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QUIZ - BONDS

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value
of 100,000 will be
a. Equal to 100,000
b. Greater than 100,000
c. Less than 100,000
d. Greater than or less than 100,000, depending on the maturity date of the bonds

2. The journal entry a company records for the payment of interest, and amortization of bond premium is
a. debit Interest Expense, credit Cash and Premium on Bonds Payable
b. debit Interest Expense, credit Cash
c. debit Interest Expense and Premium on Bonds Payable, credit Cash
d. debit Interest Expense, credit Interest Payable and Premium on Bonds Payable

3. A 300,000 bond was redeemed at 103 when the carrying value of the bond was 311,000. The entry to
record the redemption would include a
a. loss on bond redemption of 2,000.
b. gain on bond redemption of 2,000.
c. gain on bond redemption of 9,000.
d. loss on bond redemption of 9,000.

4. Bonds that are retired prior to the maturity date with proceeds from a new bond issue. The gain or loss
from the early extinguishment of debt should be
a. Amortized over the life of the new bond issued
b. Recognized in income from continuing operations
c. Amortized over the remaining original life of the retired bond issued
d. Recognized in retained earnings

5. If the bonds are measured at fair value through profit or loss, the bond issue costs are
a. Expensed as incurred
b. Expensed immediately
c. Expensed as paid
d. Expensed as prepaid

6. Statement I- There is no gain or loss on conversion at maturity

Statement II- Carrying amount of bonds is equal to the face amount plus accrued interest if paid, plus
unamortized premium or minus unamortized discount and bond issue cost

a. Both statements true

b. 1st statement true; 2nd statement false
c. 1st statement false; 2nd statement true
d. Both statement false

7. It is a high-risk, high-yield bonds issued by entities that are heavily indebted or otherwise in weak
financial condition
a. Callable bonds
b. Zero-coupon bonds
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c. Junk bonds
d. Debenture bonds

8. During the issuance of bonds payable, all are true for bond issue costs except
a. It is directly attributed to the issuance of bonds
b. It will effectively increase market rate of interest
c. Bond issue costs are not expensed immediately if the bond is measured through profit or loss
d. It is amortized using interest method over the life of the bonds

9. A transaction whereby a debtor and creditor may renegotiate the terms of a financial liability with the
result that the liability is fully or partially extinguished by the debtor issuing equity instruments to the
creditor.
a. Asset swap
b. Equity swap.
c. Liability swap
d. Modification of terms

10. The proceeds from the bonds payable issued will always be
a. Dependent upon the market interest rate
b. Greater than the face amount
c. Lesser than the face amount
d. Equal to the face amount

11. Bonds payable not designated at fair value through profit or loss shall be measured initially at
a. Fair value
b. Fair value plus bonds issue cost
c. Fair value minus bonds issue cost.
d. Face amount

12. A discount on bond payable is charged to interest expense

a. Equally over the life of the bond
b. Only in the year the bond is issued
c. Using effective interest method.
d. Only in the year the bond matures

13. All are accounting approach for issuance of bonds, except

I. Memorandum approach
II. Journal entry approach
III. Allowance approach
A. I only
B. II only
C. III only
D. I and II only

14. The amortized cost of bonds payable means

a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable, minus discount on bonds payable and minus
bond issue cost.
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15. The 10% bonds payable of Nixon Company had a net carrying amount of 570,000 on December 31,
2021. The bonds, which had a face value of 600,000, were issued at a discount to yield 12%. The
amortization of the bond discount was recorded under the effective-interest method. Interest was paid
on January 1 and July 1 of each year. On July 2, 2022, several years before their maturity, Nixon retired
the bonds at 102. The interest payment on July 1, 2022 was made as scheduled. What is the loss that
Nixon should record on the early retirement of the bonds on July 2, 2022? Ignore taxes.
a. 12,000.
b. 37,800.
c. 33,600.
d. 42,000.

16. On December 1, 2022, Lester Company issued at 103, two hundred of its 9%, 1,000 bonds. Attached to
each bond was one detachable share warrant entitling the holder to purchase 10 shares of Lester's
ordinary shares. On December 1, 2022, the fair value of the bonds, without the share warrants, was 95,
and the fair value of each share warrant was 50. The amount of the proceeds from the issuance that
should be accounted for as the initial carrying value of the bonds payable would be
a. 195,700.
b. 190,000.
c. 200,000.
d. 206,000.

17. During 2022, Gordon Company issued at 104 three hundred, 1,000 bonds due in ten years. One
detachable share warrant entitling the holder to purchase 15 shares of Gordon’s ordinary shares was
attached to each bond. At the date of issuance, the market value of the bonds, without the share
warrants, was quoted at 96. The fair value of each detachable warrant was quoted at 40. What amount,
if any, of the proceeds from the issuance should be accounted for as part of Gordon’s equity?
a. 0
b. 12,000
c. 24,000
d. 12,480

18. On January 2, Jerome Co. issued bonds with a face value of 480,000 at a discount to yield 10%. The
bonds pay interest semiannually. On June 30, Jerome paid bond interest of 14,400. After Jerome
recorded amortization of the bond discount of 3,600, the bonds had a carrying amount of 363,600. What
amount did Jerome receive upon issuing the bonds?
a. 360,000
b. 367,200
c. 476,400
d. 480,000

19. On December 31, 2022, MS Company issued 10-year convertible bonds with a face value of
2,000,000 and a stated rate of 10%, paid semi-annually. The bonds are convertible at the investor’s
option. The bonds were issued to provide an effective yield of 9% for proceeds of 2,130,080. If these
bonds did not have a conversion feature, the company would have issued the bonds for 1,880,496 to
yield 11%. Which of the following is true with respect to the reporting of this financial instrument?
a) The liability portion of this financial instrument would be 2,130,080 at December 31, 2022 under the
split accounting — incremental approach.
b) The liability portion of this financial instrument would be 2,000,000 at December 31, 2022 under the
predominant component approach.
c) The interest expense for the first half of 2023 would be 95,854 under the predominant
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component approach.
d) The interest expense for the first half of 2023 would be 103,427 under the predominant
component approach.

20. ANKLEBITERS Company decided to establish sinking fund to retire bonds at maturity for the sake of its
attractiveness. It was administered by an independent trustee. ANKLEBITERS company issue bonds,
amounting to P6,500,000 on February 1, 2020 that will mature on February 1, 2023 with 10% interest
February 1 and August 1.

The correct entries for the retirement of the bonds with sinking fund last interest payment is

a. Bonds Payable 6,500,000

Interest Expense 300,000
Cash 6,800,000

b. Bonds Payable 6,500,000

Interest Expense 300,000
Sinking Fund 6,800,000

c. Bonds Payable 6,500,000

Interest Expense 300,000
Cash 6,500,000
Sinking Fund 300,000

d. Bonds Payable 6,500,000

Sinking Fund 6,500,000

21. On its December 31, 2018 balance sheet, Jerome Corp. reported bonds payable of P8,000,000 and
related unamortized bond issue costs of P400,000. The bonds had been issued at par. On January 2,
2019, Jerome retired P4,500,000 of the outstanding bonds at par plus a call premium of P95,000. What
amount should Jerome report in its 2019 income statement as loss on extinguishment of debt (ignore
taxes)?
a. P0
b. P70,000
c. P320,000
d. P795,000

22. Joseph Company is authorized to issue P5,000,000 of 6% 10-year bonds dated July 1, 2021 with
interest payments on June 30 and December 31. When the bonds are issued on November 1, 2021,
Joseph Company received cash of P5,150,000 including accrued interest. The journal entry to record
the issuance of the bonds would include
a. 50,000 bond premium c. 150,000 bond premium
b. 150,000 bond discount d. No bond premium or discount

23. On January 1, 2019, DAZ COMPANY issued 3-year, 4,000 convertible bonds at face value of 1,000 per
bond. Interest is to be paid annually in arrears at stated rate of 6%. Each bond is convertible, at holder's
option, into 200 P 2 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 was 9%. On the same date, the
market price of one ordinary share was P 3. The bonds were converted on Dec. 31, 2022

1. The equity component of the bond is

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a. P303,768 b. P1,973,621 c. P1,600,000 d. P305,670

2. The entry to record the conversion of bond on Dec. 31, 2022, should include a credit to share
premium of
a. P2,289,893 b. P2,593,661 c. P2,330,000 d. P 0

24. On December 31, 2022, a 5-year 6% bond payable on its 5th year has a carrying amount of P3,000,000
with an amortization of P57,593 has been recorded by the entity. If the effective rate would be 4% what
would be the carrying amount of the bonds payable on 2022? The interest is payable annually.
a. P3,000,000
b. P3,057,593
c. P2,942,407
d. P3122,407

What would be the discount or premium to be reported upon the issuance of the bonds?
a. P267,024 premium
b. P267,024 discount
c. P209,431 discount
d. P209,431 premium

25. On January 1, 2022, Ezekiel Company received P1,077,200 for P1,000,000 face amount 12% bonds.
The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. The
entity has elected the fair value option for measuring the financial liability.

On December 31, 2022, the fair value of the bonds 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 1, 2022?

a. 1,000,000
b. 1,077,200
c. 500,000
d. 538,600

2. What is the interest expense for 2022?

a. 120,000
b. 100,000
c. 107,000
d. 129,264

3. What is the 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
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