Financial Accounting and Reporting: NOTES, LOANS, BONDS AND DEBT RESTRUCTURING

FAR EASTERN UNIVERSITY

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NOTES AND LOANS PAYABLE
1. National Bank grants a 2-year loan to AAA Company in the amount of P2,400,000 with a stated interest rate of
6% on January 1, 2018. Monthly payment of P100,000 plus interest are due starting January 31, 2018. AAA, the
borrower, has a carrying amount and interest expense on December 31, 2018 of
2. BBB Company purchased merchandise for resale on January 1, 2018, for P5,000 cash plus a P20,000, two-year
note payable. The principal is due on December 31, 2019; the note specified 8 percent interest payable each
December 31. BBB's going rate of interest for this type of debt was 15 percent. How much is the carrying
amount of the note payable on December 31, 2018?
3. On July 1, 2018, CCC purchased a noncash asset with a list price of P260,000 by issuing a five-year noninterest-
bearing note. The market or "going" rate of interest for this note was 12%. The note will; be paid in five equal
annual P64,000 installments each June 30, 2019 through 2023. The amount that should be recorded for the net
liability on July 1, 2021, is:
4. On December 31, 2018, DDD Company purchased equipment from Otto Corp. and issued a noninterest-bearing
note requiring payment of P50,000 annually for ten years. The first payment is due December 31, 2018, and the
prevailing rate of interest for this type of note at date of issuance is 12%. Present value factors are as follows:
Present value of 1 at 12% for 10 periods 0.3220
Present value of ordinary annuity of 1 at
12% for 10 periods 5.6502
Present value of annuity due of 1 at 12%
for 10 periods 6.3282
The interest expense to be reported by DDD in its 2019 income statement is
5. EEE Publishers offered a contest in which the winner would receive P1 million payable over 20 years. On
December 31, 2018, EEE announced the winner of the contest and signed a note payable to the winner for P1
million, payable in P50,000 installments every January 2. Also on December 31, 2018, EEE purchased an annuity
for P418,250 to provide the P950,000 prize monies remaining after the first P50,000 installment, which was paid
on January 2, 2019. In its 2018 profit or loss, what should EEE report as contest prize expense?
6. FFF Industries purchases new specialized manufacturing equipment on July 1, 2017. The equipment cash price is
P79,000. FFF signs a deferred payment contract that provides for a down payment of P10,000 and an 8-year note
for P103,472. The note is to be paid in 8 equal annual payments of P12,934. The payments include 10% interest
and are made on June 30 of each year, beginning June 30, 2018.
Determine the following:
a. The carrying amount of the note payable on December 31, 2018 is
b. The total interest expense for the year ended December 31, 2018 is
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7. On January 1, 2018, AAA Co. borrowed 10%, P1,000,000 loan from BBB Bank. Principal is due on January 1,
2017 but interests are due annually starting December 31, 2018. BBB charges 3% non-refundable loan
origination fee representing service fee. What will be the initial carrying amount of the loan?
Determine the following:
a. Carrying amount of the loans payable on January 1, 2018
b. Carrying amount of the note payable on December 31, 2018
c. Total interest expense for the year ended December 31, 2018
8. On January 1, 2018, AAA Co. obtained a P2,000,000, 180-day bank loan at an annual rate of 10%. The loan
agreement requires AAA to maintain a P200,000 compensating balance in its bank account at the lending bank.
AAA would otherwise maintain a balance of only P100,000 in this account. The bank account earns interest at an
annual rate of 2%. Based on a 360-day year, what is the effective interest rate on the borrowing?
BONDS PAYABLE
Issuance of bonds
9. On January 1, 2018, AAA Co. issued 10%, P1,000,000. These bonds mature on December 31, 2020 but interests
are due annually every year-end.
Requirement: Provide the necessary journal entry/ies on the date of issuance under the following independent
situations:
a. Bonds were issued at face amount
b. Bonds were issued to yield 8%
c. Bonds were issued to yield 12% but were quoted at 98
d. Bonds were issued to yield 12%
10. AAA Company sells five-year P1,000,000 face value bonds on January 1, 2018. The bond pays 12% interest
semiannually starting June 30, 2018.
Requirement:
a. Provide the necessary journal entries for the year 2018.
b. Determine the carrying amount of the bonds and the interest expense to be recognized by AAA on December
31, 2018.
11. AAA Corporation is authorized to issue P1,000,000 of five-year bonds dated June 30, 2018 with a stated interest
rate of 10%. Interest on the bonds is payable semi-annually on June 30 and December 31. The company uses
the effective interest method. The bonds were sold to yield 8%.
Requirement
a. Provide the necessary journal entries for the year 2018
b. Determine the following: (Round off present value factors to four decimal places)
 Bond issue price
FAR by Raymund Francis A. Escala, MBA, CPA Page 1 of 6
Financial Accounting and Reporting: NOTES, LOANS, BONDS AND DEBT RESTRUCTURING
 Interest expense for 2018 and 2019
 Carrying value of the bonds on December 31, 2018 and 2019
12. Assume the same information in Illustration 11 except that bonds were sold to yield 12%.
Requirement
a. Provide the necessary journal entries for the year 2018
b. Determine the following: (Round off present value factors to four decimal places)
 Bond issue price
 Interest expense for 2018 and 2019
 Carrying value of the bonds on December 31, 2018 and 2019
Retirement of non-convertible bonds
13. Using the information in Problem 12, determine the amount of gain or loss assuming bonds were retired under the
following independent situations:
a. January 1, 2019 at 94 b. April 1, 2021 at 102 c. June 30, 2023
Serial bonds
14. AAA Corporation issued bonds with face value of P6,000,000 on January 1, 2018. The nominal rate of 6% is
payable annually on December 31. The bonds are issued with an 8% effective yield. The bonds mature on every
December 31 each year at the rate of P2,000,000 for three years.
Based on the preceding information, determine the following: (Round off present value factors to four decimal
places) and provide the necessary journal entries for the year 2018.
a. Issue price of the serial bonds
b. Interest expense in 2018
c. Carrying value of the serial bonds payable at December 31, 2018
Issuance of bonds between interest dates
15. On April 1, 2018, AAA Co. issued 12%, P4,000,000 bonds dated January 1, 2018 at 97 including accrued interest.
The bonds mature in ten years and pay interest annually every year-end.
Requirement: Compute for the initial carrying amount of the bonds on April 1, 2018.
16. On January 1, 2018, AAA Co. is contemplating of issuing a 10%, P1,000,000. These bonds mature on December
31, 2020 but interests are due annually every year-end. ABC determines that that the current market rate on
January 1 is 12%.
Requirement: Determine the total amount of proceeds received from the issuance assuming bonds were issued on
a. Janaury 1, 2018 b. April 1, 2018
Inappropriate amortization of bonds issued
17. On January 1, 2018, AAA Co. issued 1,000, P2,000, 10%, 3-year bonds for P1,903,926. Principal is due on
December 31, 2020 but interests are due annually every year-end. The effective interest rate is 12%. AAA Co.
inappropriately used the straight line method to amortize the discount.
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Requirements: Determine the effects of the error on each of the following as of December 31, 2018:
a. Carrying amount of bonds payable b. Profit for the year
COMPOUND FINANCIAL INSTRUMENTS
18. AAA Company issued bonds payable with warrants of 4,000, 10% 5-year bonds, face value P1,000 at 98 on
January 1, 2018. Each bond is accompanied by warrant that permits the bondholder to purchase 20 shares of
common stock, par P50, at P55 per share. The nominal rate is payable annually on December 31. The bonds
mature on January 1, 2023. When the bonds are issued, the prevailing market rate of interest for similar bonds
without warrants is 12% per annum.
a. Based on the preceding information, determine the following: (Round off present value factors to four decimal
places)
 Amount allocated to warrants
 Interest expense in 2018
 Carrying value of the serial bonds payable at December 31, 2018
b. Provide the necessary journal entries assuming 60% of the warrant were exercised, 20% of the warrants were
recalled at P2 per warrant and the other 20% had expired.
19. On January 1, 2013, FFF Corporation issued a 10 percent convertible bonds with a face value of P4,000,000
maturing on December 31, 2022. Each P1,000 bond is convertible into ordinary shares of FFF at a conversion
price of P25 per share. Interest is payable half-yearly in cash. At the date of issue, FFF could have issued
nonconvertible debt with a ten-year term bearing a coupon interest rate of 11 percent.
On January 1, 2018, the convertible bond has a fair value of P4,400,000. FFF makes a tender offer to the holders
to repurchase the bonds for P4,400,000. The holders of the P2,000,000 bonds have accepted the offer. At the
date of repurchase, FFF could have issued non-convertible debt with a five-year term bearing a coupon interest
rate of 8 percent.
On December 31, 2018, to induce the holders of the remaining bonds to convert the bonds promptly, FFF reduces
the conversion price to P20 if the bonds are converted before March 1, 2019 (i.e; within 2 months). The market
price of FFF’s ordinary shares on the date the terms are amended is P32 per share.
Based on the above, compute for the following: (Round off present value factors to four decimal places)
a. Proceeds from issuance of convertible bonds to be allocated to the equity component
b. Carrying amount of the bonds on December 31, 2017 is
c. Amount to be recognized in profit or loss as a result of the repurchase of the bonds on January 1, 2018 is
d. Decrease in equity as a result of repurchase of the bonds on January 1, 2018
e. Amount to be recognized in profit or loss as a result of the amendment of the terms on December 31, 2018 is
f. The amount of gain or loss to be recognized assuming the remaining bondholders converted the bonds

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Financial Accounting and Reporting: NOTES, LOANS, BONDS AND DEBT RESTRUCTURING
DEBT RESTRUCTURING
20. AAA, Inc. provided the following balances on December 31, 2018:
Note payable P 1,500,000
Accrued interest payable 200,000
On December 31, 2018, the entity transferred to the creditor land recorded at a cost of P1,500,000. As of this
date, the land has a fair value of P2,000,000.
Requirement:
a. Provide the necessary journal entries.
b. Determine the amount of gain or loss to be recorded in the company’s income statement
21. AAA Co. owes METRO Bank P2,000,000 plus accrued interest of P180,000. The unamortized discount on the loan
is P40,000. The debt is a 10-year, 12% loan. During 2018, AAA’s business deteriorated due to loss of demand for
its services. On December 31, 2018, METRO Bank agrees to accept old equipment and cancel the entire debt.
The equipment has a cost of P6,000,000, accumulated depreciation of P4,400,000, and fair value of P1,800,000.
Requirement:
a. Provide the necessary journal entries.
b. Determine the amount of gain or loss to be recorded in the company’s income statement
22. AAA Corporation showed the following data on December 31, 2018:
Bonds payable P 4,500,000
Accrued interest payable 300,000
On December 31, 2018, the entity issued share capital with a total par value of P2,000,000. Both share capital
issued and bonds payable are quoted in an active market at P4,400,000 and P4,700,000, respectively.
Requirement:
a. Provide the necessary journal entries.
b. Determine the amount of share premium arising from the transaction
23. On December 31, 2018, AAA Co. issued 10,000 shares with par value of P200 per share in settlement of a 12%,
P2,000,000 loan payable with a related unamortized discount of P40,000, and accrued interest of P180,000. The
remaining term of the loan is 3 years. The fair value of the shares is not reliably determinable. The prevailing
market rate for similar debt on December 31, 2018 is 8%.
Requirement:
a. Provide the necessary journal entries.
b. Determine the amount of gain or loss to be recorded in the company’s income statement
24. AAA Company has an overdue Notes payable to City Bank of P8,000,000 and recorded accrued interest of
P640,000, based on 8% interest rate.
As a result of a settlement on December 31, 2018, City Bank agreed to the following restructuring arrangement:
 Reduced the principal obligation to P6,000,000.

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Forgave the P640,000 accrued interest.
 Extended the maturity date to December 31, 2020.
 Annual interest of 10% is to be paid on December 31, 2019 and 2020.
Requirement: (Round off present value factor into four decimal places)
a. Provide the necessary journal entries.
b. Determine the amount of gain or loss to be recorded in the company’s income statement
THEORETICAL CONCEPTS
1. Which of the following statements about non-interest bearing notes is false?
A. The face amount of a non-interest bearing note may include both the principal and interest as a single amount
to be paid back at maturity date.
B. The principal amount of a non-interest bearing is its future cash flows discounted at its effective interest rate.
C. The effective rate on a short-term non-interest bearing note, with specified term, cannot be determined unless
it is given on the face of the note.
D. Non-interest bearing is not a descriptive designation for zero-interest type of note because such notes do bear
interest.
2. Discount on notes payable is charged to interest expense
A. Equally over the life of the note C. Using the effective interest method
B. Only in the year the note is issued D. Using the outstanding balance method
3. Bonds that provide the issuing corporation the right to call and retire the bonds prior to their maturity
A. Secured bonds B. Convertible bonds C. Bearer bonds D. Callable bonds
4. In theory, the proceeds from the sale of a bond will be equal to the
A. Face value of the bond.
B. Present value of the principal amount due at the end of the life of the bond plus the present value of the
interest payments made during the life of the bond.
C. Face value of the bond plus the present value of the interest payments made during the life of the bond.
D. Face value of the bond plus the interest payments made during the life of the bond.
5. The interest rate written in the terms of the bonds indenture is known as
A. Coupon B. Nominal C. Stated D. Coupon, nominal or stated
6. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight premium shall be
A. Charged to retained earnings when the bonds are issued
B. Expensed in the year in which incurred
C. Capitalized as origination cost
D. Reported in the statement of financial position as a deduction from bonds payable and amortized over the ten-
year bond term.

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Financial Accounting and Reporting: NOTES, LOANS, BONDS AND DEBT RESTRUCTURING
7. SSS Company issued bonds with maturity amount of P1,000,000 and a maturity of ten years from date of issue.
If the bonds were issued at a discount, this indicates that
A. Stated rate of interest exceeded the yield rate
B. Yield rate of interest exceeded the stated rate
C. Stated rate of interest is equal to the yield rate
D. No necessary relationship exist between the two rates
8. Use of the effective interest method in amortizing a discount on bonds payable would result in
A. A decreasing amount of discount amortization each period over the life of the bonds
B. A constant amount of discount amortization each period over the life of the bonds
C. An increasing amount of discount amortization each period over the life of the bonds
D. Cannot be determined from the information given
9. How the carrying amount of the bonds payable would be affected by amortization of each of the following:
Discount Premium Discount Premium
A. No effect No effect C. Increase Decrease
B. Increase No effect D. Decrease Increase
10. If bonds are issued between interest payment dates, the entry on the books of the issuing corporation could
include a
A. Debit to Interest payable C. Credit to Interest expense
B. Credit to Interest receivable D. Credit to Unearned interest

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

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Financial Accounting and Reporting: NOTES, LOANS, BONDS AND DEBT RESTRUCTURING
6. Market price of a bond issued at a discount is the present value of its principal amount at the effective interest
rate
A. Plus the present value of all future interest payments at the rate of interest stated on the bond.
B. Plus the present value of all future interest payments at the market rate of interest.
C. Minus the present value of all future interest payments at the market rate of interest.
D. Minus the present value of all future interest payments at the rate of interest stated on the bond.
7. What is the market rate of interest for a bond issue which sells for more than its face value?
A. Less than rate stated on the bond C. Equal to rate stated on the bond
B. Higher than rate stated on the bond D. Independent of rate stated on the bond
8. After initial recognition, an entity shall measure a bond liability at amortized cost using the
A. Effective interest method C. Straight line method
B. Bond outstanding method D. Either effective interest or straight line method
9. Under effective interest method of bond discount or premium amortization, periodic interest expense is equal to
A. The stated rate of interest multiplied by the face value of the bonds.
B. The effective rate of interest multiplied by the face value of the bonds.
C. The stated rate of interest multiplied by the balance of the bonds at the beginning of the period.
D. The effective rate of interest multiplied by the balance of the bonds at the beginning of the period.
10. When the effective interest method is used to amortize bond premium or discount, the periodic amortization will
A. Increase if the bonds were issued at a discount
B. Decrease if the bonds were issued at a premium
C. Increase if the bonds were issued at a premium
D. Increase if the bonds were issued at either a discount or a premium
11. When the interest payment dates of a bond are April 1 and October 1, and the bond is issued on June 1, the
amount of interest expense at December 31 of the year of issuance would be for
A. Two months B. Seven months C. Six months D. Eight months
12. The proceeds from a bond issued with detachable stock purchase warrants should be accounted for
A. Entirely as bonds payable
B. Entirely as stockholders’ equity
C. Partially as unearned revenue and partially as bonds payable
D. Partially as stockholders’ equity and partially as bonds payable
13. In a debt restructuring that is considered an asset swap, the gain on restructuring is equal to
A. Excess of the fair value of the asset over its book value
B. Excess of the carrying value of the debt over the fair value
C. Excess of the fair value of the asset over the carrying value of the debt
D. Excess of the carrying value of the debt over the book value of the asset
14. For a debt restructuring involving modification of terms, it is appropriate for a debtor to recognize a gain when the
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carrying amount of the debt
A. Exceeds the total future cash payments specified by the new terms
B. Is less than the total future cash payments specified by the new terms
C. Exceeds the present value specified by the new terms
D. Is less than the present value specified by the new terms
15. There is substantial modification of terms of an old financial liability if the gain or loss on extinguishment is
A. At least 10% of the new liability C. At least 10% of the old liability
B. Less than 10% of the new liability D. Less than 10% of the old liability
16. On April 1, 2016, AAA Company borrowed P5,000,000 and signed a 2-year note bearing interest at 12% per
annum compounded annually. Interest is payable in full at maturity on March 31, 2019. What amount should AAA
report as a liability for accrued interest at December 31, 2018?
A. 1,200,000 B. 1,104,000 C. 1,100,000 D. 1,050,000
17. On August 1, 2018 AAA Corp.’s P2,000,000, one-year non-interest-bearing note due July 31, 2018, was
discounted at BBB Bank at 10.8%. AAA uses the straight-line method of amortizing discount. What amount
should AAA report for notes payable in its December 31, 2018 statement of financial position?
A. 2,000,000 B. 1,910,000 C. 1,874,000 D. 1,200,000
18. On September 1, 2018, AAA Co. borrowed on a P1,350,000 note payable from BBB Bank. The note bears interest
at 12% and is payable in three equal annual principal payments of P450,000. On this date, the bank’s prime rate
was 11%. The first annual payment for interest and principal was made on September 1, 2018. At December 31,
2018, what amount should AAA report as accrued interest payable?
A. 54,000 B. 49,500 C. 36,000 D. 33,000
19. On March 1, 2017, AAA Co. borrowed P10,000 and signed a two-year note bearing interest at 12% per annum
compounded annually. Interest is payable in full at maturity on February 28, 2015. What amount should AAA
report as a liability for accrued interest at December 31, 2018?
A. 2,320 B. 1,200 C. 1,000 D. ZERO
20. BBB Bank grants a 10-year loan to AAA Company in the amount of P1,500,000 with a stated interest rate of 6%.
Payments are due monthly and are computed to be P16,650. BBB Bank incurs P40,000 of direct loan origination
cost and P20,000 of indirect loan origination cost. In addition, BBB Bank charges Abbo a 4-point nonrefundable
loan origination fee. AAA, the borrower, has a carrying amount of
A. 1,520,000 B. 1,500,000 C. 1,480,000 D. 1,440,000
21. On March 1, 2018, AAA Company issued 5,000 of its P1,000 face value bonds at 110 plus accrued interest. AAA
Company paid bond issue cost of P300,000. The bonds were dated November 1, 2010, and bear interest at 12%
payable semiannually on November 1 and May 1. What net amount was received from the bond issuance on
March 1, 2018?
A. 5,700,000 B. 5,500,000 C. 5,400,000 D. 5,200,000
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Financial Accounting and Reporting: NOTES, LOANS, BONDS AND DEBT RESTRUCTURING

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)
“There are no shortcuts to any place worth going.” – Unknown

END OF HANDOUTS

FAR by Raymund Francis A. Escala, MBA, CPA Page 6 of 6