College of Accounting Education

3/F F. Facundo Hall, B & E Bldg.

Matina, Davao City Philippines
Phone No.: (082) 305-0645

BRIDGING INSTRUCTION PROGRAM

ACC 211

THEORIES

1. An example of an item which is not a liability is

a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.

2. The covenants and other terms of the agreement between the issuer of bonds and the lender
are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.

3. The term used for bonds that are unsecured as to principal is

a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.

4. Bonds for which the owners' names are not registered with the issuing corporation are called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.

5. Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.

6. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is
sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

d. increased by accrued interest from May 1 to June 1.

7. Theoretically, the costs of issuing bonds could be

a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.

8. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.

9. Treasury bonds should be shown on the balance sheet as

a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.

10. 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 the 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. all of these.

PROBLEM SOLVING

11. Benton Company issues P10,000,000 of 10-year, 9% bonds on March 1, 2017 at 97 plus
accrued interest. The bonds are dated January 1, 2017, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?

12. A company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest
is paid on June 30 and December 31. The proceeds from the bonds are P19,604,145. Using
effective-interest amortization, how much interest expense will be recognized in 2017?

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

13. Dakak Company issued bonds with a face value of P4, 000,000 and with a stated interest rate
of 10% on Jan. 01, 2018. The interest is payable semiannually on June 30 and December 31.
The bonds mature on every December 31 at a rate of P2, 000,000 per year for 2 years. The
prevailing rate for the bonds is 8%. The present value of 1 at 4% is as follows:
One period 0.9615
Two periods 0.9426
Three periods 0.8990
Four periods 0.8548
What is the present value of the bonds on January 1, 2018?

14. Axlon Company issues P10,000,000 face value of bonds at 96 on January 1, 2016. The bonds
are dated January 1, 2016, pay interest semiannually at 8% on June 30 and December 31,
and mature in 10 years. Straight-line amortization is used for discounts and premiums. On
September 1, 2019, P6,000,000 of the bonds are called at 102 plus accrued interest. What
gain or loss would be recognized on the called bonds on September 1, 2019?

15. The December 31, 2016, balance sheet of Eddy Corporation includes the following items:
9% bonds payable due December 31, 2025 P1,000,000
Unamortized premium on bonds payable 27,000
The bonds were issued on December 31, 2015, at 103, with interest payable on July 1 and
December 31 of each year. Eddy uses straight-line amortization. On March 1, 2017, Eddy
retired P400,000 of these bonds at 98 plus accrued interest. What should Eddy record as a
gain on retirement of these bonds? Ignore taxes.

16. On January 1, 2011, Gonzalez Corporation issued P4,500,000 of 10% ten-year bonds at 103.
The bonds are callable at the option of Gonzalez at 105. Gonzalez has recorded amortization
of the bond premium on the straight-line method (which was not materially different from
the effective-interest method).

On December 31, 2017, when the fair market value of the bonds was 96, Gonzalez
repurchased P1,000,000 of the bonds in the open market at 96. Gonzalez has recorded
interest and amortization for 2017. Ignoring income taxes and assuming that the gain is
material, Gonzalez should report this reacquisition as

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

17. The 10% bonds payable of Klein Company had a net carrying amount of P570,000 on
December 31, 2016. The bonds, which had a face value of P600,000, 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, 2017,
several years before their maturity, Klein retired the bonds at 102. The interest payment on
July 1, 2017 was made as scheduled. What is the loss that Klein should record on the early
retirement of the bonds on July 2, 2017? Ignore taxes.

18. During 2016, Jack issued two hundred P1,000 bonds at 102; due in ten years. One detachable
stock purchase warrant entitling the holder to purchase 15 shares of Jack’s common stock
(par P1) was attached to each bond. The option price is P15 per share. At the date of
issuance, the market value of the bonds, without the stock purchase warrants, was quoted
at 95. The market value of each detachable warrant was quoted at P50. What amount, if
any, of the proceeds from the issuance should be accounted for as part of Jack’s stockholders’
equity?

19. On December 29, 2015, Sweet Company issued P1,000,000 of 11% bonds at 109. Each P1,000
bond was issued with 50 detachable stock warrants, each of which entitled the bond holder
to purchase one share of P5 par common stock for P25. Immediately after the issuance, the
market value of each warrant was P4. The bonds alone are issued to yield at 10%. The bonds
mature in 5 years. On December 31, 2015, what amount should Sweet record as discount or
premium on issuance of bonds? What is the increase in SHE that should be recorded in 2015?

20. On March 1, 2015, Case Corporation issued P5,000,000 of 12% convertible bonds at 103
which are due on February 28, 2022. Each bond is convertible into 10 shares, with a par value
of P50, with a market price of P60 on this day. On March 1, 2015, the quoted market value
of each P1,000 was at 97. What amount of the proceeds from the bond issue should Case
record as an increase in stockholders’ equity?

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 College of Accounting Education
3/F F. Facundo Hall, B & E Bldg.
Matina, Davao City Philippines
Phone No.: (082) 305-0645

For 21-25
On January 1, 2019, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value 11%
bonds date January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each
December 31. Wizards uses the effective interest method of amortization. On December 31,
2020. The 2,000 bonds were extinguished early through acquisition on the Open Market by
Wizard for P1,980,000 plus accrued interest. On July 1, 2019, Wizards issued 5,000 of its P1,000
face value, 10% convertible bonds at par. Interest is payable every June 30 and December 31.

On the date of issue, the prevailing market interest rate for similar debt without the conversion
option is 12%. On July 1, 2020, an investor in Wizards convertible bonds tendered 1,500 bonds
for conversion into 15,000 shares of Wizards common stock, which had a fair value of P105 and
a par value of P1 at the date of conversion.

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

21. The issue price on the 2,000 5-year, P1,000 face value bonds in January 1, 2019 is
22. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2019 is
23. The gain on early retirement of bonds on December 31, 2020 is
24. The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31, 2019 is
25. The conversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2020 will increase
APIC by

END OF MATERIAL
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