Lobrigas, Claudine L.

BSIA-IV

Intermediate Accounting 2

Directions: Read and analyze problem. Select the best answer from the choices given and
provide solutions. No merit shall be given for answers without solutions. Encode your answer in
a separate word file and submit in the classwork section of our google class on or before the
date as reflected in your study schedule. Please follow the format in naming the file for
submission. Lastname_Unit3_Topic3_Assessment

PART 1

Problem #1:

Moses Company issued P5,000,000 face amount, 5-year bonds at 109. Each P1,000 bond
was issued with 10 share warrants, each of which entitled the bondholder to purchase one
share of P100 par value at P120. Immediately after issuance, the market value of each warrant
was P5. The stated interest rate on the bonds is 11% payable annually every end of the year.
However, the prevailing market rate of interest for similar bonds without 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.

1. What is the carrying amount of the bonds payable on the date of issuance?

a. 5,450,000

b. 4,830,000

c. 5,000,000

d. 4,380,000

Present value of Principal (5,000,000 x .57) 2,850,000

Present value of interest payment (5,000,000 x 550,000 x 3,60 1,980,000

11%)

Carrying amount 4,830,000

2. What amount should be recorded initially as discount or premium on bonds payable?

a. 170,000 discount
 b. 450,000 premium

c. 450,000 discount

d. 800,000 discount

Present value 4,830,000

Face amount (5,000,000)

Discount 170,000

3. What is the equity component arising from the issuance of bonds payable?

a. 450,000

b. 500,000

c. 620,000

d. 0

Issue price of the bond (5M x 1.09) 5,450,000

Present value (4,830,000)

Equity Component 620,000

4. What amount is credited to share premium if all of the share warrants are exercised?

a. 1,000,000

b. 1,450,000

c. 1,500,000

d. 1,620,000

Cash (50,000 x 120) 6,000,000

Share warrant outstanding 620,000

Share capital (50,000 x 100) 5,000,000

 Share premium 1,620,000

Problem #2:

At the beginning of the current year, Case Company issued P5,000,000 of 12%
nonconvertible bonds payable at 103 which are due in five years. 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.

On the date of issuance, the quoted market value of each warrant was P4. The market
value of the bonds ex-warrants at the time of issuance is 95.

1. What is the carrying amount of the bonds payable on the date of issuance?

a. 5,000,000

b. 4,750,000

c. 5,150,000

d. 4,550,000

Face amount 5,000,000

Price x 1.03

Carrying amount 5,150,000

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

a. 600,000

b. 300,000

c. 200,000

d. 400,000

Issue price of bonds with warrants 5,150,000

Market value of bonds without warrants (5M x (4,750,000)

95)
 Equity component 400,000

3. What amount is credited to share premium if all of the share warrants are exercised?

a. 4,350,000

b. 3,750,000

c. 4,150,000

d. 0

Cash (150,000 x 50) 7,500,000

Share warrant outstanding 400,000

Share capital (150,000 x 25) 3,750,000

Share premium 4,150,000

Problem #4:

On December 31, 2021, Tamia Company showed the following balances:

Bonds payable – 6% 4,000,000

Discount on bonds payable 500,000

Share premium – issuance 5,000,000

Share premium – conversion privilege 700,000

The interest is payable annually every December 31. The convertible bonds are not
converted but fully paid on December 31, 2021. On such date, the quoted price of the
convertible bonds with conversion option is 105 which is the payment to the bondholders plus
interest.

However, the quoted price of the bonds without the conversion privilege is 95.

1. What is the carrying amount of the bonds payable on December 31, 2021?

a. 4,000,000
 b. 4,500,000

c. 3,500,000

d. 4,200,000

Bonds payable 4,000,000

Discount (500,000)

Carrying amount 3,500,000

2. What is the gain or loss from extinguishment of bonds?

a. 700,000 gain

b. 700,000 loss

c. 300,000 gain

d. 300,000 loss

Carrying amount 3,500,000

Payment without conversion option (3,800,000)

Loss 300,000

3. What is the total payment to the bondholders on December 31, 2021?

a. 4,200,000

b. 4,440,000

c. 4,240,000

d. 4,040,000

Fair value of bonds with conversion previllege (4M x 1.05) = 4,200,000