Republic of the Philippines

SORSOGON STATE UNIVERSITY

Sorsogon City Campus
Magsaysay Street, Sorsogon City
sorsu.edu.ph | (056) 211-0102; 421-5068
AUDIT & ASSURANCE: Concepts & applications 1 Bonds 9/23/2021
Problem

1. The following data were obtained from the initial audit of SOUTH STAR BOARDERS COMPANY:

15%, 10 year, BONDS PAYABLE, dated JANUARY 1,2020

Debit Credit Balance

Cash proceeds from issue on January
1,2020 of 1,000, P1,000 bonds. The
market rate of interest on the date of
issue was 12%
1,172,044 1,172,044

BOND INTEREST EXPENSE

Cash paid, 1/2/21 75,000 75,000
Cash paid, 7/1/21 75,000 150,000
Accrual, 12/31/21 75,000 225,000

ACCRUED INTEREST ON BONDS

Balance, 1/1/21 75,000 75,000
Accrual, 12/31/21 75,000 150,000

TREASURY BONDS
Redemption price and interest to date
on 200 bonds permanently retired on
December 31,2021 265,000 265,000

Based on the following information, determine the following:

a. As of December 31, 2021 (7 points):
Present value factor (PVF) of ordinary annuity for the interest payment (Round PVF to four-decimal places).
Interest PAID every compounding period.
Present value of interest.

PVF of 1 for the principal (Round PVF to four-decimal places).

Face value of the bonds.
Present value of the principal.

Carrying value of the bonds.

b. On the date of redemption (3 points)

Carrying value of the 200 bonds.
Cash paid for the bonds.
Loss on bond redemption.

c. After redemption (2 points):

Face value of the bonds
Accrued interest on bonds on December 31, 2021

d. On interest (2 points):
Interest expense for the six months ending 7/1/2021.
Bond interest expense for the year ending December 31, 2021.

e. On amortization on December 31, 2021 (3 points):

Actual interest to be paid on January 1, 2022.
Interest expense incurred for the six months ending December 31, 2021.
Bond discount amortization on December 31, 2021

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

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____ 2. On October 1, 2022, Westridge Inc. issued, at 101 plus accrued interest, 800 of its 10 percent, P1,000 bonds.
The bonds are dated July 1, 2022, and mature on July 1, 2032. Interest is payable semiannually on January 1
and July 1. At the time of issuance, Westridge would receive cash of
a. P820,000. b. P828,000. c. P808,000. d. P800,000.

____ 3. Callable bonds

a. can be redeemed by the issuer at some time at a pre-specified price.
b. mature in a series of payments.
c. can be converted to stock.
d. None of the above.

____ 4. On January 1, 2022, Lisbon Corp. issued 2,000 of its 9 percent, P1,000 bonds at 95. Interest is payable
semiannually on July 1 and January 1. The bonds mature on January 1, 2032. Lisbon paid bond issue costs of
P80,000, which are appropriately recorded as a deferred charge. Lisbon uses the straight-line method of
amortizing bond discount and bond issue costs. On Lisbon's December 31, 2022, balance sheet, how much
would be shown as the carrying amount of the bonds payable?
a. P2,090,000 b. P1,910,000 c. P2,110,000 d. P1,982,000

____ 5. The effective interest rate on bonds is higher than the stated rate when bonds sell
a. at maturity value. c. below face value.
b. above face value. d. at face value.

____ 6. Bonds usually sell at a premium

a. when the price of the bonds is greater than their maturity value.
b. when the stated rate of interest on the bonds is greater than the market rate of interest.
c. when the market rate of interest is greater than the stated rate of interest on the bonds.
d. in none of the above cases.

____ 7. The net amount required to retire a bond before maturity (assuming no call premium and constant interest
rates) is the
a. face value of the bond plus any unamortized premium or minus any unamortized discount.
b. face value of the bond plus any unamortized discount or minus any unamortized premium.
c. maturity value of the bond plus any unamortized discount or minus any unamortized
premium.
d. issuance price of the bond plus any unamortized discount or minus any unamortized
premium.

____ 8. Debentures are

a. serial bonds. c. secured bonds.
b. ordinary bonds. d. unsecured bonds.

____ 9. During the year, Hancock Corporation incurred the following costs in connection with the issuance of bonds:

Printing and engraving ................................ P 30,000

Legal fees ............................................ 160,000
Fees paid to independent accountants for registration 20,000
information ...........................................
Commissions paid to underwriter ....................... 300,000

The amount recorded as a deferred charge to be amortized over the term of the bonds is
a. P0. b. P300,000. c. P510,000. d. P30,000.

____ 10. Bonds usually sell at a discount when

a. investors are willing to invest in the bonds only at rates that are higher than the stated
interest rate.
b. investors are willing to invest in the bonds at the stated interest rate.
c. investors are willing to invest in the bonds at rates that are lower than the stated interest
rate.
d. a capital gain is expected.

____ 11. When a company issues bonds, how are unamortized bond discounts and premiums classified on the
balance sheet?
a. Bond discounts are classified as expenses, and bond premiums are classified as
revenues.
b. Bond premiums are classified as additions to, and bond discounts are classified as
deductions from, the face value of bonds.
c. Bond discounts are classified as assets, and bond premiums are classified as contra-
asset accounts.
d. None of the above.

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____ 12. The effective-interest method of amortizing bond premiums
a. is too complicated for practical use.
b. is needed to determine the amount of cash to be paid to bondholders at each interest
date.
c. is another name for the straight-line method.
d. recognizes the time value of money.

____ 13. When interest expense is calculated using the effective-interest amortization method, interest expense
(assuming that interest is paid annually) always equals the
a. book value of the bonds multiplied by the stated interest rate.
b. book value of the bonds multiplied by the effective interest rate.
c. actual amount of interest paid.
d. maturity value of the bonds multiplied by the effective interest rate.

____ 14. The effective interest rate on bonds is lower than the stated rate when bonds sell
a. at maturity value. c. above face value.
b. at face value. d. below face value.

____ 15. In theory (disregarding any other marketplace variables), the proceeds from the sale of a bond will be equal to
a. the face amount of the bond.
b. the present value of the bond maturity value plus the present value of the interest
payments to be made during the life of the bond.
c. the face amount of the bond plus the present value of the interest payments made during
the life of the bond.
d. the sum of the face amount of the bond and the periodic interest payments.

____ 16. On July 1, 2022, TJR issued 2,000 of its 8 percent, P1,000 bonds for P1,752,000. The bonds were issued to
yield 10 percent. The bonds are dated July 1, 2022, and mature on July 1, 2032. Interest is payable
semiannually on January 1 and July 1. Using the effective-interest method, how much of the bond discount
should be amortized for the six months ended December 31, 2022?
a. P15,200 b. P12,400 c. P7,600 d. P9,920

____ 17. The issuance price of a bond does not depend on the
a. effective interest rate.
b. method used to amortize the bond discount or premium.
c. face value of the bond.
d. riskiness of the bond.

____ 18. The net amount of a bond liability that appears on the balance sheet is the
a. call price of the bond plus bond discount or minus bond premium.
b. face value of the bond plus related discount or minus related premium.
c. face value of the bond plus related premium or minus related discount.
d. maturity value of the bond plus related discount or minus related premium.

____ 19. On January 1, 2022, Matlock Inc. issued its 10 percent bonds in the face amount of P1,500,000. They mature
on January 1, 2032. The bonds were issued for P1,329,000 to yield 12 percent, resulting in bond discount of
P171,000. Matlock uses the effective-interest method of amortizing bond discount. Interest is payable July 1
and January 1. For the six months ended June 30, 2022, Matlock should report bond interest expense of
a. P79,740. b. P83,550. c. P85,260. d. P75,000.

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