FAR 4 INTERMEDIATE ACCOUNTING 2

QUIZ 3 BONDS AND OTHER CONCEPTS

PROBLEM 1
On January 1, 2018, Kakampinks Co. issued 5,000,000, 10% bonds, each with a
face amount of P1,000 par. The bonds have a 3-year term, and pay interest
annually every December of each year. The effective interest for the same type
of securities during that time was 8%. Relevant present value factors are:
PV of 1 @ 10% for 3 periods 0.75131
PV of 1 @ 8% for 3 periods 0.79383
PV of an ordinary annuity of 1 @ 10% for
3 Periods 2.4869
PV of an ordinary annuity of 1 @ 8% for 3
3 periods 2.57710

Required: (Support your answers with relevant computations. No relevant

computation, no credit shall be given to your answer)

a. Compute for the market price or issue price of the bonds

b. Prepare an effective interest amortization table for the bonds
c. Prepare the journal entries for 2018(issuance year) and 2020 (maturity
year of the bonds)
d. Assuming the bonds were retired equal to its face amount on January 1,
2020. Prepare the journal entry.

Problem 2
On June 1, 2018, BBM Co. issued P6,000,000 of 10% face value bonds to yield
12%. Interest is payable annually On June 1 of each year. The bonds mature in 3
years. The entity follows the calendar year. Relevant present value factors
are:
PV of 1 @ 10% for 3 periods 0.75131
PV of 1 @ 12% for 3 periods 0.71178
PV of an ordinary annuity of 1 @ 10% for
3 Periods 2.4869
PV of an ordinary annuity of 1 @ 12% for 3
3 periods 2.40183

Required: (Support your answers with relevant computations. No relevant

computation, no credit shall be given to your answer)
a. Determine the market price or issue price of the bonds.
b. Prepare an effective interest amortization table for the three-year term of
the bonds
c. Prepare journal entries for 2018 and 2019
d. Assuming that the bonds were retired on January 1, 2020 at face amount.
Prepare the journal entry.
Problem 3
On January 1, 2018, Isko Co. issued 2,000 convertible bonds. The bonds
have a three-year term and are issued at 110 with a face value of P1,000 per
bond, giving total proceeds of P2,200,000. Interest is payable annually in
arrears at a nominal annual interest rate of 6%
Each bond is convertible at any time up to maturity into 25 shares of
capital with par value of P20. The bonds are converted on December 31, 2019.
When the bonds are issued, the prevailing market rate for similar bonds without
the conversion privilege is 9%.
Relevant present value factors are the following:
PV of 1 @ 6% for 3 periods 0.83962
PV of 1 @ 9% for 3 periods 0.77218
PV of an ordinary annuity of 1 @ 6% for
3 Periods 2.67301
PV of an ordinary annuity of 1 @ 12% for 3
3 periods 2.53129

Required:
Prepare the journal entry to record the issuance of the bonds on January 1,
2018, interest payment, effective amortization, and bond conversion on December
31, 2019.