UNIVERSITY OF THE PHILIPPINES VISAYAS

TACLOBAN COLLEGE
DIVISION OF MANAGEMENT

BA 114.2 ACCOUNTING THEORY AND PRACTICE II

2nd Semester AY 2020-2021

ACTIVITY GUIDE

SELF-EXERCISE 2: DEBT INSTRUMENTS

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Problem 1 (AICPA Adapted)

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Blue Company reported the following long-term debt on December 31, 2019:
9% registered debentures, callable in 2020, due in 2021 3,500,

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000
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11% collateral trust bonds, convertible into ordinary shares 3,000,
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beginning in 2020, due in 2021 000
10% subordinated debentures, P500,000 maturing annually 1,500,
beginning in 2020 000
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What is the total amount of term bonds?

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Problem 2 (AICPA Adapted)

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During the current year, Eddy Company incurred the following costs in
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connection with the issuance of bonds:

Promotion cost 200,00

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Printing and engraving 150,00

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Legal fees 800,00

0
Fees paid to independent accountants 100,00
for registration 0
Commissions paid to underwriter 1,500,
000
What amount should be recorded as bond issue costs to be amortized over the
term of the bonds?

Problem 3 (AICPA Adapted)

On June 30, 2019, Huff Company issued at 99, five thousand bonds of 8%, P1,000
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 face amount. The bonds were issued through an underwriter to whom the entity
paid bond issue cost of P425,000. On June 30, 2019, what amount should be
reported as bond liability?

Problem 4 (AICPA Adapted)

On January 1, 2019, Ezekiel Company received P1,077,000 for 12% bonds with
face amount of P1,000,000. 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, 2019, the fair
value of the bonds is determined to be P1,064,600 due to market and interest
factors.
a. What is the carrying amount of the bonds payable on January 1, 2019?
b. What amount should be reported as interest expense for 2019?
c. What amount should be reported as gain or loss from change in fair value
of the bonds for 2019?

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d. What is the carrying amount of the bonds payable on January 1, 2019?

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Problem 5 (AICPA Adapted) rs e
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On January 1, 2019, West Company issued 9% bonds in the face amount of
P5,000,000 which mature on January 1, 2029. The bonds were issued for
P4,695,000 to yield 10%. Interest is payable annually on December 31. The
entity used the interest method of amortizing bond discount.
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a. What amount should be reported as interest expense for 2019?

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b. On December 31, 2019, what is the carrying amount of the bonds

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payable?
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Problem 6 (AICPA Adapted)

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On January 1, 2019, Ward Company issued 9% bonds in face amount of

P4,000,000 which mature on January 1, 2029.The bonds were issued for
P3,756,000 to yield 10%, resulting in bond discount of P244,000. The entity used
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the interest method of amortizing bond discount. Interest is payable annually on

December 31.
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a. On December 31, 2019, what is the unamortized bond discount?

b. What is the carrying amount of bonds payable on December 31, 2019?

Problem 7 (IFRS)

On January 1, 2019, Luyang Company issued 3-year bonds with face amount of
P5,000,000 at 98 Additionally, the entity paid bond issue cost of P140,000. The
nominal rate is 10% and the effective rate is 12% after considering the bond
issue cost. The interest is payable annually on December 31. The entity used the
effective interest method in amortizing bond discount and issue cost. What is the
carrying amount of the bonds payable on December 31, 2019?

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 Problem 8 (AICPA Adapted)

On January 1, 2019, Dome 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. The entity amortized
the bond discount by the interest method. The bond proceeds totaled P3,805,600
based on the present value on January 1, 2019 of five annual payments.
Due Princi Intere PV on
date pal st 1/1/2019
12/31/2 800,0 320,0 1,018,0
019 00 00 00
12/31/2 800,0 256,0 872,200
020 00 00
12/31/2 800,0 192,0 745,0
021 00 00 00
12/31/2 800,0 128,0 633,8

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022 00 00 00
12/31/2 800,0 64,0 536,000

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On December 31, 2019, what is the carrying amount of the bonds payable?

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Problem 9 (AICPA Adapted)
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Margaret Company provided the following information in relation to the issuance

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of bonds at the beginning of current year:

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Face amount P5,000,000

Term Ten years
Stated interest rate 6%
Interest payment date Annually on
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December 31
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Yield 9%
At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
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Future value of 1 for 10 periods 1.791 2.367

Present value of an ordinary annuity of 1 for 7.360 6.418
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10 periods
What is the issue price of the bonds payable?

Problem 10 (AICPA Adapted)

At the beginning of current year, Case Company issued P5,000,000 of 12%

nonconvertible 5-year bonds at 103. In addition, each P1,000 bond was issued
with 30 detachable share warrants, each of which entitled the bondholder to
purchase, for P50, one ordinary share of Case Company, par value P25. The
quoted market value of each warrant was P4. The market value of the bonds ex-
warrants at the time of issuance is 95.
a. What is the carrying amount of the bonds payable?

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 b. What amount of the proceeds from the bond issue should be recognized
as an increase in shareholders' equity?

Problem 11 (IAA)

At the beginning of current year, Susan Company issued 5,000 convertible bonds
payable. The bonds have a three-year term and are issued at 110 with a face
amount of P 1,000 per bond. Interest is payable annually in arrears at a nominal
6% interest rate. Each bond is convertible at any time up to maturity into 100
ordinary 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 amount should be
reported as equity component of the original issuance of the convertible bonds
payable?

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Problem 12 (AICPA Adapted)

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At year-end, Cey Company had outstanding 10%, P1,000,000 face amount
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convertible bonds payable maturing in three years. Interest is payable on June 30
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and December 31. Each P1,000 bond is convertible into 50 shares of P10 par
value. The unamortized premium on bonds payable was P60,000 at year-end. At
year-end, 400 bonds were converted when Cey's share had a market price of
P24. The entity incurred P4,000 in connection with the conversion. No equity
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component was recognized when the bonds were originally issued. What amount
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should be recorded as share premium from the issuance of shares as a result of

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the bond conversion at year-end?

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Problem 13 (IAA)
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On January 1, 2019, Arlene Company issued convertible bonds with a face

amount of P5,000,000 for P6,000,000. The bonds are convertible into 50,000
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shares with P100 par value. The bonds have a 5-year life with 10% stated
interest rate payable annually every December 31. The fair value of the
convertible bonds without conversion option is computed at P5,399,300 on
January 1, 2019. On December 31, 2021, the convertible bonds were not
converted but fully paid for P5,550,000. On such date, the fair value of the bonds
without conversion privilege is P5,400,000 and the carrying amount is
P5,178,300.
a. What is the carrying amount of the bonds payable on January 1?
b. What is the premium on bonds payable on January 1, 2019?
c. What should be recorded as equity component arising from issuance of
bonds payable on January 1, 2019?
d. What amount should be recorded as loss on the extinguishment of the
convertible bonds payable on December 31, 2021?

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