CODE: AC438 [FINANCIAL ACCOUNTING AND REPORTING] FAR 006PS (22-23)

INTEGRATED TOPIC 1 – FINANCIAL ACCOUNTING AND

REPORTING

Bonds Payable

Problem I

On January 01, 2022, Ezekiel Company received the fair value of P1,077,200 for 12% bonds with
face amount pf P1,000,000. The bonds were sold to yield 10%. Interest is payable semiannually every
January 01 and July 01. The entity has elected the fair value option measuring the financial lianbility.

On December 31, 2022, the fair value of the bond is determined to be P1,064,600 due to market and
interest factors.

1. What is the carrying amount of the bonds payable on January 01, 2022?
a) 1,000,000
b) 1,077,200
c) 500,000
d) 538,600
2. What amount should be reported as interest expense for 2022?
a) 120,000
b) 100,000
c) 107,720
d) 129,264
3. What amount should be reported as gain or loss from change in fair value of the bonds for 2022?
a) 64,600 gain
b) 64,600 loss
c) 12,600 gain
d) 12,600 loss
4. What is the carrying amount of the bonds payable on December 31, 2022?
a) 1,064,600
b) 1,077,200
c) 1,000,000
d) 1,064,920

Problem II

On January 01, 2021, Angel Company issued 5-year 5,000 bonds with face amount of P1,000 per
bond for P5,380,000 to yield 10%. Interest of 12% is payable annually every December 31. On June
30, 2022 the entity retired 2,000 bonds at 96 plus accrued interest. The entity used the interest
method.

5. What amount should be recognized as gain or loss on bond retirement on June 30, 2022
a) 193,560 gain
b) 193,560 loss
c) 179,920 gain
d) 179,920 loss

6. What is the carrying amount of the remaining bonds payable on December 31, 2022?
a) 3,228,000
b) 3,190,000
c) 3,149,880
d) 3,129,420

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Problem III

At the beginning of the current year, Luyang Company issued 3-year bonds with face amount of
P5,000,000 at 98. Additionally, the entity paid bond issue cost of P140,000.

The nominal rate is 10% and the effective rate is 12% after considering the bond issue cost. The
interest is payable annually on December 31.

The entity used the effective interest method in amortizing the bond discount and issue cost.

7. What is the carrying amount of the bonds payable on December 31?

a) 4,840,000
b) 4,831,200
c) 4,848,000
d) 5,000,000

Problem IV

On September 01, 2022 an entity issues bonds with face amount of P4,000,000 for P4,552,511,
including accrued interest. The bonds are dated January 01, 2022 and pay annual interest every
December 31. The effective rate is 9%

8. What is the initial carrying amount of the bonds?

a) 4,112,511
b) 4,259,178
c) 4,405,845
d) 4,552,511

9. Compute for the interest expense in 2022

a) 127,775
b) 132176
c) 136,576
d) 146,667

Problem V

On January 01, 2022 Evening Star Corp. issued P5,000,000 of 12% bonds for P6,066,340 due
December 31, 2028. Bond issue cost of P25,000 were incurred. Interest on the bonds is payable
annually every December 31 starting December 31, 2022.

The effective interest rate was determined to be 8% after considering the bond issue cost.

The bonds are callable at 120 and on December 31, 2025, after the settlement of the 2025 interest ,
the entity called P2,000,000 face amount of bonds and retired them.

9. How much is the interest expense for the year 2023?

a) 463,890
b) 473,972
c) 483,307
d) 600,000
10. What is the carrying value of the bonds on December 31, 2024?
a) 5,000,000
b) 5,515,509
c) 5,662,508
d) 5,798,619
11. How much is the gain or loss on retirement of bonds on December 31, 2025?
a) 180,192 gain on bond retirement
b) 180,192 loss on bond retirement
c) 193,796 gain on bond retirement
d) 193,796 loss on bond retirement

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12. How much is the interest expense for the year 2026?
a) 264,744
b) 360,000
c) 441,241
d) 600,000

13. At what amount shall the bonds be reported on December 31, 2026?
a) 2,000,000
b) 3,000,000
c) 3,214,049
d) 3,309,305

Problem VI

On January 02, 2022, Gastambide Corp. issued 10,000, 10-year, 8% P1,000 face value bonds with
share warrants to purchase the issuer entity’s ordinary shares at 30 per share. The interest on the
bonds is payable annually every December 31, starting December 31, 2022.

Each bond contains one share warrant which can be used to acquire four shares of P25 par value
ordinary share capital.

The bond price with share warrants is P120. The bond price ex-warrants is 115 with 6% yield.

14. What is the initial measurement of the bonds payable on January 02, 2022
a) 500,000
b) 10,000,000
c) 11,500,000
d) 12,000,000
15. What is the amount assigned to the warrants on January 02, 2022
a) 500,000
b) 10,000,000
c) 11,500,000
d) 12,000,000
16. What is the interest expense for the year 2022?
a) 600,000
b) 690,000
c) 800,000
d) 920,000
17. What amount should be credited to share premium assuming all the warrants are exercised on
December 31, 2022?
a) 700,000
b) 1,000,000
c) 1,200,000
d) 1,700,000
18. Net effect on shareholder’s equity assuming all warrants are exercised on December 31, 2022?
a) 700,000
b) 1,000,000
c) 1,200,000
d) 1,700,000
19. What amount should be credited to share premium assuming only 75% of the warrants are
exercised on December 31, 2022?
a) 525,000
b) 750,000
c) 900,000
d) 1,275,000
20. Net effect on shareholder’s equity assuming only 75% of the warrants are exercised on December
31, 2022?
a) 525,000
b) 750,000
c) 900,000

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d) 1,275,000

Problem VII

On July 01, 2021, Arisu Company issued 25,000 of its 6-year, P1,000 face value, 10% convertible
bonds at 94. Each P1,000 face value bond is convertible into 10 ordinary shares with P10 par value.
Interest is payable every June 30 and December 31. On the date of issue, the prevailing market
interest rate for similar debt without the conversion option is 12%. On June 30, 2022, an investor in
Arisu’s convertible bonds tendered 7,500 bonds for conversion. On this date, each ordinary share has
a fair value of 105.

PV of 1 @ 6% for 12 periods: 0.4970

PV of an ordinary annuity of 1 @6% for 12 periods: 8.3838

21. What is the equity component of the 6-year bonds

a) 0
b) 595,250
c) 1,500,000
d) 2,095,000
22. What amount should be credited to share premium as a result of the conversion of the 7,500, 6-
year bonds on June 30, 2022.
a) 6,198,308
b) 6,376,808
c) 2,500,000
d) 2,771,389
23. What is the Interest expense for the year 2022?
a) 2,125,000
b) 2,354,495
c) 2,500,000
d) 2,771,389
24. Carrying value of the bonds on December 31, 2022
a) 16,310,297
b) 17,500,000
c) 23,300,424
d) 25,000,000

Problem VIII

Sang Woo Company, after having experienced financial difficulties in 2022, negotiated with a major
creditor arrived at an agreement to restructure a note payable on December 31, 2022. The creditor
was owed principal of P9,000,000 and interest of P1,000,000 but agreed to accept equipment worth
1,750,000 and note receivable from Sang Woo Company’s customer with face amount of P6,250,000
and accrued interest receivable of P500,000. The equipment had an original cost of P2,250,000 and
accumulated depreciation of P750,000.

25. Under IFRS, what amount should be recognized as gain on debt extinguishment on December 31,
2022?
a) 0
b) 1,000,000
c) 1,500,000
d) 1,750,000

Problem IX

Sato Corporation was threatened with bankruptcy due to inability to settle note payable amounting to
P10,000,000 plus accrued interest of P800,0000.

The entity entered into an agreement with the creditor to exchange shares in full settlement of the
note.

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The terms of the exchange were 300,000 ordinary shares with P10 par value and P20 market value,
and 25,000 preference shares with P20 par and P120 market value. The fair value of the liability was
P9,600,000

26. What amount should be recognized as gain on extinguishment of debt?

a) 0
b) 1,800,000
c) 5,500,000
d) 7,300,000

Problem X

On January 01, 2022, Netherlands Co. had an overdue 10% note payable at P9,000,000 and accrued
interest of P900,000. As a result of the restructuring arrangement on the same date, the creditor
agreed to the following concession agreements:
 The accrued interest is forgiven
 The principal amount be reduced to P6,000,000
 The new interest rate is 6% payable every December 31
 The new maturity date of the note is December 31, 2024

The Company paid P525,000 as an arrangement to the creditor. The market rate of interest for similar
note is 14%

PV of 1 @ 10% for 3 periods: 0.75

PV of an ordinary annuity of 1 @ 10% for 3 periods: 2.49
PV of 1 @ 14% for 3 periods: 0.67
PV of an ordinary annuity of 1 @ 10% for 3 periods: 2.32

27. At what amount should the new note payable be measured on January 01, 2022?
a) 4,855,200
b) 5,396,400
c) 5,921,400
d) 6,000,000
28. What amount of gain on extinguishment should be recognized for 2022?
a) 3,798,600
b) 4,503,600
c) 4,519,800
d) 5,044,800
29. What amount should be reported as interest expense for 2022?
a) 360,000
b) 539,640
c) 592,140
d) 679,728
30. What is the carrying amount of the new note payable on December 31, 2022?
a) 5,174,928
b) 5,534,928
c) 5,680,272
d) 6,000,000

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