FINANCIAL ACCOUNTING AND REPORTING Page 1 of 9

BONDS PAYABLE

PROBLEMS

1. On March 1, 2021, Lamarcus Company issued 5,000 of its P1,000

face value bonds at 110 plus accrued interest. Lamarcus Company
paid bond issue cost of P100,000. The bonds were dated November
1, 2020, mature on November 1, 2030, and bear interest at 12%
payable semiannually on November 1 and May 1. What is the net
amount received by Lamarcus from the bond issuance?
a. 5,500,000
b. 5,700,000
c. 5,600,000
d. 6,000,000
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2. On January 1, 2021, Orange Company issued 10,000 of its 12%,

P1,000 face value bonds for P10,600,000, including accrued interest.
The bonds are dated October 1, 2020, mature on October 1, 2025, and
pay interest annually on October 1. The bonds were issued through an
underwriter to whom Orange paid bond issue cost of P150,000. On
January 1, 2021, what should Orange Company report as bonds
payable?
a. 10,000,000
b. 10,450,000
c. 10,150,000
d. 10,300,000
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3 On January 1, 2021, Clinton Company issued eight-year bonds with a

face value of P500,000 and a stated interest rate of 6%, payable
semiannually on June 30 and December 31. The bonds were sold to
yield 8%. Table values are:
Present value of 1 for 8 periods at 6% ......................... .627
Present value of 1 for 8 periods at 8% ......................... .540
Present value of 1 for 16 periods at 3% ....................... .623
Present value of 1 for 16 periods at 4% ....................... .534
Present value of annuity for 8 periods at 6% ............... 6.210
Present value of annuity for 8 periods at 8% ............... 5.747
Present value of annuity for 16 periods at 3% ............. 12.561
Present value of annuity for 16 periods at 4% ............. 11.652

1 What is the present value of the principal?

a. 267,000 c. 311,500
b. 270,000 d. 313,500
2. What is the present value of the interest?
a. 172,410 c. 186,300
b. 174,780 d. 188,415
3. What is the issue price of the bonds?
a. 441,780 c. 444,780
b. 442,410 d. 499,800
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4. On January 1, 2021, Lucian Company issued 9% bonds in the amount

of P5,000,000 which mature on December 31, 2030. The bonds were
issued for P4,800,000 but Lucian had to pay for a P107,000 bond
issuance cost. The effective rate determined by Lucian is 10%.
Interest is payable annually on December 31. Lucian uses the interest
method of amortizing bond discount. In its December 31, 2021,
statement of financial position, what amount should Lucian report as
bonds payable?
a. 5,000,000 c. 4,712,300
b. 4,693,000 d. 4,723,700
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5. On January 1, 2021, Christian Company issued its 5-year, 5,000, 8%

bonds that will mature on December 31, 2025, and pay interest
annually at 110. Christian however had to incur P80,000 of bond
issue cost. The effective rate on the same date was 6%. If Christian
uses the effective interest method of amortization, what is the carrying
amount of this bonds payable on December 31, 2021?
a. 5,345,200 c. 5,420,000
b. 5,300,000 d. 5,375,600
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6. On December 31, 2021, Michelle Company issued 5,000 of its 12%,

10-year P1,000 face value bonds with detachable stock warrants at
110. Each bond carried a detachable warrant for ten shares of
Michelle's P100 par value ordinary shares at a specified option price
of P120. Immediately after issuance, the market value of the bonds
ex-warrants was P4,800,000 and the market value of the warrants
were ascertained to be P1,200,000. For the issuance of the bonds,
what amount should be the increase in shareholders’ equity?
a. 600,000 c. 700,000
b. 1,100,000 d. 1,200,000
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7. On December 31, 2021, Armor Company issued P5,000,000 face

value, 5-year bonds at 109. Each P1,000 bond was issued with 10
non-detachable stock warrants, each of which entitled the
bondholder to purchase one share of P100 par value common at
P120. Immediately after the 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 the 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,
2021, what amount should Armor record as increase in stockholders’
equity as a result of the bond issuance?
a. 620,000 c. 440,000
b. 250,000 d. 0
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8. Hoover Company issued 4,000 convertible bonds on January 1, 2021.

The bonds have a four-year term and are issued at 110 with a face
value of P1,000 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 8%. What is the equity
component of the issuance of convertible bonds on January 1, 2021?
(Round off present value factors to two decimal places).
a. 245,600
b. 312,800
c. 645,600
d. 0
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9. On July 1, 2021, after recording interest and amortization for half a

year, Kennedy Company converted P5,000,000 of its 12% convertible
bonds into 60,000 shares of P50 par value ordinary shares. On the
conversion date the carrying amount of the bonds was P6,000,000,
the market value of the bonds was P6,500,000, and Kennedy’s
ordinary shares was publicly trading at P150 per share. Kennedy paid
P300,000 in connection with the conversion and other share issue
costs. The equity component on issue date of the bonds was
P800,000. What is the share premium from issuance should Kennedy
record because of the conversion?
a. 3,000,000
b. 2,000,000
c. 2,700,000
d. 3,500,000

end