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PRACTICAL ACCOUNTING 1 – REVIEW

BONDS PAYABLE

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. On January 1, 2018, Nati Corporation issued 5,000 of its 5-year, P1,000 face value, 11% bonds
dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each
December 31. Nati uses the effective interest method of amortization. On December 31, 2019,
the 3,000 bonds were extinguished early through acquisition in the open market by Nati for
P2,970,000 plus accrued interest.

Based on the above and the result of your audit, determine the following: (Round off present
value factors to four decimal places.)

1. The issue price of the bonds on January 1, 2018 is

a. P5,388,835 c. P5,282,135
b. P4,630,655 d. P5,000,000

2. The carrying amount of the bonds on December 31, 2018 is

a. P4,755,930 c. P5,323,830
b. P5,453,840 d. P5,000,000

3. The gain on early retirement of bonds on December 31, 2019 is

a. P116,442 c. P181,785
b. P266,811 d. P 0

2. On January 2, 2017, the Nati, Inc. issued P2,000,000 of 8% convertible bonds at par. The
bonds will mature on January 1, 2021 and interest is payable annually every January 1. The
bond contract entitles the bondholders to receive 6, P100 par value, ordinary shares in
exchange for each P1,000 bond. On the date of issue, the prevailing market interest rate for
similar debt without the conversion option is 10%.

On January 1, 2021, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42.

Based on the above and the result of your audit, answer the following: (Round off present value
factors to 4 decimal places)

1. The proceeds from issuance of convertible bonds to be allocated to the liability component
is
a. P1,366,000 c. P1,873,184
b. P1,778,336 d. P2,000,000

2. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. P634,000 c. P126,816
b. P221,664 d. P 0

3. The carrying amount of the bonds payable on December 31, 2017 is

a. P2,000,000 c. P1,389,400
b. P1,796,170 d. P1,900,502

4. The interest expense for the year 2018 is

a. P160,000 c. P138,940
b. P179,617 d. P190,050

5. The gain to be recognized on conversion of the bonds is

a. P126,816 c. P463,408
b. P400,000 d. P 0
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3. Friendly Corporation issued P500,000, 6%, nonconvertible bonds with detachable stock
purchase warrants. Each P1,000 bond carried 20 detachable stock purchase warrants, each of
which called for one share of friendly common stock, par P50, at the specified option price of
P60 per share. The bonds sold at 106, and the detachable stock purchase warrants were
immediately quoted at P1 each on the market.

Questions:

1. The entry to record the issuance of the bonds is

a. Cash 500,000
Bonds payable 500,000
b. Cash 530,000
Bonds payable 500,000
Premium on bonds payable 20,000
CS warrants outstanding 10,000
c. Cash 530,000
Bonds payable 500,000
Premium on bonds payable 30,000
d. Cash 530,000
Bonds payable 500,000
CS warrants outstanding 30,000

2. The entry to record the subsequent exercise of the 10,000 stock purchase warrants is
a. Cash 600,000
Premium on BP 20,000
Bonds payable 500,000
Additional paid-in capital 120,000
b. Cash 500,000
Common stock 500,000
c. Cash 600,000
Common stock 500,000
Additional paid-in capital 100,000
d. Cash 600,000
CS warrants outstn. 10,000
Common stock 500,000
Additional paid-in capital 110,000

4. On December 31, 2019, Orland Company issued P4,000,000, 8% serial bonds, to be repaid in
the amount of P800,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10 % a year. Orland amortizes the bond discount by the interest method.

How much is the proceeds from issuance of bonds?

a. 4,000,000 b. 3,805,600 c. 4,400,000 d. 2,982,000

In its December 31, 2020 statement of financial position, what amount should Orland report as
the carrying value of the bonds payable?
a. 3,005,600 b. 3,066,160 c. 2,982,000 d. 2,787,600

In its December 31, 2020 statement of profit and loss, what amount should Orland report as
interest expense on the bonds ?
a. 64,000 b. 256,000 c. 128,000 d. 380,560

5. On January 1, 2020, Ezekiel Company received P1,077,200 for P1,000,000 face amount 12%
bonds. The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and
July 1. The entity has elected the fair value option for measuring the financial liability.

On December 31, 2020, the fair value of the bonds is determined to be P1, 064,600 due to
market and interest factors.
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1. What is the carrying amount of the bonds payable on January 1, 2020?

a. 1,000,000
b. 1,077,200
c. 500,000
d. 538,600

2. What is the interest expense for 2020?

a. 120,000
b. 100,000
c. 107,000
d. 129,264

3. What is the gain or loss from change in fair value of the bonds for 2020?
a. 64,600
b. 64,600
c. 12,600
d. 13,200

4. What is the carrying amount of the bonds payable on December 31, 2020?
a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920

6. On December 1, 2018, the Lawrz Corporation issued five-year, non-convertible P5,000,000 face
value 12% bonds for P5,386,072, a price that yields 10%. Interest is payable semi-annually on
June 1 and December 1. On August 1, 2021, the Lawrz Corporation retired P3,000,000 of the
bonds at 105 plus interest. The Accounting period for the Lawrz Corporation is the calendar
year.

Q1. What is the carrying value of the bonds on December 31, 2019?
a. 5,306,515
b. 5,309,000
c. 5,309,010
d. 5,317,505

Q2. What is the carrying value of the bonds retired on August 1, 2021?
a. 3,125,172
b. 3,127,008
c. 3,129,355
d. 3,200,061
e. 3,122,038

Q3. What is the gain or loss on redemption of the bonds on August 1, 2021?
a. 24,828 loss
b. 24,848 loss
c. 24,828 gain
d. 24,848 gain
e. 27,962 loss

7. On December 31, 2019, Moses Company issued P5,000,000 face value, 5-year bonds at 109.
Each P1,000 bond was issued with 50 detachable stock warrants, each of which entitled the
bondholder to purchase one share of P5 par value common 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, 2019, what
amount should Moses record as discount or premium on bonds payable?
a. 170,000 discount b. 450,000 premium
c. 450,000 discount d. 800,000 premium
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8. Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2019. The bonds have a
four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value
of 1,000 per bond (the total proceeds received from issuance of the bonds are 1,000,000).
Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares
with a par value of 1. The market rate of interest on similar non-convertible debt is 9 percent.
Assume that at the issuance date, 97,187 was credited to Share Premium—Conversion Equity.
The bonds were not converted at maturity and Mae Jong pays off the convertible debt holders.
What amount will Mae Jong record as a gain or a loss on this transaction?
a. -0- b.97,187 c. 24,297 d. 250,000

9. On May 1, 2019, Marly Co. issued P500,000 of 7% bonds at 103, which are due on April 30,
2027. Twenty detachable stock warrants entitling the holder to purchase for P40 one share of
Marly’s ordinary shares P15 par value, were attached to each P1,000 bond. The bonds without
the warrants would sell at 96. On May 1, 2019, the fair value of Marly’s shares was P35 per
share and of the warrants was P2.

1. On May 1, 2019, the carrying amount of bonds payable is?

a. P515,000. b. P500,000. c. P480,000. d. P494,400.

2. On May 1, 2019, Marly should credit Share Premium–Share Warrants for

a. P20,600 b. P35,000 c. P20,000 d. P15,000

3. Assuming the warrants were exercise on May 1, 2020, how much is the increase in
contributed capital as a result of the exercise of warrants?

10. Lovely Corp. had P600,000 convertible 8% bonds outstanding at June 30, 2019. Each P1,000
bond was convertible into 10 shares of Lovely's P50 par value ordinary share. On July 1, 2020,
the interest was paid to bondholders, and the bonds were converted into ordinary share, which
had a fair market value of P75 per share. The unamortized premium on these bonds
wasP12,000 at the date of conversion. Under the book value method, this conversion increased
the following elements of the stockholders' equity section by

Ordinary share Share premium

a. P300,000 P312,000
b. P306,000 P306,000
c. P450,000 P162,000
d. P600,000 P 12,000

11. Feller Company issues 20,000,000 of 10-year, 9% bonds on March 1, 2018 at 97 plus accrued
interest. The bonds are dated January 1, 2018, and pay interest on June 30 and December 31.

What is the total cash received on the issue date?

a. 19,400,000 b. 20,450,000 c. 19,700,000 d.19,100,000

12. The 12% bonds payable of Nyman Co. had a carrying amount of 832,000 on
December 31, 2019. The bonds, which had a face value of 800,000, were issued at a premium
to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June
30 and December 31. On June 30, 2020, several years before their maturity, Nyman retired the
bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. 0. b. 6,400. c. 9,920. d. 32,000.

13. On November 1, 2019, Jerome Company issued P8,000,000 of its 10-year, 8% term bonds
dated October 1, 2019. The bonds were sold to yield 10% with total proceeds of P7,000,000
plus accrued interest. Interest is paid every April 1 and October 1. What should Jerome report
for interest payable in its December 31, 2019 balance sheet?
a. 175,000 b. 160,000 c. 116,667 d. 106,667

14. On June 30, 2019, Jerome Company issued at 99, five thousand of its 8%, P1,000 face value
bonds. The bonds were issued through an underwriter to whom Jerome paid bond issue cost of
P425,000. On June 30, 2019, Jerome should report the bond liability at
a. 4,525,000 b. 4,950,000 c. 5,000,000 d. 4,575,000
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15. Pat Co. has 3,000,000 of 8% convertible bonds outstanding. Each 1,000 bond is convertible
into 30 no-par value common shares with a stated rate of 25. The bonds pay interest on
January 31 and July 31. On July 31, 2019, the holders of 900,000 bonds exercised the
conversion privilege. On that date, the market price of the bonds was 105, the market price of
the common shares was 36, the carrying value of the common shares was 18, and the
contributed capital: bond conversion rights was 450,000. The total unamortized bond premium
at the date of conversion was 210,000.

Using the book value method, what amount will Pat record as a result of this conversion?
a. A loss of 9,000 b. An extraordinary loss of 9,000
c. A gain of 18,000 d. No gain or loss

16. A company issued 500,000, 12% (interest payable annually on May 1), 5-year bonds. At year
end, the company had the following account balances:
Bonds payable 500,000 Cr
Discount on bonds 9,500 Dr
Interest payable 10,000 Cr
Conversion rights on convertible bonds 36,000 Cr
Interest expense 10,300 Dr

What amount of proceeds from the bond issue would be shown under the financing activities
section of the year-end cash flow statement?
a. 490,200 b. 526,200 c. 526,500 d. 545,800

17. During year 1, Lake Co. issued 3,000 of its 9%, 1,000 face value bonds at 101 1/2. In
connection with the sale of these bonds, Lake paid the following expenses:
Promotion costs 20,000
Engraving and printing 25,000
Underwriters’ commissions 200,000

What amount should Lake record as bond issue costs to be amortized over the term of the
bonds?
a. 0 b. 220,000 c. 225,000 d. 245,000

18. Grim Corporation reports under IFRS. Grim issued 2,000 1,000 convertible bonds at par, with
an annual interest rate of 6% when the market was 8%. The bonds are due in 5 years and each
1,000 bond is convertible into 3 shares of common stock. At what amount would Grim record
the liability component of the bond?
a. 479,125 b. 1,840,285 c. 2,000,000 d. 2,006,000

19. On January 1, 2019, Southern Corporation received 107,720 for a 100,000 face amount, 12%
bond, a price that yields 10%. The bonds pay interest semiannually. Southern elects the fair
value option for valuing its financial liabilities. On December 31, 2019, the fair value of the bond
is determined to be 106,460. Southern recognized interest expense of 12,000 in its 2019
income statement. What was the gain or loss recognized on the 2019 income statement to
report this bond at fair value?
a. 1,260 gain b. 6,460 gain c. 12,000 loss d. 13,260 loss

20. Bonds with a face value of 1,000,000 were retired prior to maturity, when their book value was
987,000. The amount (excluding interest) paid to retire the bonds was 950,000. What would the
entry to record the retirement include?
a) Dr. bonds payable 987,000 b) Cr. cash 1,000,000
c) Cr. discount 13,000 d) Dr. loss on bond retirement 37,000

21. On January 2, Vole Co. issued bonds with a face value of 480,000 at a discount to yield 10%.
The bonds pay interest semiannually. On June 30, Vole paid bond interest of 14,400. After Vole
recorded amortization of the bond discount of 3,600, the bonds had a carrying amount of
363,600. What amount did Vole receive upon issuing the bonds?
a. 360,000 b. 367,200 c. 476,400 d. 480,000
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22. On December 31, 2019, MS Company issued 10-year convertible bonds with a face value of
2,000,000 and a stated rate of 10%, paid semi-annually. The bonds are convertible at the
investor’s option. The bonds were issued to provide an effective yield of 9% for proceeds of
2,130,080. If these bonds did not have a conversion feature, the company would have issued
the bonds for 1,880,496 to yield 11%.

Which of the following is true with respect to the reporting of this financial instrument?
a) The liability portion of this financial instrument would be 2,130,080 at December 31, 2019
b) The liability portion of this financial instrument would be 2,000,000 at December 31, 2019
c) The interest expense for the first half of 2020 would be 95,854 .
d) The interest expense for the first half of 2020 would be 103,427.

23. The 10% bonds payable of Nixon Company had a net carrying amount of 570,000 on
December 31, 2019. The bonds, which had a face value of 600,000, were issued at a discount
to yield 12%. The amortization of the bond discount was recorded under the effective-interest
method. Interest was paid on January 1 and July 1 of each year. On July 2, 2020, several years
before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2020 was
made as scheduled. What is the loss that Nixon should record on the early retirement of the
bonds on July 2, 2020? Ignore taxes.
a. 12,000. b. 37,800. c. 33,600. d. 42,000.

24. On January 2, year 1, West Co. issued 9% bonds in the amount of 500,000, which mature on
January 2, year 11. The bonds were issued for 469,500 to yield 10%. Interest is payable
annually on December 31. West uses the interest method of amortizing bond discount and does
not elect the fair value option for reporting financial liabilities. In its June 30, year 1 balance
sheet, what amount should West report as bonds payable?
a. 469,500 b. 470,475 c. 471,025 d. 500,000

25. Webb Co. has outstanding a 7%, ten-year 100,000 face-value bond. The bond was originally
sold to yield 6% annual interest. Webb uses the effective interest rate method to amortize bond
premium, and does not elect the fair value option for reporting financial liabilities. On June 30,
year 1, the carrying amount of the outstanding bond was 105,000. What amount of unamortized
premium on bond should Webb report in its June 30, year 2 balance sheet?
a. 1,050 b. 3,950 c. 4,300 d. 4,500