Practice Set – Bonds Payable

1. On January 1, 20x1, Sixty Hours Co. issued 1,000, P2,000, 10% bonds for P1,903,927. Principal
is due on December 31, 20x3. While interest is due annually every year end. The effective
interest rate is 12%.

Requirements provide journal entries over the life of the bonds.

Face Amount of Bonds 2,000,000

Cash Proceed 1,903,927
Discount on Bonds Payable 96,073

Interest Payments= 2,000,000 x 10% = 200,000

Subsequent Measurement:
Date Interest Payable Interest Expense Amortization Present Value
(Present Value x EIR) (I.P. x I.E.) (Prev. Bal.+
Amortization)

Jan. 01, 20x1 1,903,927

Dec. 31,20x1 200,000 228,471 28,471 1,932,398

Dec. 31,20x2 200,000 231,888 31,888 1,964,286

Dec. 31,20x3 200,000 235,714 35,714 2,000,000

Unamortized Discount of Bonds Payable- December 31, 20x1

Face Amount 2,000,000
Carrying Amount (1,932,398)
Discount on bonds payable- Dec. 31, 20x1 67,602

Jan. 01, 20x1 Cash 1,903,927

Discount on Bonds Payable 96,073
Bonds Payable 2,000,000
Dec. 31, 20x1 Interest Expense 228,471
Cash 200,000
Discounts on Bonds Payable 28,471
Dec. 31, 20x2 Interest Expense 231,888
Cash 200,000
Discounts on Bonds Payable 31,888
Dec. 31, 20x3 Interest Expense 235,714
Cash 200,000
Discounts on Bonds Payable 35,714

Bonds Payable 2,000,000

Cash 2,000,000
2. On January 1, 20x1, Faith Co. issued 1,000, P2,000, 12% bonds for P2,206,168. Principal is due
on December 31, 20x3, while interest is due annually every year-end. Faith Co. incurred
transaction costs of P106,694 on the issuance. The effective interest rates are 8% before
adjustment for transaction costs and 10% after adjustment for transaction costs.

Requirements: Provide the journal entries over the life of the bonds.

Jan. 01, 20x1

Dec. 31, 20x1

Dec. 31, 20x2

Dec. 31, 20x3

3. On January 1, 20x1, Hope Co. issued 5-year, 12%, P2,000,000 bonds for P2,151,632. Principal is
due at maturity, while interest is due annually every year-end. The effective interest rate is
10%. On July 1, 20x3, Hope Co. retired all the bonds at 102. The retirement price includes
payment for the accrued interest.

Requirement: Provide the entries on July 1, 20x3.

Subsequent Measurement:
Date Interest Payable Interest Expense Amortization Present Value
(Present Value x EIR) (I.P. x I.E.) (Prev. Bal.+
Amortization)

Jan. 01, 20x1 2,151,632

Dec. 31,20x1 240,000 215,163 24,837 2,126,795

Dec. 31,20x2 240,000 212,680 27,320 2,099,475

Dec. 31,20x3 120,000 104,974 15,026 2,084,449

Carrying amount of bonds retired 2,084,449

Retirement price including payment for accrued interest 2,040,000
Accrued Interest (120,000)
Retirement Price 1,920,000
164,449
 Journal Entries:
July 01, 20x3 Interest Expense 104,974
Premium on bonds payable 15,026
Interest Payable 120,000
July 01, 20x3 Bonds Payable 2,000,000
Premium on bonds payable 84,449
Interest Payable 120,000
Cash 2,040,000
Gain on extinguishment 164,449
of bonds

4. On January 1, 20x1, Patience Co. issued 10%, 3-year P2,000,000 convertible bonds at 105. Each
P1,000 bond is convertible into 8 shares with par value per share of P100. Principal is due on
December 31, 20x3, while interest is due annually every year-end. On issuance date, the bonds
were selling at a yield to maturity market rate of 12% without the conversion option. All the
bonds were converted into equity on December 31, 20x2. Patience Co. incurred stock issuance
costs of P20,000.

Requirement: Provide all the journal entries in 20x1 and 20x2.

5. On January 1, 20x1, Kindness Co. issued a 3-year, 10% P2,000,000 convertible bonds for
P2,200,000. Principal is due at maturity but interest is payable every year-end. The bonds are
convertible into 6,000 ordinary shares with par value per share of P200. On issuance date, the
prevailing market rate of interest for similar debt without conversion feature was 12%. On
December 31, 20x2, Kindness Co. retired all the bonds for P2,000,000. On retirement date, the
current rate for similar debt instrument without a conversion feature was 11%.

Requirement: Provide all the entries in 20x1 and 20x2.

PROBRLEM – Multiple Choice

1. Blue Corp.’s December 31, 1991, balance sheet contained the following items in the long-term
liabilities section:

9 ¾ %, registered debentures callable in 2002, due in 2007 700,000

9 ½%, collateral trust bonds, convertible into common stock beginning
In 2000, due in 2010 600,000
10% subordinated debentures (P30,000 maturing annually beginning
In 1997) 300,000

What is the total amount of Blue’s term bonds?

a. 600,000 b. 700,000 c. 1,000,000 d. 1,300,000

2. On January 2, 2001, West Co. issued 9% bonds in the amount of P500,000, which mature on
January 2, 2011. The bonds were issued for P469,500 to yield 10%. Interest is payable annually
on December 31. West uses the effective interest method of amortizing bond discount. In its
June 30, 2001, what amount should West report in its bond’s payable?
a. P469,500 b. P470,475 c. 471,025 d. 500,000

3. ON January 1, 20x1, Yoga Co. issued 1,000, P4,000, face amount bonds for P3,807,852. The
bonds mature on December 31, 20x3. Interest of 10% is due annually every year end. The
effective interest rate is 12%. How much is the unamortized discount on bonds payable on
December 31, 20x1?
a. 147,908 b. 135,206 c. 134,987 d. 143,134

4. On January 1, 20x1, Silent Co. issued 1,000 bonds with face amount of P4,000 each for total of
P3,807,852. Silent Co. paid transaction costs of P179,316 on the issuance. The bonds mature on
December 31, 20x3 but 10% interest is due every year-end. The effective interest rate adjusted
for the transaction costs is 14%. How much is the carrying amount of the bonds on December
31, 20x1?
a. 3,288,776 b. 3,391,580 c. 3,401,832 d. 3,736,531

5. On April 1, 20x9, Hill Corp. issued 200 of its P1,000 face value bonds at 101 plus accrued
interest. The bonds were dated November 1, 20x8, and bear interest at an annual rate of 9%
payable semiannually on November 1 and May 1. What amount did Hill receive from the bond
issuance?
a. 194,500 b. 200,000 c. 202,000 d. 209,500

6. Tuck Co. plans on issuing three-year, 12% term bonds with face amount of P2,000,000. If the
current rate on issuance date is 10%, the estimated issue price of the bonds would be
a. 2,099,474 b. 2,123,649 c. 2,230,713 d. 1,979,365
7. On June 30, 20x9, King Co. had outstanding 9%, P5,000,000 face value bonds maturing on June
30, 2x14. Interest was payable semiannually every June 30 and December 31. On June 30,
20x9, after amortization was recorded for the period, the amortized bond premium and bond
issue costs were P30,000 and P50,000, respectively. On that date, King acquired all its
outstanding bonds on the open market at 98 and retired them. At June 30, 20x9, what amount
should King recognize as gain on redemption of bonds?
A. 20,000 b. 80,000 c. 120,000 d. 180,000

8. On December 31, 20x0, Arnold, Inc., issued P200,000, 8% serial bonds, to be repaid in the
amount of P40,000 each year. Interest is payable annually on December 31. The bonds were
issued to yield 10% a year. The bond proceeds were P190,280 based on the present values at
December 31, 20x0, of the five annual payments as follows:

Due Date Amounts due Present Value

Principal Interest
12/31/20x1 40,000 16,000 50,900
12/31/20x2 40,000 12,800 43,610
12/31/20x3 40,000 9,600 37,250
12/31/20x4 40,000 6,400 31,690
12/31/20x5 40,000 3,200 26,830
190,280

Arnold amortizes the bond discount by the effective interest method. In its December 31, 20x1,
balance sheet, at what amount should Arnold report the carrying value of the bonds?
a. 139,380 b. 149,100 c. 150,280 d. 153,308