCIAL INSTRUMENT

1. Zola Company had the following long-term debt:
Bonds maturing in installments, secured by machinery1,000,000
Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000
What is the total amount of debenture bonds?
A. 0 C. 1,800,000
B. 1,000,000 D. 2,000,000

Bond issue cost

2. During the current year, Cain Company incurred the following costs in connection with the issuance of
bonds:
Promotion cost 200,000
Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration information100,000
Commissions paid to underwriter 900,000
What total amount should be recorded as bond issue cost to be amortized over the term of the bonds?
A. 1,800,000 C. 2,000,000
B. 1,950,000 D. 2,150,000

Issue Price
3. White Company issued P2,000,000 face value of 10-year bonds on January 1. The bonds pay interest on
January 1 and July 1 and had a stated rate of 10%. If the market rate of interest is 8%, what is the issue
price of the bonds?
A. 2,113,000 C. 2,262,000
B. 2,159,000 D. 2,279,000

ISSUANCE BETWEEN INTEREST DATES-Proceeds

4. On October 1, 2014, Shane Company issued 5,000 of the PI,000 face value 12% bonds at 110. The bonds
which mature on January 1, 2019, pay interest semiannually on January 1 and July 1. The entity paid
bond issue cost of P200,000. How much cash was received from the issuance of the bonds?
A. 5,300,000 C. 5,550,000
B. 5,450,000 D. 5,650,000

Initial measurement
5. On January 1, 2013, Borg Company issued 4,000 of 8% P2,000 face value bonds at 97 plus accrued
interest. The bonds are dated October 1, 2012 and mature on October 1, 2022. Interest is payable
semiannually on April 1 and October 1. Accrued interest for the period October 1,2012 to January 1, 2013
amounted to P160,000. On January 1, 2013, what is the carrying amount of bonds payable?
A. 7,606,000 C. 7,766,000
B. 7,760,000 D. 7,840,000

6. On June 30, 2014, Huff Company issued at 99, four thousand of 8% P1,000 bonds. The bonds were issued
through an underwriter to whom the entity paid bond issue cost of P340,000. On June 30, 2014, what is the
carrying amount of the bonds payable?
A. 3,620,000 C. 3,960,000
B. 3,820,000 D. 4,000,000

7. On July 1, 2014, Carol Company issued at 104, five thousand of 10% PI,000 bonds. The bonds were issued
through an underwriter to whom the entity paid bond issue cost of P125,000. On July 1, 2014, what is the
carrying amount of the bonds payable?
A. 4,875,000 C. 5,200,000
B. 5,075,000 D. 5,325,000
Effective interest method – Term Bonds
8. On July 1,2013, Tara Company issued 4,000 of 8%, PI,000 face value bonds payable for P3,504,000. The
bonds were.issued to yield 10%. The bonds are dated July 1,2013 and mature on July 1, 2023. Interest is
payable semiannually on January 1 and July 1. Using the effective interest method, what amount of the
bond discount should be amortized for the six months ended December 31,2013?
A. 15,200 C. 24,800
B. 19,840 D. 30,400

9. On January 1, 2013, Carrow Company issued 10% bonds in the face amount of P1,000,000 that mature on
January 1, 2023. The bonds were issued for P886,000 to yield 12%, resulting in bond discount of
P114,000. The entity used the interest method of amortizing bond discount. Interest is payable on
January 1 and July.
For the year ended December 31,2013, what amount should be reported as bond interest expense?
A. 50,000 C. 100,000
B. 53,160 D. 106,510

10. On January 1, 2014, West Company issued 9% bonds in the amount of P5,000,000, which mature on
January 1, 2024. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on
December 31. The entity used the interest method. What is the carrying amount of the bonds payable on
June 30, 2014?
A. 4,695,000 C. 4,710,250
B. 4,704,750 D. 5,000,000

Gain (loss) on early extinguishment of debt

11. On June 30, 2014, King Company had outstanding 9%, P5,000,000 face value bonds maturing on June 30,
2019. Interest is payable semiannually every June 30 and December 31. On June 30, 2014, after
amortization was recorded for the period, the unamortized bond premium and bond issue cost were
P30,000 and P50,000, respectively. On that date, the entity acquired all outstanding bonds on the open
market at 98 and retired them. On June 30, 2014, what amount should be recognized as gain before tax
on redemption of bonds?
A. 20,000 C. 120,000
B. 80,000 D. 180,000
12. Marie Company reported the following balances on December 31, 2014:
Bonds payable 7,360,000
Interest payable 200,000
The bonds are retired on January 1, 2015 for P8,160,000 excluding interest. What amount should be
reported as gain or loss on redemption?
A. 600,000 gain C. 800,000 gain
B. 600,000 loss D. 800,000 loss

13. Bohol Company reported on December 31, 2014 9% bonds payable due December 31, 2020 with a
carrying amount of P15,405,000. The bonds were issued on December 31, 2010 and have a face amount
of P15,000,000 with interest payable semiannually on June 30 and December 31. On January 1, 2015, the
entity retired P5,000,000 of these bonds at 98. What amount should be reported in the 2015 income
statement as gain or loss on the retirement of the bonds?
A. 100,000 gain C. 235,000 gain
B. 100,000 loss D. 235,000 loss

Comprehensive
Questions 53 & 54 are based on the following information.
On January 1, 2014, Davao Company issued 6% bonds with face amount of P4,000,000 for net proceeds of
P3,677,600, a price that yields 8%. Interest is payable annually every December 31. The entity elected the fair
value option. On December 31, 2014, the bonds are quoted at 95.

14. What amount should be reported as interest expense for 2014?

A. 120,000 C. 240,000
B. 220,656 D. 294,208

15. What amount should be reported as gain or loss from change in fair value for 2014?
A. 122,400 gain C. 322,400 gain
 B. 122,400 loss D. 322,400 loss

Compound Financial Instrument

16. On December 31, 2013, Moses Company issued P5,000,000 face value, 5-year bonds at 109. Each P
1,000 bond was issued with 50 detachable share warrants, each of which entitled the bondholder to
purchase one ordinary share of P5 par value at P25. Immediately after issuance, the market value of each
warrant was P5. The stated interest rate on the bonds is 11% payable annually every December 31.
However, the prevailing market rate of interest for similar bonds without warrants is 12%. The present
value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5
periods is 3.60. On December 31, 2013, what amount should be recorded as discount or premium on
bonds payable?
A. 170,000 discount C. 450,000 premium
B. 450,000 discount D. 800,000 discount

Convertible Preference Shares

17.
At the beginning of the current year, Ria Company issued 10,000 ordinary shares of P20 par value and
20,000 convertible preference shares of P20 par value for a total of P800,000. At this date, the ordinary
share was selling for P36, and the convertible preference share was selling for P27. What amount of the
proceeds should be allocated to the convertible preference shares?
A. 440,000 C. 540,000
B. 480,000 D. 600,000

Convertible Bonds - Issuance

18. Moriones Company issued P5,000,000 face value 12% convertible bonds at 110 on January 1, 2013,
maturing on January 1,2018 and paying interest semiannually on January 1 and July 1. It is estimated
that the bonds would sell only at 103 without the conversion feature. Each P 1,000 bond is convertible into
10 ordinary shares with PI00 par value. What is the increase in shareholders' equity arising from the
issuance of the convertible bonds on January 1, 2013?
A. 0 C. 350,000
B. 150,000 D. 500,000

19. On December 1, 2014, Lancaster Company issued at 103, five thousand of 9%, P1,000 face value bonds.
Attached to each bond was one share warrant entitling the holder to purchase 10 ordinary shares of the
entity. On December 1, 2014, the fair value of the bonds without the share warrants was 95, and the fair
value of each share warrant was P50. What amount of the proceeds from the bond issuance should be
accounted for as the initial carrying amount of the bonds payable?
A. 4,750,000 C. 5,000,000
B. 4,892,500 D. 5,150,000

Convertible bonds - conversion

Ordinary share
20. In 2014, Hyatt Company issued for P110 per share, 15,000 convertible preference shares of P100 par
value. One preference share may be converted into three ordinary shares with P25 par value at the option
of the preference shareholder. On December 31, 2015, all of the preference shares were converted into
ordinary shares. The market value of the ordinary share at the conversion date was P40. What amount
should be credited to ordinary share capital on December 31, 2015?
A. 1,125,000 C. 1,650,000
B. 1,500,000 D. 1,800,000

Share premium
21. On December 31, 2013, Cey Company had outstanding 10%, P1,000,000 face amount convertible bonds
payable maturing on December 31,2016. Interest is payable on June 30 and December 31. Each P1,000
bond is convertible into 50 shares of P10 par value. On December 31,2013, the unamortized premium on
bonds payable was P60,000. On December 31,2013,400 bonds were converted when Cey's share had a
market price of P24. The entity incurred P4,000 in connection with the conversion. No equity component
was recognized when the bonds were originally issued. What is the share premium from the issuance of
shares as a result of the bond conversion on December 31, 2013?
 A. 176,000 C. 276,000
B. 220,000 D. 280,000

Share capital & share premium

22. Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30, 2014. Each PI,000
bond was convertible into 10 ordinary shares of P50 par value. On July 1, 2014, the interest was paid to
bondholders, and the bonds were converted into ordinary shares which had a fair value of P75 per share.
The unamortized premium on these bonds was P12,000 at the date of conversion. No equity component
was recognized when the bonds were originally issued. What is the increase in the share capital and
share premium, respectively, as a result of the bond conversion?
A. 300,000 and 312,000 C. 450,000 and 162,000
B. 306,000 and 306,000 D. 600,000 and 12,000

23. On December 31, 2014, Tamia Company showed the following balances:
Bonds payable 4,000,000
Discount on bonds payable 500,000
Share premium - issuance 5,000,000
Share premium - conversion privilege 700,000
The interest is payable annually every December 31. The convertible bonds are not converted but fully
paid on December 31, 2014. On such date, the quoted price of the convertible bonds with conversion
option is 105 which is the payment to the bondholders plus interest. However, the quoted price of the
bonds without the conversion privilege is 95. What is the gain or loss from extinguishment of bonds?
A. 300,000 gain C. 700,000 gain
B. 300,000 loss D. 700,000 loss

24.Unamortized bond discount should be reported on the financial statements of the issuer as a
a. Direct deduction from the face amount of the bond
b. Direct deduction from the present value of the bond
c. Deferred charge
d. Part of the issue costs
25.Straight-line amortization of bond premium or discount:
a. can be used as an optional method of amortization in all situations.
b. provides the same total amount of interest expense and interest revenue as the effective interest method over
the life of the bonds.
c. provides the same amounts of interest expense and interest revenue each interest period as the effective
interest method.
d. is appropriate when the bond term is especially long.
e. is appropriate for deep discount bonds.

26. For a bond issue which sells for less than its face amount, the market rate of interest is
a. Dependent on the rate stated on the bond.
b. Equal to rate stated on the bond.
c. Less than rate stated on the bond.
d. Higher than rate stated on the bond.

27. The market price of a bond issued at a discount is the present value of its principal amount at the market
(effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.
28. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments (i.e., similar remaining
maturity, cash flow pattern, currency, credit risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts through the expected life of
the debt instrument or, when appropriate, a shorter period to the net carrying amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.
“Forgive yourself, you’re human.” / map 😊