FAR-2201 (Bonds Payable)

FAR EASTERN UNIVERSITY – DILIMAN
FAR Review Batch 2022 January 25, 2022
FINANCIAL ACCOUNTING & REPORTING G. Macariola
FAR-2201: BONDS PAYABLE

PROBLEM SOLVING
On January 1, 2017, Egg Company issued a 5-year bonds with face value of P 8,000,000 and stated
interest of 10% per year payable semi-annually January 1 and July 1. The bonds were issued to
yield 8%.
Present value factors are:

PV of an annuity of 1 for 5 periods at 8% - 3.99
PV of 1 for 5 periods at 8% .6806
PV of annuity of 1 for 10 periods at 4% 8.11
PV of 1 for 10 periods at 4% .6756
1. What is the issue price of the bonds?

a. 8,636,800 c. 7,040,800
b. 8,648,800 d. 8,688,800
2. How much is the interest expense for the year 2017?

a. 691,904 c. 862,177
b. 864,880 d. 689,742
3. How much is the carrying value of the bonds on December 31, 2017?
a. 8,538,542 c. 8,994,752
b. 8,594,752 d. 8,423,960
On January 1, 2017, Noodles Company issued serial bonds with a face value of P 3,000,000 and
stated 12% interest payable annually every December 31. The bonds have a yield rate of 10%. The
bonds mature at an annual installment of P1,000,000 every December 31. The rounded present
value of 1 at 10% for one period is 0.91; for two periods is 0.83 and for three periods is 0.75.
4. What is the issue price of the serial bonds on January 1, 2017?

a. 2,250,000 c. 3,106,800
b. 3,386,400 d. 2,490,000
5. How much is the carrying value of the bonds on December 31, 2017?
a. 1,023,228 c. 2,057,480
b. 2,023,228 d. 3,057,480
On January 1, 2017, Hotdog Inc. issued P2,000,000 of 16% bonds at 102. Each P 1,000 bonds has
one detachable warrant that allows the holder to purchase ten shares of P 50 par value stock at P 70
per share. The bonds would have been sold at 99 without the warrants.
6. What is the amount assigned to the warrants at the date of issuance?

a. 0 c. 60,000
b. 20,400 d. 1,980,000
7. Assuming that 800 of the warrants were exercised, how much is the credit to share
premium?
a. 160,000 c. 560,000
b. 184,000 d. 584,000
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On December 31, 2017, Ham Inc. had an outstanding P5 million face value convertible bonds
maturing on December 31, 2021. Each P 1,000 bond is convertible into 20 shares of P25 par value
ordinary shares. The unamortized discount as of December 31, 2017 is P225,000. The balance of
the Paid-in Capital from Bond Conversion Privilege is P 240,000. On December 31, 2017, bonds with
a face value of P2 million were converted into ordinary shares when the market value of the ordinary
shares is P 50.
8. How much is the gain or loss on the conversion of the bonds?

a. 0 c. 1,006,000
b. 910,000 d. 2,006,000
9. How much should be credited to share premium upon conversion of the bonds?
a. 0 c. 1,006,000
b. 910,000 d. 2,006,000
On July 1, 2017, Sardines Company issued P 5,000,000, 14% bonds at 105. Each P 1,000 bond is
convertible into 5 shares of P150 ordinary share. Without the conversion feature, the bonds would
have been sold at 102.
At a later interest date, prior to maturity date of the bonds, Sardines retired P2,000,000 face value
bonds at 103. After appropriate premium amortization and interest payment, the premium on bonds
payable has a balance of P 30,000 on the date of retirement. Without the conversion privilege, these
bonds would have been sold on this date at 101.
10.How much is the gain or loss on retirement of bonds that should be taken to profit
or loss?
a. 8,000 loss c. 48,000 loss
b. 8,000 gain d. 48,000 gain
11.How much is the amount of gain on cancellation of conversion privilege taken to

equity?
a. 0 c. 40,000
b. 20,000 d. 60,000
THEORIES
1. Which of the following is not true about bonds being sold at a premium?
a. The interest expense gets smaller each year
b. The premium on bonds payable account gets smaller each year
c. At maturity, the face value and carrying amount will be equal
d. The periodic amortization of bond premium decreases each year
2. When bonds are issued at a discount

a. The carrying value of the bond is higher than the face value of the bond throughout
the life of the bond
b. The bonds are issued to yield a higher rate than the rate indicated in the bond
c. The bonds are issued to yield a lower rate than the rate indicated in the bond
d. The bonds were issued at the middle of nowhere
3. Transaction costs associated with the issuance of bonds should

a. Be expensed when incurred
b. Be considered in calculating the new effective interest rate on bonds and in measuring
the value of the bond liability
c. Be taken directly to retained earnings
d. Not be considered at all
4. When interest actually incurred is more than interest paid?

a. When bonds are sold at face value
b. When bonds are sold at a discount
Page 2 of 3
c. When bonds are sold at a premium
d. When stated interest rate exceeds the market interest rate
5. Which statement is true?

a. The amortization of bond premium increases interest expense.
b. The amortization of bond discount increases bond carrying value
c. The amortization of bond premium increases bond carrying value
d. The amortization of bond discount decreases interest expense
6. When bonds are issued between interest payment dates, any accrued interest
received is credited to
a. Interest payable c. Interest receivable
b. Interest revenue d. Premium on bonds payable
7. The bonds issued in June 1 of the current year have interest payment dates of
April 1 and October 1. Bond interest expense for the current year ended
December 31 is for a period of
a. 3 months c. 6 months
b. 4 months d. 7 months
8. When bonds are retired before maturity date, the excess retirement price over
the carrying value of the bonds payable is
a. Treated as a gain and taken to profit or loss
b. Treated as a loss and taken to profit or loss
c. Treated as either gain or loss and taken to OCI
d. Treated as either gain or loss and taken to profit or loss
9. When bonds are retired on maturity date

a. Gain is recognized and taken to profit or loss
b. Loss is recognized and taken to profit or loss
c. Treated as either gain or loss and taken to profit or loss
d. No gain or loss shall be recognized
10. When convertible bonds are converted

a. Gain is recognized and taken to profit or loss
b. Loss is recognized and taken to profit or loss
c. Treated as either gain or loss and taken to profit or loss
d. No gain or loss shall be recognized in profit or loss
Page 3 of 3

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FAR EASTERN UNIVERSITY – DILIMAN

FAR Review Batch 2022 January 25, 2022

FINANCIAL ACCOUNTING & REPORTING G. Macariola