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B-ACTG214 BSA25 1st Sem ( 2021-2022 )

Notes and Bonds Payable

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Question 1
On January 1, 2019, Ansley Company sold land to Louie Company. There was no established market price for the land. Louie gave Ansley a P2,400,000
noninterest bearing note payable in three equal annual installments of P800,000 with the first payment due December 31, 2019. The note has no ready
market. The prevailing rate of interest for a note of this type is 10%. The present value of a P2,400,000 note payable in three equal annual installments of
P800,000 at a 10% rate of interest is P1,989,600.

What amount should be reported as interest expense for 2019?

Response: 198,960

Question 2
Aira Company issued P8,000,000 12% bonds payable on December 31, 2021 at 96. Interest is payable annually on December 31.
Bond maturity

December 31:

2023 – 1,000,000

2024 – 1,000,000

2025 – 1,000,000

2026 – 1,000,000

2027 – 2,000,000

2028 – 2,000,000

How much is the interest expense for the year ended December 31, 2022?

Response: 64,000

Question 3

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What is the carrying amount of the note payable on January 1, 2019?

Response: 751,000

Question 4

If no correction is made, by what amount would interest expense for 2019 be understated?

Response: 230,000

Question 5
JP Company incurred the following costs in connection with the issuance of bonds.

Promotion cost – P200,000

Printing and engraving – P150,000

Legal fees – P800,000

Fees paid to independent accountants for registration – P100,000

Commissions paid to underwriter – P1,500,000

What amount should be recorded as bond issue costs to be amortized over the term of the bonds?

Response: 2,750,000

Question 6
On January 1, 2021, Bright Company received P5,385,000 for a P5,000,000 face amount 12% bonds payable, a price that yields 10%. The bonds pay
interest semiannually on June 30 and December 31. The entity elected the fair value option. On December 31, 2021, the fair value of the bonds payable is
determined to be P5,125,000 based on market and interest factors.

What amount should be reported as interest expense for 2021?

Response: 600,000

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Question 7

What amount should be recorded as interest expense for 2019?

Response: 380,000

Question 8
On January 1, 2021, Evangeline Company reported 10% bonds payable with carrying amount of P5,700,000. The bonds had a face amount of P6,000,000
and were issued to yield 12%. The interest method of amortization is used. Interest was paid on January 1 and July 1 of each year. On July 1, 2021, the
entity retired the bonds payable at 102. The interest payment on July 1, 2021 was made as scheduled.

What is the carrying amount of the bonds payable on July 1, 2021?

Response: 5,742,000

Question 9
At issuance date, the present value of a note payable should be equal to the face amount if the note

Response: Bears a stated rate of interest which is realistic

Question 10
Aira Company issued P8,000,000 12% bonds payable on December 31, 2021 at 96. Interest is payable annually on December 31.
Bond maturity

December 31:

2023 – 1,000,000

2024 – 1,000,000

2025 – 1,000,000

2026 – 1,000,000

2027 – 2,000,000

2028 – 2,000,000

How much is the interest expense for the year ended December 31, 2024?

Response: 896,000

Question 11
On December 31, 2019, Roxy Company purchased a machine from Reicel Company in exchange for a noninterest bearing note requiring 8 payments of
200,000. The first payment was made on December 31, 2019 and the others are due annually on December 31. The following are the relevant PV factors:

PV of ordinary annuity of 1 at 11% for 8 periods – 5.146

PV of annuity of 1 in advance at 11% for 8 periods – 5.712

On December 31, 2019, what is the carrying amount of the notes payable?

Response: 942,400

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Question 12
Aira Company issued P8,000,000 12% bonds payable on December 31, 2021 at 96. Interest is payable annually on December 31.
Bond maturity

December 31:

2023 – 1,000,000

2024 – 1,000,000

2025 – 1,000,000

2026 – 1,000,000

2027 – 2,000,000

2028 – 2,000,000

How much is the discount/premium on bonds payable?

Response: 320,000 discount

Question 13
On January 1, 2021, Bright Company received P5,385,000 for a P5,000,000 face amount 12% bonds payable, a price that yields 10%. The bonds pay
interest semiannually on June 30 and December 31. The entity elected the fair value option. On December 31, 2021, the fair value of the bonds payable is
determined to be P5,125,000 based on market and interest factors.

What is the carrying amount of the bonds payable in December 31, 2021?

Response: 5,125,000

Question 14
If the present value of the note issued in exchange for a property less than face amount, the difference should be

Response: Amortized as interest expense over the life of the note

Question 15
The issuer of a 10-year term bond sold at par three years ago with interest payable May 1 and November 1 each year shall report at year end

Response: Liability for accrued interest

Question 16

Response: 1,500,000

Question 17
On April 1, 2019, KC Company issued at 99 plus accrued interest, 2,000 of 8% P1,000 face amount of bonds. The bonds are dated January 1, 2019, mature
on January 1, 2029 and pay interest on January 1 and July 1. The entity paid bond issue cost of P70,000. How much is the net cash received?
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Response: 1,950,000

Question 18

What is the result of the remeasurement to fair value?

Response: 91,000 gain

Question 19

What is the carrying amount of the note payable on December 31, 2019?

Response: 842,000

Question 20
How would the amortization of premium on bonds payable affect the carrying amount of the bond and the net income, respectively?

Response: Decrease, increase

Question 21
On September 1, 2019, Kevin Company issued a note payable to National Bank in the amount of P1,800,000, bearing an interest at 12% and payable in
three equal annual principal payments of P600,000. On this date, the bank’s prime rate was 11%. The first principal and interest payment were made on
September 1, 2020.

What amount should be reported as interest expense for 2020?

Response: 192,000

Question 22
Green Company issued, in a private placement with an investment house, P3,000,000 face amount of 3-year 16% bonds payable. Interest is payable semi-
annually on June 30 and December 31 of each year. The bonds were issued on January 1, 2021 at a price yielding the entity of P2,738,682 which represents
an effective interest cost of 20% per year.

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How much is the interest expense on 2022?

Response: 480,000

Question 23
At yearend, Ansley Company issued a P3,000,000 face amount note payable to Louie Company in exchange for services rendered to Ansley. The note,
made at usual trade terms, is due in nine months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The
compound interest factor of 1 due in 9 months at 8% is 0.944. At what amount should the note payable be reported at yearend?

Response: 3,000,000

Question 24
The market price of the bond issued at a discount is the present value of the principal amount at the market rate of interest

Response: Plus the present value of all future interest payments at the market rate of interest

Question 25
Ave Company offered a contest in which the winner would receive P1,000,000 payable over twenty years. On December 31, 2019, Ave Company
announced the winner of the contest and signed a note payable to the winner for P1,000,000 payable in P50,000 installments every January 31. On
December 31, 2019, Ave Company purchased an annuity for P418,250 to provide the P950,000 prize remaining after the first P50,000 installment which
was paid on January 31, 2020.

On December 31, 2019, what amount should be reported as note payable contest winner, net of current portion?

Response: 418,250

Question 26
When an entity failed to recognize amortization of discount on bonds payable for the current year, what is the effect of the error on liabilities and equity,
respectively?

Response: Overstated and overstated

Question 27
On January 1, 2021, Bright Company received P5,385,000 for a P5,000,000 face amount 12% bonds payable, a price that yields 10%. The bonds pay
interest semiannually on June 30 and December 31. The entity elected the fair value option. On December 31, 2021, the fair value of the bonds payable is
determined to be P5,125,000 based on market and interest factors.

What amount should be recognized as gain or loss from change in fair value in 2021?

Response: 260,000 gain

Question 28
Which of the following statements is/are correct in relation to the fair value option of measuring note payable?

Response: At initial recognition, an entity may irrevocably designate the note payable as at fair value through profit or loss

Response: The interest expense on the note payable is recognized using the nominal or stated interest rate

Response: After initial recognition, the note payable is remeasured at fair value at every year-end and any changes in fair value are recognized in profit or
loss

Question 29
Which of the following statements is true about electing the fair value option for measuring bonds payable?

Response: The fair value of the bond and the principal obligation value must be disclosed.

Question 30
Ren Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2019 with interest payments on June 30 and December 31. When the
bonds are issued on November 1, 2019, the entity received cash of P5,150,000 including accrued interest. What amount was recorded as discount or
premium on bonds payable?
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Response: 50,000 bond premium

Question 31
On January 1, 2019, Ansley Company sold land to Louie Company. There was no established market price for the land. Louie gave Ansley a P2,400,000
noninterest bearing note payable in three equal annual installments of P800,000 with the first payment due December 31, 2019. The note has no ready
market. The prevailing rate of interest for a note of this type is 10%. The present value of a P2,400,000 note payable in three equal annual installments of
P800,000 at a 10% rate of interest is P1,989,600.

What is the carrying amount of the note payable on December 31, 2019?

Response: 1,388,560

Question 32
When a note payable is issued for property, the present value of the note is measured by

Response: All of these are considered in measuring the present value of the note payable

Question 33
Green Company issued, in a private placement with an investment house, P3,000,000 face amount of 3-year 16% bonds payable. Interest is payable semi-
annually on June 30 and December 31 of each year. The bonds were issued on January 1, 2021 at a price yielding the entity of P2,738,682 which represents
an effective interest cost of 20% per year.

How much is the total discount amortization on the last year of the bond?

Response: 104,137

Question 34
Green Company issued, in a private placement with an investment house, P3,000,000 face amount of 3-year 16% bonds payable. Interest is payable semi-
annually on June 30 and December 31 of each year. The bonds were issued on January 1, 2021 at a price yielding the entity of P2,738,682 which represents
an effective interest cost of 20% per year.

What is the carrying amount as of December 31, 2022?

Response: 3,000,000

Question 35
On January 1, 2021, Evangeline Company reported 10% bonds payable with carrying amount of P5,700,000. The bonds had a face amount of P6,000,000
and were issued to yield 12%. The interest method of amortization is used. Interest was paid on January 1 and July 1 of each year. On July 1, 2021, the
entity retired the bonds payable at 102. The interest payment on July 1, 2021 was made as scheduled.

What amount should be recorded as loss on early extinguishment of bonds payable?

Response: 378,000

Question 36
After initial recognition, bonds payable shall be measured at

Response: Either amortized cost using the effective interest method or fair value through profit or loss

Question 37
On December 31, 2019, Roxy Company purchased a machine from Reicel Company in exchange for a noninterest bearing note requiring 8 payments of
200,000. The first payment was made on December 31, 2019 and the others are due annually on December 31. The following are the relevant PV factors:

PV of ordinary annuity of 1 at 11% for 8 periods – 5.146

PV of annuity of 1 in advance at 11% for 8 periods – 5.712

What amount should be reported as interest expense for 2020?

Response: 103,664

Question 38

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Ave Company offered a contest in which the winner would receive P1,000,000 payable over twenty years. On December 31, 2019, Ave Company
announced the winner of the contest and signed a note payable to the winner for P1,000,000 payable in P50,000 installments every January 31. On
December 31, 2019, Ave Company purchased an annuity for P418,250 to provide the P950,000 prize remaining after the first P50,000 installment which
was paid on January 31, 2020.

What amount should be reported as contest prize expense for 2019?

Response: 468,250

Question 39
Ace Company had the following long-term debt:

Bonds maturing in installments, secured by machinery – P1,000,000

Bonds maturing on a single date, secured by realty – P1,800,000

Collateral trust bonds – P2,000,000

What is the total amount of debenture bonds?

Response: 0

Question 40
On September 1, 2019, Kevin Company issued a note payable to National Bank in the amount of P1,800,000, bearing an interest at 12% and payable in
three equal annual principal payments of P600,000. On this date, the bank’s prime rate was 11%. The first principal and interest payment were made on
September 1, 2020.

On December 31, 2020, what amount should be reported as interest payable?

Response: 48,000

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