NON-CURRENT LIABILITIES

Mark Anecito R. Perlas

MATCHING TYPE.
Description
1.
2.
3.
4.
5.
6.
7.

Backed by the general credit of the issuing corporation

May be retired at the option of the issuer
Secured by investments in stocks and bonds
Redeemable in terms of articles of trade such as oil or precious
metals
High risk and high yield bonds issued by entities that are heavily
indebted or otherwise in weak financial position
Bonds issued whereby another party promises to make payment
if the borrowing company fails to do so
Allow the issuing company to retire the bonds by installments

Backed by a lien on a real property

May require the issuing company to establish a sinking fund to
provide adequate money to retire the bond issue at one time
10. Can be exchanged for a specified number of shares of capital
stock of the issuing company
8.
9.

Type of Bonds
a.
b.
c.
d.

Term bonds
Registered bonds
Guaranteed bonds
Coupon bonds

e.
f.
g.
h.
i.

Convertible bonds
Mortgage bonds
Debenture bonds
Serial bonds
Commodity-backed
bonds
Collateral trust bonds
Callable bonds
Junk bonds
Treasury bonds
James bonds

j.
k.
l.
m.
n.

True or False
A.
B.
C.
D.
1.

Both statements are correct.

Only statement I is correct.
Only statement II is correct.
Both statements are incorrect.
I.

II.
2.

I.

II.
3.
4.

5.

I.
II.
I.
II.
I.
II.

A bond is a formal conditional promise made under seal to pay a specified sum of money at
a determinable future date, and to make periodic interest payments at a stated rate until the
principal sum is paid.
Bonds are fixed-income securities because the issuer promises to pay a specified amount of
interest regularly.
To find the price of a P1000, 5% bond with quarterly coupons, which is bought to yield
6% means to find the price under the assumption that the bond will be redeemed at par, and
that the investor wishes interest payable or compounded quarterly at the rate of 5%.
The life of the bond is the period commencing on the date of issuance up to the maturity
date.
The bond premium is a loss on the part of the investee.
The bond discount is a gain on the part of the investor.
If the face value of the bonds is more than the sales price, the bonds are said to be sold at a
premium.
When bonds are sold at a premium, the effective rate is lower than the nominal rate.
When bonds are sold at a discount, the nominal rate is lower than the effective rate.
The bond discount is amortized as loss over the life of the bonds and charged to interest
expense.

6.

I.

7.

II.
I.
II.
I.
II.
I.

8.
9.

II.
10. I.
II.

The discount or premium on bonds payable shall not be considered separate from the bonds
payable account.
Both accounts shall be treated consistently as valuation accounts of the bond liability.
When bonds are bought and sold, a brokerage charge is normally added to the price of the
bond.
Documentary stamp taxes and other charges related to the acquisition of the bond form part
of the cost.
Treasury bonds are companys own bonds originally issued and reacquired and canceled.
When treasury bonds are acquired, the treasury bonds account is debited at face value.
The straight-line method would result in higher amortization of premium at the end of the
first year than under the effective interest method.
The higher amortization of premium under the straight-line method would result in a lower
carrying value at the end of the first year than under the effective interest method.
Under the bond outstanding method, the amortization in the fifth year of a 10-year bond is
equivalent to 1/11 of the premium or discount.
Under the effective interest method, premium amortization is computed as: (nominal rate x
face value) less (effective rate x book value).

PROBLEM-SOLVING.
1. A P 1,000,000, 6% bond pays coupons on January 1 and July 1 and will be redeemed on July 1, 2010.
The bond is bought on January 1, 2008 to yield 4%. Find the price and form an amortization schedule.
a) Price = ______________________

b)
Date
Jan. 1, 2008
July 1, 2008
Jan. 1, 2009
July 1, 2009
Jan. 1, 2010
July 1, 2010

Interest paid

Interest expense

Amortization

Book value

2. On January 1, 2006, Aphrodite Company issued 4-year bonds with face value of P 8,000,000 at 110.
The bonds are issued to yield 10% per annum. On January 1, 2008, Aphrodite reacquired P 2,000,000
face value bonds to be placed in the treasury at 105. The company amortizes the bond premium by the
effective interest method. In recording the acquisition of the treasury bonds, find the amount to be
debited or credited to the following accounts:
Account
Cash
Interest expense
Gain on acquisition of treasury
bonds
Loss on acquisition of treasury
bonds
Premium on bonds payable
Treasury bonds

Debit or Credit

Amount

KNOWING THE EFFECTS OF TRANSACTIONS ON SEVERAL ACCOUNTS. (5 min)

Zeus, Inc.s P50 par value common stock has always traded above par. During 2008, Zeus had several
transactions that affected the following balance sheet accounts:
Account
Discount on bonds payable
Premium on bonds payable
Bonds payable
Ordinary share capital
Share premium
Retained earnings

Determine whether the transaction increased, decreased, or had no effect on each of the balances in the
above accounts.
1. Zeus issued bonds payable with a nominal rate of interest that was less than the market rate of interest.
2. Zeus issued convertible bonds, which are ordinary share equivalents, for an amount in excess of the
bonds face amount.
3. Zeus issued ordinary shares when the convertible bonds described in item 2 were submitted for
conversion. Each P1000 bond was converted into twenty ordinary shares. The book value method was
used for the early conversion.
4. Zeus issued bonds, with detachable share warrants, for an amount equal to the face amount of the bonds.
The share warrants have a determinable value.
5. Zeus declared and issued a 2% stock dividend.

MULTIPLE CHOICES. Mathematically, you have a chance of 0.000095367% of getting a perfect

score. (5 min)
1. Which of the following is reported as interest expense?
a. Pension cost interest
b. Postretirement health care benefits interest
c. Imputed interest on noninterest-bearing note
d. Interest incurred to finance construction of machinery for own use
2. An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the
sinking fund and subsequently used to purchase investments. The sinking fund
I. Increases by revenue earned on the investments.
II. Is not affected by revenue earned on the investments.
III. Decreases when the investments are purchased.
a.
b.
c.
d.

I only
I and III
II and III
III only

3. Which is incorrect concerning the retirement of bonds prior to maturity date?

a. Gain or loss is computed as the difference between the retirement price and the book value of the
bonds.
b. The total cash payment is equal to the book value of the bonds plus the accrued interest.
c. If the retirement price is more than the book value of the bonds, there is loss.
d. Any accrued interest is debited to interest expense.
4. Main Co. issued bonds with detachable common stock warrants. The sum of the fair value of the
warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as
a. Discount on bonds payable
b. Premium on bonds payable
c. Common stock subscribed
d. Contributed capital in excess of par stock warrants
5. An investor purchased a bond as a long-term investment between interest dates at a premium. At the
purchase date, the cash paid to the seller is
a. The same as the face amount of the bond
b. The same as the face amount of the bond plus accrued interest
c. More than the face amount of the bond
d. Less than the face amount of the bond
6. In the prior year, an entity acquired at a premium 10-year bond as a long-term investment. At December
31 of the current year, the bond is quoted at a small discount. Which of the following situations is the
most likely cause of the decline in the bonds market value?
a. The bond issuer issued a stock dividend.
b. The bond issuer is expected to call the bond at a premium, which is less than the investors
carrying amount.
c. Interest rates have declined since the investor purchased the bond.
d. Interest rates have increased since the investor purchased the bond.
7. On March 1, 2006, 3-BSA established a sinking fund in connection with an issue of bonds due in 2009.
At December 31, 2008, the independent trustee held cash in the sinking fund account representing the
annual deposits to the fund and the interest earned on those deposits. How should the sinking fund be
reported in 3-BSAs balance sheet at December 31, 2008?
a. The cash in the sinking fund should appear as a current asset.
b. Only the accumulated deposits should appear as a noncurrent asset.
c. The entire balance in the sinking fund account should appear as a current asset.
d. The entire balance in the sinking fund account should appear as a noncurrent asset.
8. Venus, Inc. issued P 500,000, 10% bonds to yield 8%. Bond issuance costs were P 10,000. How should
Venus calculate the net proceeds to be received from the issuance?
a. Discount the bonds at the stated rate of interest.
b. Discount the bonds at the market rate of interest.
c. Discount the bonds at the stated rate of interest and deduct bond issuance costs.
d. Discount the bonds at the market rate of interest and deduct bond issuance costs.
9. On March 1, 2008, Mars Co. issued bonds at a discount. Mars incorrectly used the straight-line method
instead of the effective interest method to amortize the discount. How were the following amounts, as
of December 31, 2008, affected by the error?

a.

Bond carrying amount

No effect

Retained earnings
No effect

b.
c.
d.

Overstated
Understated
Understated

Understated
Overstated
Understated

10. For which of the following transactions would the use of the present value of an annuity due concept
be appropriate in calculating the present value of the asset obtained or liability owed at the date of
incurrence?
a. A capital lease is entered into with the initial lease payment due one month subsequent to the
signing of the lease agreement.
b. A capital lease is entered into with the initial lease payment due upon the signing of the lease
agreement.
c. A ten-year 8% bond is issued on January 2 with interest payable semiannually yielding 7%.
d. A ten-year 8% bond is issued on January 2 with interest payable semiannually yielding 9%.

He will wipe away every tear from their eyes, and there will be no more death or mourning or
crying or pain, for the former things have passed away." Revelations 21:4
MERRY CHRISTMAS
HAPPY NEW YEAR 2017!
GOD BLESS