ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 11

FINANCIAL ACCOUNTING & REPORTING C. Uberita  G. Macariola  J. Binaluyo

FAR-4214: BONDS & OTHER LONG-TERM LIABILITIES

THEORIES

1. When all bonds mature on a single date, they are called

a. Term bond
b. Serial bond
c. Debenture bond
d. Callable bond

2. The interest rate written in the terms of the bond indenture is known as the
a. coupon rate only
b. nominal rate only
c. stated rate only
d. coupon rate, nominal rate, or stated rate

3. The rate of interest actually incurred by the issuer is called the

a. stated rate only
b. yield rate only
c. effective rate only
d. effective, yield or market rate

Fox Co. issued P1,000,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield
8%.

4. One step in calculating the issue price of the bonds is to multiply the principal by the table value
for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.

5. Another step in calculating the issue price of the bonds is to

a. multiply P100,000 by the table value for 10 periods and 10% from the present value of an annuity
table.
b. multiply P100,000 by the table value for 20 periods and 5% from the present value of an annuity
table.
c. multiply P100,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. None of these answer choices are correct.

6. Real, Inc. issued bonds with a maturity amount of P2,000,000 and a maturity ten years from date
of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

7. If bonds are issued between interest dates, the entry on the books of the issuing corporation could
include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Payable.
d. credit to Unearned Interest.

8. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on
June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.

9. Bond issuance costs, including the printing costs and legal fees associated with the issuance, should
be
a. expensed in the period when the debt is issued.
b. recorded as a reduction in the carrying value of bonds payable.
c. accumulated in a deferred charge account and amortized over the life of the bonds.
d. reported as an expense in the period the bonds mature or are retired.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4214
Week 11: BONDS & OTHER LONG-TERM LIABILITIES

10. The amortization of a premium on bonds payable

a. decreases the balance of the premium on bonds payable account.
b. increases the amount of interest expense reported.
c. increases the carrying amount of the bond.
d. increases the cash payment to bondholders.

11. When bonds are retired before maturity date, the excess retirement price over the carrying value
of the bonds payable is
a. Treated as a gain and taken to profit or loss
b. Treated as a loss and taken to profit or loss
c. Treated as a share premium and taken to equity
d. Treated as either gain or loss and taken to profit or loss

12. Which of the following transactions would not lead to an increase or decrease in share premium
in relation to bonds payable?
a. Exercise of warrants related to bonds with detachable share warrants
b. Issuance of nonconvertible bonds at the middle of the year
c. Retirement of convertible bonds before maturity date
d. None of the above

13. The bonds issued in June 1 of the current year have interest payment dates of April 1 and October
1. Bond interest expense for the current year ended December 31 is for a period of
a. 3 months
b. 4 months
c. 6 months
d. 7 months

14. When a note payable is exchanged for property, goods, or services, the stated interest rate is
presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales price for similar
items or from current fair value of the note.
d. All of these answer choices are correct.

15. Which of the following statements concerning non-interest bearing notes payable is generally a
false statement?
a. Discount on notes payable should be deducted to arrive at the carrying value of
notes payable
b. Amortizing the discount causes the carrying amount of the notes payable to
gradually increase over the life of the note
c. Amortizing the premium causes the carrying amount of the notes payable
to gradually decrease over the life of the note
d. Interest expense is recognized even for non-interest-bearing notes.

PROBLEM SOLVING

On January 1, 2020, Ellison Co. issued eight-year bonds with a face value of P1,000,000 and a stated interest
rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values
are:
Present value of 1 for 8 periods at 6% ........................................... .627
Present value of 1 for 8 periods at 8% ........................................... .540
Present value of 1 for 16 periods at 3%.......................................... .623
Present value of 1 for 16 periods at 4%.......................................... .534
Present value of annuity for 8 periods at 6%................................... 6.210
Present value of annuity for 8 periods at 8%................................... 5.747
Present value of annuity for 16 periods at 3% ................................. 12.561
Present value of annuity for 16 periods at 4% ................................. 11.652

1. The present value of the principal is

a. P534,000 c. P623,000
b. P540,000 d. P627,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4214
Week 11: BONDS & OTHER LONG-TERM LIABILITIES

2. The present value of the interest is

a. P344,820 c. P372,600
b. P349,560 d. P376,830

3. The issue price of the bonds is

a. P883,560 c. P889,560
b. P884,820 d. P999,600

On October 1, 2020 Mack Corporation issued 5%, 10-year bonds with a face value of P1,000,000 at 108 (a 4%
yield). Interest is paid on October 1 and April 1, with any premiums or discounts amortized on an effective-
interest basis.

4. The entry to record the issuance of the bonds would include a credit of
a. P25,000 to Interest Payable c. P1,000,000 to Bonds Payable
b. P80,000 to Bonds Payable d. P1,080,000 to Bonds Payable.

5. Bond interest expense reported for the year 2020 is:

a. P10,000 c. P13,500
b. P12,500 d. P21,600

On January 1, 2021, Noodles Company issued serial bonds with a face value of P 3,000,000 and stated 12%
interest payable annually every December 31. The bonds have a yield rate of 10%. The bonds mature at an
annual installment of P1,000,000 every December 31. The rounded present value of 1 at 10% for one period is
0.91; for two periods is 0.83 and for three periods is 0.75.

6. What is the issue price of the serial bonds on January 1, 2021?

a. P2,250,000 c. P3,106,800
b. P3,386,400 d. P2,490,000

7. How much is the carrying value of the bonds on December 31, 2021?
a. P1,023,228 c. P2,057,480
b. P2,023,228 d. P3,057,480

On January 1, 2021, Hotdog Inc. issued P2,000,000 of 16% bonds at P102. Each P1,000 bond has one detachable
warrant that allows the holder to purchase ten shares of P 50 par value stock at P 70 per share. The bonds would
have been sold at 99 without the warrants.

8. What is the amount assigned to the warrants at the date of issuance?

a. P0 c. P60,000
b. P20,400 d. P1,980,000

On January 1, 2019, Athens Corporation issued its 8%, 5-year convertible debt instrument with a face amount of
P8,000,000 for P 7,700,000. Interest is payable every December 31 each year. The debt instrument is convertible
into 50,000 ordinary shares with a par value of P100. When the debt instruments were issued, the bonds without
the conversion option were sold for P7,393,312 yielding 10%. On December 31, 2021, P 4,000,000 of the
convertible debt instrument were converted.

9. How much is the gain or loss on conversion taken to profit or loss for the year 2021?
a. P2,423,029 gain c. P6,177,678 gain
b. P2,423,029 loss d. P0

Kant Corporation retires its P100,000 face value bonds at 102 on January 1, following the payment of interest.
The carrying value of the bonds at the redemption date is P96,250.

10. The entry to record the redemption will include a

a. Debit of P5,750 to Loss on Extinguishment of Debt.
b. Debit of P96,250 to Bonds Payable.
c. Credit of P3,750 to Gain on Extinguishment of Debt.
d. Debit of P3,750 to Bonds Payable.

On December 31, 2019, Beijing Corporation issued 20-year, nonconvertible bonds of P5,000,000 for P5,851,160
to yield 10%. Interest is payable annually on December 31 at 12%. On April 1, 2021, Beijing retires 2,000 of
its own P1,000 bond at 102 plus accrued interest. The accounting period of Beijing Corporation is the calendar
year.

11. What is the amount of gain or loss on early retirement of bond that will be reported in 2021 income
statement?
a. P292,873 gain c. P232,873 loss
b. P292,873 loss d. P232,873 gain

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FAR-4214
Week 11: BONDS & OTHER LONG-TERM LIABILITIES

On January 1, 2018, Faith Company issued its 8%, 5-year convertible debt instrument with a face amount of
P8,000,000 for P7,700,000. Interest is payable every December 31 of each year. The debt instrument is
convertible into 50,000 ordinary shares with a par value of P100. When the debt instruments were issued, the
prevailing market rate of interest for similar debt without conversion option is 10%.

PV of 10% for an ordinary annuity of P1 after 5 periods 3.7907868

PV of 10% after 5 interest periods .6209213

On December 31, 2020, all the convertible debt instruments were retired for P8,000,000. The prevailing
rate of interest on a similar debt instrument as of December 31, 2020 is 9% without the conversion option.

PV of 9% for an ordinary annuity of P1 after 2 periods 1.7591112

PV of 9% after 2 interest periods .8416799

12. What amount of gain or loss that should be reported in the profit or loss on the retirement of the
convertible debt instruments?
a. P136,957 c. P165,797
b. P138,420 d. P305,760

13. What amount of gain or loss that should be reported directly in the shareholders’ equity on the
retirement of the convertible debt instrument?
a. P136,957 c. P165,797
b. P138,420 d. P305,760

On January 1, 2020, Gomawo Company purchased a Land by issuing a 3-year noninterest bearing note of
P7,200,000 payable in three equal annual payments of P2,400,000 with the first payment due on December 31,
2020. The prevailing rate of notes of this type is 10%.

14. How much is the initial cost of the Land?

a. P5,968,560 b. P7,200,000 c. P5,409,360 d. P2,400,000

15. How much is the carrying value of the notes payable on December 31, 2021?
a. P5,968,560 b. P4,800,000 c. P4,165,416 d. P2,181,958

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