BONDS PAYABLE STUDENT HANDOUTS

FINANCIAL ACCOUNTING & REPORTING MAY 2021 CPALE REVIEW

DISCUSSION

1. IT Corporation December 31, 2019 balance sheet contained the following items in the long-term liabilities section:

9.25% registered debentures, callable in 11 years, due in 16 years 700,000

9.25% collateral trust bonds, convertible into common stock beginning in 2028, due in 19 years 600,000
10% subordinated debentures (P30,000 maturing annually beginning in 2020) 300,000

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

A. 600,000 C. 700,000
B. 1,000,000 D. 1,300,000

2. IT Corporation December 31, 2018 balance sheet contained the following items in the long-term liabilities section:

10% registered bonds, callable in 2019, due in 2023, secured by machinery 3,000,000
11% bonds, convertible into common stock beginning in 2018, due in 2025, secured by realty 5,000,000
12% collateral trust bonds (P50,000 maturing annually) 7,000,000

What are the total amounts of IT’s secured bonds?

A. 15,000,000 C. 12,000,000
B. 10,000,000 D. 8,000,000

3. Ava Company issued 10-year bonds payable with face amount of P4,000,000 on January 1, 2023. The interest is payable
annually on December 31 at the 6% stated interest rate. The bonds were issued to yield 9%.

The present value of 1 at 6% for 10 periods is 0.56

The present value of an ordinary annuity of 1 at 6% for 10 periods is 7.36.
The present value of 1 at 9% for 10 periods is 0.42
The present value of an ordinary annuity of 1 at 9% for 10 periods is 6.42.

What is the market price of the bonds on January 1, 2023?

A. 1,680,000 C. 3,220,800
B. 3,991,200 D. 4,000,000

4. Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1, 2022. The bonds pay
interest semiannually on June 30 and December 31. The bonds are issued to yield 5%.

Present value of 1 PV of annuity of Present value of PV of annuity of

Periods at 2.5% 1 at 2.5% 1 at 5% 1 at 5%
5 0.884 4.646 0.784 4.330
10 0.781 8.752 0.614 7.722

What are the proceeds from the bond issue?

A. 6,531,618 C. 5,217,800
B. 5,216,494 D. 5,215,050

5. Kim Chui Company issued bonds with face amount of P6,000,000 on January 1, 2021. The nominal rate of 6% is payable
annually on December 31. The bonds are issued with an 8% effective yield. The bonds mature on every December 31
each year at the rate of P2,000,000 for the three years.

Present value of 1 at 8%:

One period 0.9259
Two periods 0.8573
Three periods 0.7938
Determine the market price or issue price of the bonds:
A. 5,788,532 C. 4,762,800
B. 5,690,555 D. 5,960,555

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6. On May 1, 2019, Raiders Company issued P2,000,000, 10 years, 9% bonds at 105 including accrued interest. These
bonds are dated January 1, 2019. Interest is payable semi-annually on January 1 and July 1. Transaction costs of P10,000
were paid by Raiders.

What is the carrying amount of bonds payable on May 1, 2019?

A. 2,090,000 C. 2,030,000
B. 2,150,000 D. 2,160,000

7. On March 1, 2019, Madine Corporation issued at 103 plus accrued interest, 1,000 of its 15%, P1,000 bonds. The bonds
are dated January 1, 2019 and mature on January 1, 2024. Interest is payable semi-annually on January 1 and July 1.
Madine paid transaction costs of P60,000.

Based on the given information, how much would Madine realize as net cash receipts from the bond issuance?
A. 995,000 C. 1,055,000
B. 1,030,000 D. 1,095,000

8. On January 1, 2016, Quilladin Company issued 5-year bonds with face value of P5,000,000 at 110. The company paid
bond issued cost of P80,000 on same date. The stated interest rate on the bonds is 8% payable annually every December
31. After consideration of bond issue costs to be initially measured, the bonds were determined to yield 6% per annum.

On December 31, 2016, what should Quilladin report as carrying amount of the bonds payable?
A. 5,430,800 C. 5,414,800
B. 5,345,200 D. 5,000,000

9. On January 1, 2021, Classroom Company issued 10% bonds in the face amount of P5,000,000 that mature on January
1, 2026. The bonds were issued for P4,580,000 to yield 12%, resulting in bond discount of P420,000. Classroom
Company used the interest method. Interest is payable semiannually on January 1, and July 1.

10. What is the carrying amount of the bonds payable on December 31, 2021?
A. 4,580,000 C. 4,631,088
B. 4,604,800 D. 5,000,000

11. On January 1, 2017, Bontoc Company issued 5,000,000, 8% serial bonds to be repaid in the amount of P1,000,000 each
year. Interest is payable annually on December 31. The bonds were issued to yield 10% a year. The bond proceeds were
P4,757,000 based on the present value at January 1, 2017 of five annual payments. The entity amortized the bond
discount by the interest method.

On December 31, 2017, what is the carrying amount of the bonds payable?
A. 3,832,700 C. 4,805,600
B. 4,832,700 D. 3,805,600

12. On January 1, 2019, Rossana Company issued 10-year bonds with face value of P5,000,000 for P5,775,000. The entity
paid bond issue cost of P100,000 on same date. The stated interest rate on the bonds is 10% payable annually every
December 31. The bonds have an 8% yield per annum after considering the bond issue cost. The entity used the effective
interest method of amortizing bond premium.

What is the interest expense for 2019?

A. 454,000 C. 400,000
B. 500,000 D. 567,500

13. On January 1, 2021, Mom Company received P1,032,880 for P1,000,000 face amount, 12% bonds, a price that yields
10% interest is payable semi-annually every June 30 and December 31. Interest expense for the year ended December
31, 2021 is
A. 123,946 C. 103,288
B. 124,155 D. 102,870

14. On December 31, 2019, the liability section of Phillies Company’s statement of financial position included bonds payable
of P10 million and unamortized premium on bonds payable of P180,000. Further verification revealed that these bonds
were issued on December 31, 2017 and will become due on December 31, 2027. Interest at 12% is payable every June
30 and December 31. On April 1, 2020, Phillies retired P4,000,000 of these bonds at 97 plus accrued interest.

How much was the total amount of cash paid for the retirement of bonds on April 1, 2020?
A. 3,950,000 C. 4,040,000
B. 4,000,000 D. 4,180,000

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15. The 12% bonds payable of Nyman Company had a carrying amount of P832,000 on December 31, 2021. The bonds,
which had a face value of P800,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method
of amortization. Interest is paid on June 30 and December 31. On June 30, 2022, several years before their maturity,
Nyman retired the bonds at 104 plus accrued interest.

The loss on retirement is:

A. 32,000 C. 9,920
B. 6,400 D. 0

16. On December 31, 2018, Affenpinscher Corporation issued 20-year, noncovertible bonds of P5,000,000 for P5,851,160 to
yield 10%. Interest is payable annually on December 31 at 12%. On June 1, 2021, Affenpinscher retires 3,000 of its own
P1,000 bonds. Total cash paid by Affenpinscher is P3,120,000. The accounting period of Affenpinscher is the calendar
year.

What is the amount of gain or loss on early retirement of bond that will be reported in 2021 income statement?
A. 617,440 C. 514,740
B. 517,440 D. 367,440

17. On January 1, 2022, Marimar Company issued 10,000 of its 12%, P1,000 face value 5-year bonds at 105. Interest on the
bonds is payable annually every December 31. In connection with the sale of these bonds, Marimar paid the following
expenses:

Promotion costs 100,000

Engraving and printing 400,000
Underwriter’s commissions 500,000

Using the straight-line method, what amount should Marimar report as bond interest expense for the year 2022?
A. 1,100,000 C. 1,200,000
B. 1,300,000 D. 1,600,000

18. Sanji, Inc. issued P100,000 of its 8%, five-year bonds on January 1, 2015, at 98. Interest is paid on January 1 and July
1. The bonds are callable at 103 and straight-line amortization is used. The bonds are recallable on April 1, 2017.

The journal entry to record the reacquisition of the bonds will include a:
A. Debit Bonds payable P100,000
B. Credit Gain on retirement P5,000
C. Credit Discount on bonds payable P1,100
D. Debit Loss on retirement P4,200

Numbers 19-21
On January 1, 2016, Dragonflame Company issued P5,000,000 of 12% nonconvertible bonds at 110 which are due on
December 31, 2020. In addition, each P1,000 bond was issued with 30 detachable share warrants, each of which entitled the
bondholder to purchase for P50 one share of Drangonflame Company with par value of P25.

On January 1, 2016, the quoted market value of each warrant was P5. The market value of the bond ex-warrant at the time
of issuance is 98.

19. What is the carrying amount of the bonds payable at the time of issuance?
A. 5,500,000 C. 4,900,000
B. 5,000,000 D. 4,750,000

20. What amount of the proceeds from the bond issue should be recognized as an increase in shareholders’ equity?
A. 600,000 C. 200,000
B. 300,000 D. 400,000

21. What amount should be recorded as share premium upon exercise of all of the share warrants?
A. 3,750,000 C. 4,250,000
B. 4,350,000 D. 4,500,000

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Numbers 22-23
On January 1, 2021, Jumbo Corporation issued a P3,000,000 6% convertible bonds at par. The bonds are redeemable at a
premium of 10% on December 31, 2024 or it may be converted into ordinary shares on the basis of 50 shares for each P1,000
bond at the option of the holder. The interest rate for an equivalent bond without the conversion rights would have been 10%.

Present value of 1 at 10% for 3 periods 0.6830

Present value of ordinary annuity of 1 at 10% for 3 periods 3.1699

22. The issuance of convertible bonds on January 1, 2021 increased the entity’s equity by
A. 380,418 C. 73,068
B. 175,518 D. 0

23. The carrying amount of the bonds payable as of December 31, 2021 is
A. 2,701,540 C. 3,000,000
B. 2,926,930 D. 3,039,625

Numbers 24-26
On January 1, 2019, Dias Company issued 3-year, 4,000 convertible bonds at face value of P1,000 per bond. Interest is to be
paid annually in arrears at the stated coupon rate of 6%. Each bond is convertible, at the holder’s option, into 200 P2 par
value ordinary shares at any time up to maturity.

On the date of issuance, the prevailing market interest rate for similar debt without the conversion privilege was 9%. On the
same date, the market price of one ordinary share was P3. The bonds were converted on December 31, 2020.

Present value of 1 at 9% for 3 periods 0.7722

Present value of ordinary annuity of 1 at 9% for 3 periods 2.5313

24. The equity component of the convertible debt is

A. 303,688 C. 1,973,621
B. 1,600,000 D. 2,400,000

25. The interest expense to be reported on Dias Company’s income statement for the year ended December 31, 2020 is
A. 101,000 C. 110,107
B. 240,000 D. 341,008

26. Entry to record the bond conversion on December 31, 2020, should include a credit to share premium – issuance of
A. 2,289,893 C. 2,400,000
B. 2,593,676 D. 0

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