02 Notes Loans and Bonds Payables and Debt Restructuring PDF
02 Notes Loans and Bonds Payables and Debt Restructuring PDF
02 Notes Loans and Bonds Payables and Debt Restructuring PDF
11. When bonds are retired prior to maturity, any gain or loss from the early extinguishment of debt should be
A. Recognized in income of the period of extinguishment
B. Treated as an increase or decrease in paid-in capital
C. Allocated between a portion that is recognized over an increase (decrease) in paid-in capital and a portion is
recognized in current income
D. Amortized over the remaining original term of the debt extinguished.
12. An early extinguishment of bonds payable, which were originally issued at a premium is made by purchase of the
bonds between interest dates. At the time of reacquisition
A. Any costs of issuing bonds must be amortized up to the purchase date
B. The premium must be amortized up to the purchase date
C. Interest must be accrued from the last interest date to the purchase date
D. The premium should be deducted from the carrying amount of the bonds to determine the appropriate amount
of gain or loss to be recognized.
13. Which of the following statements is incorrect regarding troubled debt restructuring?
A. In a modification of terms, when the total discounted cash flows under the new terms exceed the carrying
value of the debt, a gain on debt restructuring is recognized in profit or loss if the discounted present value of
the new terms is at least 10% different from the carrying value of the old obligation.
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B. Any difference between the carrying value of the debt settled and the carrying value of the asset transferred
shall be taken to profit or loss during the period of the debt settlement.
C. In debt restructuring where shares of equity instruments are granted to settle an obligation, the excess of the
carrying value of the debt settled over the par value of the shares issued shall be taken to profit or loss during
the period of settlement.
D. In a modification of terms where a gain on debt restructuring is recognized, the debtor recognizes interest
expense after the debt restructuring based on the historical interest rate.
14. Under a debt restructuring involving substantial modification of terms, the future cash flows under the new terms
should be discounted using
A. Market rate of interest C. Interest rate under new terms
B. Prime interest rate D. Original effective interest rate
15. TTT Co. neglected to amortize discount on outstanding 20-year bonds payable. What is the effect of the failure to
record discount amortization on interest expense and bond carrying value, respectively?
A. Understated, understated C. Overstated, overstated
B. Understated, overstated D. Overstated, understated
SELF-TEST QUIZZER
1. At issuance date, the present value of a promissory note will be equal to its face amount if the note
A. Bears a stated rate of interest which is realistic.
B. Bears a stated rate which is less than the prevailing market rate for similar notes.
C. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for similar notes.
D. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar notes.
2. Which of the following is incorrect about discount on notes payable account?
A. The account has a debit balance C. Effective interest rate is higher than nominal rate
B. The account is presented as asset D. All of these statements are correct
3. As a loan is paid off, the
A. Debt portion of the fixed payment increases C. Debt portion do not change each interest period
B. Interest portion from payment increases D. Monthly payment changes
4. These are bonds that mature on a single date are called
A. Serial bonds B. Term bonds C. Debenture bonds D. Secured bonds
5. These are high-risk, high-yield bonds issued by companies that are heavily in debt or otherwise in weak financial
conditions
A. Zero-interest bonds B. Junk bonds C. Unsecured bonds D. Bearer bonds
22. On December 31, 2018, AAA Company had outstanding 12%, P5,000,000 face value bonds maturing on
December 31, 2023. Interest was payable semiannually every June 30 and December 31. On December 31,
2018, after amortization was recorded for the period, the unamortized bond discount and bond issue cost were
P500,000 and P300,000, respectively. On that date, AAA acquired all its outstanding bonds on the open market
at 98 and retired them. At December 31, 2018, what amount should be AAA recognize as pretax loss on early
extinguishment of bonds?
A. 700,000 B. 400,000 C. 200,000 C. 100,000
23. On January 1, 2018, AAA Company issued 5-year bonds with face value of P5,000,000 at 110. The company paid
bond issued cost of P80,000 on same date. The stated interest rate on the bonds is 8% payable annually every
December 31. The bonds are issued to yield 6% per annum.
AAA company uses the effective interest method of amortization. On December 31, 2018, what should AAA report
as carrying amount of the bonds payable?
A. 5,000,000 B. 5,400,000 C. 5,430,000 D. 5,345,000
24. On December 31, 2018, AAA Company issued 5,000 of its 8% 10-year P1,000 face value bonds with detachable
warrants at 110. Each bond carried a detachable warrant for 10 ordinary shares of AAA’s 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. In the December 31, 2018 balance sheet,
what amount should AAA report as bonds payable?
A. 5,500,000 B. 5,000,000 C. 4,400,000 D. 4,800,000
25. On December 31, 2018, AAA Company issued P8,000,000 of 12% bonds payable maturing in 5 years. The bonds
pay interest semiannually. The bonds include nondetachable stock warrants giving the bondholders the right to
purchased 16,000 P100 par value ordinary shares for P150 per share within the next three years. The bonds and
warrants were issued at 120. The value of the warrants at the time of issuance is P1,500,000. The market rate
of interest for similar bonds without the warrants is 10%. The PV of 1 at 5% for ten periods is .61 and the PV of
an ordinary annuity of 1 at 5% for ten periods is 7.72. On December 31, 2018 the bonds payable should be
reported at
A. 9,600,000 B. 8,598,400 C. 8,585,600 D. 8,100,000
26. AAA Company issued 5,000 convertible bonds on January 1, 2018. The bonds have a three-year term and are
issued at 110 with face value of P1,000 per bond. Interest is payable annually in arrears at a nominal 6% interest
rate. Each bond is convertible at anytime up to maturity into 100 shares with par value of P5. When the bonds
are issued, the prevailing market interest rate for similar debt instrument without conversion option is 9%. The
present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9% for 3 periods
is 2.53. What is the equity component of the issuance of the convertible bonds on January 1, 2018?
A. 1,650,000 B. 1,150,000 C. 891,000 D. 391,000
27. On January 1, 2018, after recording interest and amortization, AAA Company converted P5,000,000 of its 12%
convertible bonds into 50,000 shares of P50 par value. On the conversion date, the carrying amount of the bonds
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was P6,000,000, the market value of the was P6,500,000, and AAA’s shares was publicly trading at P150. AAA
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 additional paid in capital should AAA record as a result
of the conversion?
A. 5,000,000 B. 4,900,000 C. 3,500,000 D. 3,400,000
28. AAA Company is indebted to a bank under a P6,000,000, 10% three-year note dated December 31, 2015.
Because of financial difficulties, AAA owed accrued interest of P600,000 on the note at December 31, 2018. Under
a debt restructuring on December 31, 2018, the bank agreed to settle the note and accrued interest for a tract of
land having a fair value of P5,000,000. The acquisition cost of the land is P3,500,000. In its 2018 statement of
comprehensive income, AAA should report gain on extinguished of debt at
A. 1,000,000 B. 1,600,000 C. 2,500,000 D. 3,100,000
29. On December 31, 2018, AAA Company shows the following data with respect to its matured obligation.
Note payable P 5,000,000
Accrued interest payable 500,000
The company is threatened with the court suit if it could not pay its maturing debt. Accordingly, the company
enters into an agreement with the creditor for the issuance of share capital in full settlement of the note payable.
The agreement provides for the issue of 50,000 ordinary shares with par value of P50. The ordinary share is
currently quoted at P70. How much is the share premium arising from the debt restructuring considered as
“equity swap”?
A. 3,000,000 B. 2,000,000 C. 1,500,000 D. 1,000,000
30. Due to extreme financial difficulties, AAA Company has negotiated a restructuring its 10%, P5,000,000 note
payable due on December 31, 2018. The unpaid interest on the note on such date si P500,000. The creditor has
agreed to reduce the face value to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and
extend the due date three years from December 31, 2018. The present value of 1 at 10% for three periods is 0.75
and the present value of an ordinary annuity of 1 at 10% for three periods is 2.49.
What is the interest expense to be recognized by AAA Company for the year 2019?
A. 303,680 B. 320,000 C. 379,680 D. 400,000
Suggested answers to self-test quizzers (ABABB BAADD BDDCC BCCAD CADDC CBDDC)
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