02a Bonds Payable Compound Financial Instrument

FINANCIAL ACCOUNTING THEORY & PRACTICE BONDS PAYABLE & COMPOUND FINANCIAL INSTRUMENT QUIZZER

Bonds Payable BONDS PAYABLE Essay Questions 1. What is a bond? A bond is a formal unconditional promise, made under seal, to pay a specified sum of money at a determinable future date, and to make periodic interest payments at a stated rate until the principal sum is paid. In simple language, a bond is a contract of debt whereby one party called the borrower or issuer borrows funds from another party called the investor or bondholder. A bond indenture or deed of trust is the document which shows in detail the terms of the bond and the rights and duties of the borrower and other parties to the contract. 2.

Define or describe the following types of bonds: 1. Term bonds 7. 2. Serial bonds 8. 3. Mortgage bonds 9. 4. Collateral trust bonds 10. 5. Debenture bonds 11. 6. Registered bonds 12.

Coupon or bearer bonds Convertible bonds Callable bonds Guaranteed bonds Junk bonds Commodity-backed bonds

1. Term bonds are bonds with a single date of maturity. 2. Serial bonds are bonds with a series of maturity dates or bonds that mature by installments. 3. Mortgage bonds are bonds secured by mortgage of real properties. 4. Collateral trust bonds are bonds secured by investments in stocks and bonds. 5. Debenture bonds are bonds without collateral security. 6. Registered bonds require the registration of the name of the bondholder on the books of the corporation. Consequently, when the bondholder sells a bond, the old bond certificate is surrendered and a new bond certificate is issued to the buyer. Interest is paid periodically to the bondholder of record. 7. Coupon or bearer bonds - The name of the bondholder is not registered. Accordingly, interest is paid periodically to the bearer of the bond or the person submitting a detachable interest coupon. 8. Convertible bonds are bonds that can be exchanged for equity shares of the issuing entity. 9. Callable bonds are bonds that can be called in for payment before the date of maturity. 10. Guaranteed bonds are bonds issued whereby another party promises to make payment if the borrower fails to do so. 11. Junk bonds are high risk and high yield bonds issued by entities that are heavily indebted or otherwise in weak financial position. Essay Questions: Bonds Payable

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FINANCIAL ACCOUNTING 12. Commodity-backed bonds are bonds which are redeemable in terms of commodities such as oil or precious metals. 3.

Explain a "premium on bonds payable". If the sales price of the bonds is more than the face value of the bonds, the bonds are said to be sold at a premium. The "premium on bonds payable" is in effect gain on the part of the issuing entity or borrower, because it receives more than what it is obligated to pay under the bond issue. The obligation of the issuing entity is limited only to the face value of the bonds. The premium on bonds payable, however, is not treated as an outright gain but amortized over the life of the bond by debiting premium on bonds payable and crediting interest expense.

4.

Explain a "discount on bonds payable". If the sales price of the bonds is less than the face value of the bonds, the bonds are said to be sold at a discount. The "discount on bonds payable" is in effect a loss to the issuing entity because it receives less than what it is obligated to pay which is equal to the face value. However, the discount on bonds payable is not treated as outright loss but amortized over the life of the bonds by debiting interest expense and crediting discount on bonds payable.

5.

Explain "bond issue costs". Bond issue costs or "transaction costs" are incremental costs that are directly attributable to the issue of bonds payable. Such costs include printing and engraving cost, promotion cost, legal and accounting fee, registration fee with regulatory authorities, commission paid to agents and underwriters and other similar charges. Bond issue costs are not treated as outright expense but amortized over the life of the bond issue in a manner similar to that used for discount on bonds payable. Bond issue costs are conceived as cost of borrowing and therefore will increase interest expense. The amortization of bond issue costs is recorded by debiting interest expense and crediting bond issue costs.

6.

Explain the measurement of bonds payable. PFRS 9, paragraph 5.1.1, provides that bonds payable not designated at fair value through profit or loss shall be measured initially at fair value minus transaction costs that are directly attributable to the issue of the bonds' payable. The fair value of the bonds payable is equal to the present value of the future cash payments to settle the bond liability. Bond issue costs shall be deducted from the fair value or issue price of the bonds payable in measuring initially

Essay Questions: Bonds Payable

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Bonds Payable the bonds payable. However, if the bonds are designated and accounted for "at fair value through profit or loss", the bond issue costs are treated as expense immediately. Actually, the fair value of the bonds payable is the same as the issue price or net proceeds from the issue of the bonds, excluding accrued interest. 7.

Explain the subsequent measurement of bonds payable. PFRS 9, paragraph 5.3.1, provides that after initial recognition, bonds payable shall be measured either: a. At amortized cost, using the effective interest method b. At fair value through profit or loss

8.

Explain the "amortized cost" of bonds payable. The "amortized cost" of bonds payable is the amount at which the bond liability is measured initially minus principal repayment, plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount and the maturity amount. Simply stated, the difference between the face amount and present value of the bonds payable is amortized using the effective interest method. Actually, the difference between the face amount and present value is either discount or premium on the issue of the bonds payable. Accordingly, discount on bonds payable and bond issue cost are presented as deduction from bonds payable and premium on bonds payable is an addition to bonds payable.

9.

Explain the "fair value option" of measuring bonds payable. PFRS 9, paragraph 4.2.2, provides that at initial recognition, bonds payable may be irrevocably designated as at fair value through profit or loss. In other words, under the fair value option, the bonds payable shall be measured initially at fair value and remeasured at every year-end at fair value and any changes in fair value are recognized in profit or loss. There is no more amortization of bond issue cost, bond discount and bond premium. As a matter of fact, interest expense is recognized using the nominal or stated interest rate and not the effective interest rate.

10. On January 1, 2013, an entity issued bonds with face amount of P5,000,000 and 12% stated interest rate for P5,379,100. The bonds are sold to yield 10%. Interest is payable annually on December 31. The entity paid bond issue cost of P100,000. On December 31, 2013, the fair value of the bonds is determined to be P5,300,000. Prepare the journal entries for 2013 assuming the entity elects the fair value option of measuring the bonds payable. Essay Questions: Bonds Payable

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FINANCIAL ACCOUNTING Jan. 1 Cash 5,379,100 Bonds payable 1 Transaction cost 100,000 Cash Dec. 31 Interest expense 600,000 Cash (12% x 5,000,000) 31 Bonds payable 79,100 Gain from change in fair value Bonds payable-January 1, 2013 Fair value - December 31, 2013 Decrease in fair value of bonds - gain

5,379,100 100,000 600,000 79,100 5,379,100 5,300,000 79,100

11. What is the meaning of treasury bonds? Treasury bonds are an entity's own bonds originally issued and reacquired but not canceled. 12. Explain the accounting for treasury bonds. When treasury bonds are acquired, the "treasury bonds account" is debited at face value and any related unamortized premium or discount or issue cost is canceled. The difference between the acquisition cost and the carrying amount of the treasury bonds is treated as gain or loss on acquisition of treasury bonds. Any accrued interest paid is charged to interest expense. Treasury bonds are reported in the statement of financial position as a deduction from bonds payable. 13. What is meant by bond refunding? Bond refunding is the floating of new bonds payable the proceeds from which are used in paying the original bonds payable. Simply stated, bond refunding is the premature retirement of the old bonds payable through the issuance of new bonds payable. 14. What is the treatment of bond refunding charges? The refunding charges include the unamortized bond discount or premium, unamortized bond issue cost and redemption premium on the old bonds being refunded. PFRS 9, paragraph 3.3.1, provides that bond refunding is an extinguishment of a financial liability. Paragraph 3.3.3 further provides that the difference between the carrying amount of the financial liability extinguished and the consideration paid shall be included in profit or loss. Accordingly, the refunding charges shall be accounted for as loss on early extinguishment of debt. Essay Questions: Bonds Payable

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Bonds Payable 15. Explain the "effective interest" method of amortizing discount on bonds payable, premium on bonds payable and bond issue cost. The effective interest method or simply "interest method" or scientific method recognizes two kinds of interest rate - nominal rate and effective rate. The nominal rate is the rate appearing on the face of the bonds while the effective rate is the actual interest incurred on the bond issue. The effective rate is the rate that exactly discounts estimated cash future payments through the expected life of the bonds payable or when appropriate, a shorter period to the net carrying amount of the bonds payable. The nominal rate is also known as coupon or stated rate. The effective rate is also known as yield or market rate. If the bonds are sold at face value, the nominal rate and effective rate are the same. If the bonds are sold at a discount, the effective rate is higher than nominal rate. If the bonds are sold at a premium, the effective rate is lower than nominal rate. Amortization of bond premium or discount. The annual amortization of premium or discount is the difference between the effective interest expense and nominal interest expense. The effective interest expense is computed by multiplying the carrying amount of the bonds payable at the beginning of the year by the effective rate. The nominal interest expense is computed by multiplying the face value of the bonds payable by the nominal rate. The effective interest method provides for an increasing amount of discount amortization and increasing amount of interest expense. The effective interest method provides for an increasing amount of premium amortization but a decreasing amount of interest expense. The calculation of effective interest rate shall include all transaction costs, premiums and discounts. Thus, bond issue costs will increase discount on bonds payable and will decrease premium on bonds payable. Under the effective interest method, bond issue cost must be "lumped" with the discount on bonds payable and "netted" against the premium on bonds payable.

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FINANCIAL ACCOUNTING COMPOUND FINANCIAL INSTRUMENT Essay Questions 1. Define a "compound financial instrument". PAS 32, paragraph 28, defines a compound financial instrument as "a financial instrument that contains both a liability and an equity element from the perspective of the issuer". In other words, one component of the financial instrument meets the definition of a financial liability and another component of the financial instrument meets the definition of an equity instrument. The common examples of compound financial instrument are as follows: a. Bonds payable issued with share warrants b. Convertible bonds payable 2.

Explain the accounting for a compound financial instrument. The issuer of a financial instrument shall evaluate the terms of the instrument whether it contains both a liability and an equity component. If the financial instrument contains both a liability and an equity component, PAS 32, paragraph 29, mandates that such components shall be accounted for separately in accordance with the substance of the contractual arrangement and the definition of a financial liability and an equity. The approach in accounting for a compound financial instrument is to apply "split accounting". This means that the consideration received from the issuance of the compound financial instrument shall be allocated between the liability and equity components. In other words, the fair value of the liability component is first determined. The fair value of the liability component is then deducted from the total consideration received from issuing the compound financial instrument. The residual amount is allocated to the equity component. QUESTION 5-3

3.

Explain bonds payable issued with share warrants. When the bonds are sold with share warrants, the bondholders are given the right to acquire shares of the issuing entity at a specified price at some future time. Actually, when bonds are sold with share warrants two securities are sold - the bonds and the share warrants. Share warrants attached to a bond may be detachable or nondetachable. Detachable share warrants can be traded separately from the bond while nondetachable share warrants cannot be traded separately.

Essay Questions: Compound Financial Instrument

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Compound Financial Instrument 4.

Explain the accounting for bonds payable issued with share warrants. Bonds issued with share warrants are considered as compound financial instrument. Accordingly, the proceeds from the issuance of the bonds payable with share warrants shall be accounted for as partly liability and partly equity. The proceeds shall be allocated between the bonds payable and the share warrants. PAS 32 does not differentiate whether the equity component is detachable or nondetachable. Whether detachable or nondetachable, share warrants have a value and therefore shall be accounted for separately. PAS 32, paragraph 31, provides that equity instruments are instruments that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Therefore, the bonds are assigned an amount equal to the "market value of the bonds exwarrant", regardless of the market value of the warrants. The residual amount or remainder of the issue price shall then be allocated to the share warrants. If the bonds have no known market value ex-warrant, the amount allocated to the bonds is equal to the present value of the bonds payable. The present value of bonds payable is the sum of the present value of the principal bond liability and the present value of the future interest payments using the effective or market interest rate for similar bonds without the share warrants.

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Explain the accounting for convertible bonds at the "time of original issuance". Convertible bonds are conceived as compound financial instrument. Accordingly, the issuance of convertible bonds shall be accounted for as partly liability and partly equity. The issue price of the convertible bonds shall be allocated between the bonds payable and the conversion privilege.

6.

Explain the allocation of the "original issue price" of convertible bonds payable. The economic effect of issuing convertible bonds is substantially the same as issuing simultaneously bonds payable with share warrants. Accordingly, the bonds are assigned an amount equal to the market value of the bonds without the conversion privilege. In the absence of market value of the bonds without conversion privilege, the amount allocated to the bonds is equal to the present value of the bonds payable.

Essay Questions: Compound Financial Instrument

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FINANCIAL ACCOUNTING The present value of bonds payable is the sum of the present value of the principal bond liability and the present value of future interest payments using the effective or market interest rate for similar bonds without conversion privilege The residual amount or remainder of the issue price shall then be allocated to the conversion privilege or equity component. 7.

Explain the accounting for the conversion of convertible bonds into share capital. If bonds are converted into share capital of the issuing entity, the accounting problem is the measurement of the share capital issued. Application Guidance 32 of PAS 32 provides that on conversion of a convertible instrument at maturity, the entity derecognizes the liability component and recognizes it as equity. There is no gain or loss on conversion at maturity. The reason is that the convertible bond is viewed in substance as an equity and the conversion is really an exchange of one type of equity capital for another. The conversion is not considered a significant economic transaction and therefore no gain or loss would be recognized. Accordingly, the carrying amount of the bonds payable is the measure of the share capital issued because the carrying amount is the "effective price" for the shares issued as a result of the conversion. Any cost incurred in connection with the bond conversion shall be deducted from share premium, if any. Otherwise, the cost incurred is treated as expense. The carrying amount of the bonds payable is equal to the face value plus accrued interest if not paid, plus unamortized premium or minus unamortized discount and bond issue cost.

8.

Explain the treatment of the "share premium from the conversion privilege" that was recognized at the original issuance of the bonds. The share premium from the conversion privilege that was recognized at the original issuance of convertible bonds payable shall form part of equity. If the bonds are later converted, the "share premium from conversion privilege" should be canceled because this would effectively form part of the total consideration paid for the shares ultimately issued as a result of the bond conversion.

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Bonds Payable MCQ – Theory: Bonds Payable Basic concepts 1. Debentures are A. Ordinary bonds B. Secured bonds

C. Serial bonds D. Unsecured bonds

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Bonds for which the bondholders' names are not registered with the issuer are called A. Bearer bonds C. Serial bonds B. Debenture bonds D. Term bonds FA 2 © 2014

3.

Bonds that pay no interest unless the issuer is profitable are known as A. Income bonds C. Mortgage bonds B. Junk bonds D. Registered bonds

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Bonds issued with scheduled maturities at various dates are called A. Callable bonds C. Serial bonds B. Convertible bonds D. Terms bonds

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5. 6.

7.

Bonds that mature on a single date are called A. Callable bonds C. Serial bonds B. Convertible bonds D. Term bonds What is the contract between the issuer of bonds and the bondholders? A. Bond coupon C. Bond indenture B. Bond debenture D. Registered bond What is the interest rate written on the face of the bond? A. Stated rate B. Coupon rate C. Nominal rate D. Coupon rate, nominal rate or stated rate

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8.

What is the rate of interest actually incurred? A. Effective rate C. Market, yield or effective rate B. Market rate D. Yield rate FA 2 © 2014

9.

When interest expense for the current year is more than interest paid, the bonds were issued at A. A discount C. Face amount B. A premium D. Cannot be determined FA 2 © 2014

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FINANCIAL ACCOUNTING 10. When interest expense for the current year is less than interest paid, the bonds were issued at A. A discount C. Face amount B. A premium D. Cannot be determined FA 2 © 2014 11. For a bond issue which sells for less than face value, the market rate of interest is Wiley 2011 A. Dependent on rate stated on the bond C. Higher than rate stated on the bond B. Equal to rate stated on the bond D. Less than rate stated on the bond 12. What is the market rate of interest for a bond issue which sells for more than face value? A. B.

Equal to rate stated on the bond Higher than rate stated on the bond

C. Independent of rate stated on the bond D. Less than rate stated on the bond FA 2 © 2014

13. If bonds are issued at a premium, this indicates that A. The yield and nominal rates coincide B. The yield rate of interest exceeds the nominal rate C. The nominal rate of interest exceeds the yield rate D. No necessary relationship exists between the two rates

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14. Which of the following is true of a premium on bonds payable? A. The premium or bonds payable is a contra shareholders' equity account. B. The premium on bonds payable is an account that appears only on the books of the investor. C. The premium on bonds payable increases when amortization entries are made until maturity date. D. The premium on bonds payable decreases when amortization entries are made until the balance reaches zero at maturity date. S&S 19e Initial Measurement 15. Bonds payable not designated at fair value through profit loss shall be measured initially at A. Face amount C. Fair value minus bond issue cost B. Fair value D. Fair value plus bond issue cost FA 2 © 2014 Bond issue cost 16. Cost of issuing bonds payable I. Is included in the measurement of the bonds payable measured at amortized cost. II. Is amortized using the "interest" method over the life of the bonds. III. Will effectively increase the market rate of interest. A. I and II only C. II and III only B. I and III only D. I, II and III FA 2 © 2014 MCQ – Theory: Bonds Payable

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Bonds Payable Issued at interest date 17. The market price of a bond issued at a discount is the present value of the principal amount at the market rate of interest AICPA 1191 A. Less the present value of all future interest payments at the market rate of interest. B. Plus the present value of all future interest payments at the market rate of interest. C. Less the present value of all future interest payments at the rate of interest stated on the bond. D. Plus the present value of all future interest payments at the rate of interest stated on the bond. 18. The proceeds from the sale of bonds A. Will always be equal to the face amount. B. Will always be less than the face amount. C. Will always be more than the face amount. FA 2 © 2014 D. May be equal to or more or less than the face amount depending on market interest rate. 19. In theory, the proceeds from the sale of a bond would be equal to A. The face amount of the bond B. The sum of the face amount of the bond and the periodic interest payments. C. The face amount of the bond plus the present value of the interest payments made during the life of the bond D. The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond S&S 19e Issued between interest dates 20. 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. Increased by accrued interest from May 1 to June 1 B. Decreased by accrued interest from May 1 to June 1 C. Increased by accrued interest from June 1 to November 1 D. Decreased by accrued interest from June 1 to November 1 K, W & W 21. When bonds are sold between interest dates, any accrued interest is credited to A. Bonds payable C. Interest receivable B. Interest payable D. Interest revenue

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S&S 19e

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FINANCIAL ACCOUNTING 22. Which of the following is true of accrued interest on bonds that are sold between interest dates? A. The accrued interest is extra income to the buyer. B. The accrued interest is computed at the effective rate. C. The accrued interest will be paid to the seller when the bonds mature. S&S 19e D. None of the above 23. A bond issued on June 1 of the current year has 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. Three months C. Six months B. Four months D. Seven months FA 2 © 2014 After initial measurement 24. After initial recognition, bonds payable shall be measured at I. Amortized cost using the effective interest method. II. Fair value through profit or loss. A. I only C. Either I or II B. II only D. Neither I nor II

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25. Under international accounting standard, the valuation method used for bonds payable is A. Historical cost B. Maturity amount C. Discounted cash flow valuation at current yield rate D. Discounted cash flow valuation at yield rate at issuance FA 2 © 2014 Fair value option 26. Under the fair value option, bonds payable shall be measured initially at FA 2 © 2014 A. Face amount C. Fair value minus bond issue cost B. Fair value D. Fair value plus bond issue cost 27. Which of the following statements is true in relation to the fair value option of measuring a bond payable? I. At initial recognition, an entity may revocably designate a bond payable at fair value through profit or loss. II. The bond payable is remeasured at every year-end at fair value and any changes in fair value are recognized in other comprehensive income. A. I only C. Both I and II B. II only D. Neither I nor II FA 2 © 2014 MCQ – Theory: Bonds Payable

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Bonds Payable Amortized cost option 28. The "amortized cost" of bonds payable means A. Face amount minus bond issue cost B. Face amount plus premium on bonds payable C. Face amount minus discount on bonds payable D. Face amount plus premium on bonds payable, minus discount on bonds payable and minus bond issue cost FA 2 © 2014 Straight-line amortization 29. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years [1] A. Will be less than the coupon rate of interest. B. Will exceed what it would have been had the effective interest method of amortization been used. C. Will be less than what it would have been had the effective interest method of amortization been used. D. Will be the same as what it would have been had the effective interest method of amortization been used. K, W & W Effective interest method 30. What is the effective interest rate of a bond measured at amortized cost? A. The stated rate of the bond. B. The interest rate currently charged by the entity or by others for similar bond. Valix 12 C. The basic risk-free interest rate that is derived from observable government bond prices. D. The interest rate that exactly discounts estimated future cash payments through the expected life of the bond or when appropriate, a shorter period to the net carrying amount of the bond. 31. When interest expense is calculated using the effective interest method, interest expense equals A. Actual amount of interest paid. B. Maturity value of the bonds multiplied by the effective interest rate. C. Carrying amount of the bonds multiplied by the stated interest rate. D. Carrying amount of the bonds multiplied by the effective interest rate. Valix 12 32. Under the effective interest method of amortization, the interest expense is equal to A. The stated rate of interest multiplied by the face amount of the bonds. B. The market rate of interest multiplied by the face amount of the bonds. FA 2 © 2014 C. The stated rate of interest multiplied by the beginning carrying amount of the bonds. D. The market rate of interest multiplied by the beginning carrying amount of the bonds. MCQ – Theory: Bonds Payable

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FINANCIAL ACCOUNTING 33. An entity issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the entity report on the first interest payment date? A. A debit to the unamortized bond discount. B. A debit to the unamortized bond premium. Becker 2013 C. An interest expense that is less than the cash payment made to bondholders. D. An interest expense that is greater than the cash payment made to bondholders. Discount & premium amortization 34. A discount on bond payable is charged to interest expense FA 2 © 2014 A. Equally over the life of the bond C. Only in the year the bond matures B. Only in the year the bond is issued D. Using the effective interest method 35. Which of the following statements is true for a bond maturing on a single date when the effective interest method of amortizing bond discount is used? A. Interest expense increases each six-month period B. Nominal interest rate exceeds effective interest rate C. Interest expense remains constant each six-month period FA 2 © 2014 D. Interest expense as a percentage of the bond carrying amount varies from period to period 36. When the effective interest method is used, the periodic amortization would A. Increase if the bonds were issued at a discount. B. Increase if the bonds were issued at a premium. C. Decrease if the bonds were issued at a premium. D. Increase if the bonds were issued at either a discount or a premium. FA 2 © 2014 Carrying amount 37. A five-year term bond was issued on January 1, 2012 at a premium. The carrying amount of the bond on December 31, 2013 would be A. Higher than the carrying amount on January 1, 2013 B. The same as the carrying amount on January 1, 2013 C. Lower than the carrying amount on December 31, 2014 D. Higher than the carrying amount on December 31, 2014 Valix 12 38. A five-year term bond was issued on January 1, 2012 at a discount. The carrying amount of the bond on December 31, 2013 would be A. Lower than the carrying amount on January 1, 2013 B. Higher than the carrying amount on January 1, 2013 C. The same as the carrying amount on January 1, 2013 D. Higher than the carrying amount on December 31, 2014 Valix 12 MCQ – Theory: Bonds Payable

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Bonds Payable Early extinguishment of debt 39. A 20-year bond was issued at a premium with a call provision to retire the bond. When the bond issuer exercised the call provision on an interest date, the call price exceeded the carrying amount of the bond. The amount of bond liability removed from the accounts should have equaled the A. Cash paid B. Current market price C. Call price plus unamortized premium D. Face amount plus unamortized premium 40. A ten-year term bond was issued at a discount with a call provision to retire the bond. When the bond issuer exercised the call provision on an interest date, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts should have equaled the A. Call price C. Face amount less unamortized discount B. Call price less unamortized discount D. Face amount plus unamortized discount 41. When bonds are retired prior to maturity with proceeds from a new bond issue, any gain or loss from the early extinguishment of debt should be A. Recognized in retained earnings. B. Amortized over the life of the new bond issue. C. Recognized in income from continuing operations. D. Amortized over the remaining original life of the retired bond issue. FA 2 © 2014 42. An extinguishment of bonds payable originally issued at a premium is made by purchase of the bonds between interest dates. Which of the following statements is true at the time of extinguishment? A. The premium must be amortized up to the purchase date. B. Interest must be accrued from the last interest date to the purchase date. C. Any costs of issuing the bonds must be amortized up to the purchase date. D. All of these statements are true. FA 2 © 2014 Derecognition 43. A ten-year term bond was issued at a discount with a call provision to retire the bond. When the bond issuer exercised the call provision on an interest date, the carrying amount of the bond was less than the call price. The amount of bond liability derecognized should have equaled the A. Call price B. Call price less unamortized discount C. Face amount less unamortized discount D. Face amount plus unamortized discount FA 2 © 2014 MCQ – Theory: Bonds Payable

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FINANCIAL ACCOUNTING Effect of transactions Amortization of bond discount 44. The amortization of discount on bonds payable A. Decreases the amount of interest expense. B. Decreases the face amount of bonds payable. C. Increases the carrying amount of bonds payable. D. Decreases the carrying amount of bonds payable.

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45. How would the amortization of discount on bonds payable affect each of the following? Wiley 2011 A. B. C. D. Carrying amount of bond Increase Increase Decrease Decrease Net income Increase Decrease Increase Decrease Amortization of bond premium 46. How would the amortization of premium on bonds payable affect each of the following? Wiley 2011 A. B. C. D. Carrying amount of bond Increase Increase Decrease Decrease Net income Increase Decrease Increase Decrease Accounting error 47. At the beginning of the current year, an entity issued bonds at a discount. The entity incorrectly used the straight-line method instead of the effective interest method to amortize the discount. What is the effect of the error on the following amounts at the current year-end? [2] AICPA 0591 A. B. C. D. Bond carrying Overstated Overstated Understated Understated amount Retained earnings Overstated Understated Overstated Understated 48. When an entity failed to recognize amortization of discount on bond payable for the current year, what is the effect of the error on liabilities and equity, respectively? A. Overstated and Overstated C. Understated and Overstated FA 2 © 2014 B. Overstated and Understated D. Understated and Understated 49. An entity neglected to amortize the discount on outstanding bonds payable. What is the effect of the failure to record discount amortization on interest expense and bond carrying amount, respectively? FA 2 © 2014 A. B. C. D. Interest expense Overstated Overstated Understated Understated Bond carrying amount Overstated Understated Overstated Understated MCQ – Theory: Bonds Payable

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Bonds Payable 50. An entity neglected to amortize the premium on outstanding bonds payable. What is the effect of the failure to record premium amortization on interest expense and bond carrying amount, respectively? S&S 6e A. B. C. D. Interest expense Overstated Overstated Understated Understated Bond carrying amount Overstated Understated Overstated Understated 51. On January 1, 2013, an entity issued bonds at a discount. The bonds mature on December 31, 2017. The entity incorrectly used the straight-line method instead of the effective interest method to amortize the discount. How is carrying amount of the bonds affected by the error? AICPA 0595 A. B. C. D. December 31, 2013 Overstated Overstated Understated Understated December 31, 2017 Understated No effect Overstated No effect Presentation & disclosure 52. Bond issue costs should be A. Expensed in the period when incurred. B. Deferred and amortized over the life of the bonds. C. Expensed in the period when the bonds are retired. D. Recorded as a reduction in the carrying amount of bonds payable.

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53. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight premium shall be A. Capitalized as organization cost B. Expensed in the year in which incurred C. Charged to retained earnings when the bonds are issued Valix 12 D. Reported as a deduction from bonds payable and amortized over the ten-year bond term 54. Unamortized debt discount should be reported as A. Deferred charge B. Part of the bond issue cost C. Direct deduction from the face value of the debt D. Direct deduction from the present value of the debt

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55. The carrying amount of a bond liability is the A. Call price of the bond plus bond discount or minus bond premium. B. Face amount of the bond plus related discount or minus related premium. C. Face amount of the bond plus related premium or minus related discount. D. Maturity value of the bond plus related discount or minus related premium. FA 2 © 2014 MCQ – Theory: Bonds Payable

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FINANCIAL ACCOUNTING 56. The issuer of a 10-year bond sold at par three years ago with interest payable February 1 and August 1 should report in the year-end statement financial position A. An addition to bonds payable C. Increase in deferred charge B. Contingent liability D. Liability for accrued interest FA 2 © 2014 Journal entries 57. If bonds are issued between interest dates, the entry of the issuer could include a A. Debit to interest payable C. Credit to interest receivable B. Credit to interest expense D. Credit to unearned interest FA 2 © 2014

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Compound Financial Instrument MCQ – Theory: Compound Financial Instrument Basic concepts 58. It is any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. A. Debt instrument C. Equity instrument B. Derivative instrument D. Financial instrument FA2 © 2014 59. Which of the following is not classified as a financial instrument? A. Convertible bond C. Loan receivable B. Foreign currency contract D. Warranty provision

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60. A financial liability is a contractual obligation I. To deliver cash or other financial asset to another entity. II. To exchange financial instruments with another entity under conditions that are potentially unfavorable. A. I only C. Both I and II B. II only D. Neither I nor II FA2 © 2014 61. Which of the following should be considered a financial liability? A. A constructive obligation C. Deferred revenue FA2 © 2014 B. A warranty obligation D. Redeemable preference share 62. Financial liabilities include all of the following, except A. Bonds payable C. Notes payable B. Income taxes payable D. Trade accounts payable

FA2 © 2014

63. It is any contract that evidences residual interest in the assets of an entity after deducting all of its liabilities. A. Debt instrument B. Loan receivable C. Equity instrument D. Financial asset with indeterminable fair value FA2 © 2014 64. Equity instruments include all of the following, except A. Ordinary shares B. Preference shares C. Corporate bonds and other debt instruments issued by the entity. D. Warrants or options that allow the holder to purchase a fixed number of ordinary shares of the issuing entity in exchange for a fixed amount of cash. FA2 © 2014 MCQ – Theory: Compound Financial Instrument

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FINANCIAL ACCOUNTING Compound financial instrument 65. A bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is A. A compound financial instrument C. A primary financial instrument B. A derivative financial instrument D. An equity instrument FA2 © 2014 66. What is the principal accounting for a compound financial instrument? A. The issuer shall classify a compound instrument as a liability in its entirety, until converted into equity. B. The issuer shall classify the liability and equity components of a compound instrument separately as financial liability or equity instrument. C. The issuer shall classify a compound instrument as either liability or equity based on evaluation of the predominant characteristics of the contractual arrangement. D. The issuer shall classify a compound instrument as a liability in its entirety, until converted into equity, unless the equity component is detachable and separately transferable, in which case the liability and equity components shall be presented separately. FA2 © 2014 67. How are the proceeds from issuing a compound financial instrument allocated between the liability and equity components? A. First, the liability component is measured at fair value, and then the remainder of the proceeds is allocated to the equity component. B. First, the equity component is measured at fair value, and then the remainder of the proceeds is allocated to the liability component. C. The equity component is measured at its intrinsic value. The liability component is measured at the face amount less the intrinsic value of the equity component. D. First, the fair values of both the equity component and the liability component are estimated. Then, the proceeds are allocated to the liability and equity components based on the relation between the estimated fair value. FA2 © 2014 Convertible bonds 68. Convertible bonds A. Are usually secured by a mortgage. B. May be exchanged for equity shares. C. Have priority over other indebtedness. D. Pay interest only in the event earnings are sufficient.

MCQ – Theory: Compound Financial Instrument

KW&W 1e

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Compound Financial Instrument 69. Convertible bonds A. Allow an entity to issue debt financing at lower rate. B. Are separated into their components based on relative fair value. C. Are separated into the liability component and the expense component. D. All of the choices are correct.

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70. When an entity issued bonds payable that can be converted into ordinary shares, what will be the effect on liabilities and equity? Valix 2012 A. B. C. D. Liabilities Increase Increase No effect Decrease Equity No effect Increase Increase Increase 71. The conversion of bonds is usually recorded by A. Carrying amount method C. Incremental method B. Fair value method D. Proportional method FA2 © 2014 72. When an entity issued convertible bonds, how will share premium be computed if the bonds were converted into ordinary shares? A. It is the difference between the face value of the bonds and the total par or stated value of the shares issued. B. It is the difference between the carrying amount of the bonds and the total par or stated value of the shares issued. C. It is the difference between the carrying amount of the bonds plus share premium from conversion privilege and the total par or stated value of the shares issued. D. It is the difference between the face value of the bonds plus the share premium from conversion privilege and the total par or stated value of the shares issued. Valix 2012 73. Bondholders exchanged their convertible bonds for ordinary shares. The carrying amount of these bonds was lower than market value but greater than the par value of the ordinary shares issued. If the book value or carrying amount method is used, which of the following correctly states an effect of the conversion? A. A loss is recognized. C. Share premium is decreased. Valix 2012 B. Retained earnings account increased. D. Shareholders' equity is increased. 74. When convertible bond is not converted but paid at maturity A. The amount allocated to equity is recorded as a gain. B. The amount allocated to equity is recorded as a loss. C. The carrying amount of the bond equal to face value is derecognized. D. A gain or loss is recorded for the difference between the carrying amount of the bond and the present value of the cash flows. FA2 © 2014 MCQ – Theory: Compound Financial Instrument

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FINANCIAL ACCOUNTING Bonds with share warrants 75. The major difference between convertible bonds and bonds issued with share warrants is that upon exercise of the warrants A. The shares involved are restricted. B. No share premium can be part of the transaction. C. The holder has to pay a certain amount to obtain the shares. D. The shares are held by the issuer for a certain period before they are issued to the warrant holder. FA2 © 2014 76. The proceeds from a bond issued with share warrants shall be accounted for as A. Entirely bonds payable B. Entirely shareholders' equity C. Partly bonds payable and partly unearned revenue D. Partly bonds payable and partly shareholders' equity FA2 © 2014 77. When bonds are issued with share warrants, a portion of the proceeds should be allocated to equity when the bonds are issued with I. Detachable share warrants II. Nondetachable share warrants A. I only C. Both I and II B. II only D. Neither I nor II Valix 2012 78. When bonds are issued with share warrants, the equity component is equal to A. Zero B. The market value of the share warrants. C. The excess of the proceeds over the face value of the bonds. FA2 © 2014 D. The excess of the proceeds over the fair value of the bonds without the share warrants. 79. When the cash proceeds from bonds issued with share warrants exceed the fair value of the bonds without the warrants, the excess should be credited to A. Liability account C. Share premium - ordinary FA2 © 2014 B. Retained earnings D. Share premium - share warrants 80. The proceeds from an issue of bonds with share warrants should not be allocated between the liability and equity components when A. The warrants issued are nondetachable. B. The fair value of the warrants is not readily available. C. The exercise of the warrants within the next reporting period seems remote. D. The proceeds should be allocated between liability and equity under all of these circumstances. KW&W 1e MCQ – Theory: Compound Financial Instrument

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Compound Financial Instrument 81. The proceeds from bonds issued with nondetachable share warrants shall be accounted for A. Entirely as bonds payable B. Entirely as shareholders' equity C. Partly us unearned revenue and partly as bonds payable D. Partly as bonds payable and partly as shareholders' equity Valix 2012 82. An entity issued bonds payable with non-detachable share warrants. In computing interest expense for the first year, the effective interest rate is multiplied by the A. Face value of the bonds B. Share warrants outstanding C. Fair value of the bonds ex-warrant D. Proceeds received from sale of the bonds Valix 2012 83. When an entity issued bonds payable with detachable share warrants, how will share premium be computed if the warrants are exercised by the bondholders? A. It is the balance of the share warrants outstanding. B. It is the sum of the share warrants outstanding and total par or stated value of the shares issued. C. It is the difference between the proceeds received based on the exercise price and the total par or stated value of the shares issued. Valix 2012 D. It is the difference between the proceeds received based on the exercise price plus the share warrants outstanding and the total par or stated value of the shares issued.

MCQ – Theory: Compound Financial Instrument

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FINANCIAL ACCOUNTING MCQ – Problems: Bonds Payable Time Value of Money 3. A cash flow of P2,000,000 may be received by Marvin Company in one year, two years, or three years, with probabilities of 20%, 50%, and 30%, respectively. The rate of interest on default risk-free investments is 5%. The present value factors are: PV of 1 at 5% for 1 year .952 PV of 1 at 5% for 2 years .907 PV of 1 at 5% for 3 years .864 What is the expected present value of the cash flow? A. 1,728,000 C. 1,814,000 B. 1,806,200 D. 1,904,000 FA 2 © 2014 Types of bonds 4. Glen Company had the following long-term debt: Sinking fund bonds, maturing in installments Industrial revenue bonds, maturing in installments Subordinated bonds, maturing on a single date What is the total amount of serial bonds? A. 1,500,000 C. 2,400,000 B. 2,000,000 D. 3,500,000

1,100,000 900,000 1,500,000 FA 2 © 2014

5.

Blue Company reported the following financial liabilities on December 31, 2014: 9% debentures, callable in 2015, due in 2016 3,500,000 11% collateral trust bonds, convertible into share capital beginning in 2015, due in 2016 3,000,000 10% debentures (P300.000 maturing annually) 1,500,000 What is the total amount of term bonds? A. 3,000,000 C. 5,000,000 B. 3,500,000 D. 6,500,000 FA 2 © 2014

6.

Zola Company had the following long-term debt: Bonds maturing in installments, secured by machinery Bonds maturing on a single date, secured by realty Collateral trust bonds What is the total amount of debenture bonds? A. 0 C. 1,800,000 B. 1,000,000 D. 2,000,000

MCQ – Problems: Bonds Payable

1,000,000 1,800,000 2,000,000 FA 2 © 2014

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Bonds Payable 7.

Hancock Company reported the following noncurrent liabilities on December 31, 2014: Unsecured 9% registered bonds (P250,000 maturing annually beginning in 2015) 2,750,000 11% convertible bonds, callable beginning in 2015, due 2016 1,250,000 Secured 12% guaranty security bonds, due 2016 2,500,000 10% commodity backed bonds (P500,000 maturing annually beginning in 2015) 2,000,000 What total amount of serial bonds and debenture bonds should be reported? A. B. C. D. Serial bonds 2,000,000 4,500,000 4,750,000 4,750,000 Debenture bonds 6,500,000 4,000,000 1,250,000 4,000,000 Effective interest rate 8. On January 1, 2014, Rizal Company issued 4-year bonds with face value of P4,000,000 at P4,395,800. The 12% stated rate is payable semiannually every June 30 and December 31. In addition, the entity paid P137,430 in connection with the issuance of the bonds. What is the effective rate of interest on the bonds on the date of issue? A. 9% C. 11% B. 10% D. 12% FA 2 © 2014 Bond issue cost 9. During the current year, Cain Company incurred the following costs in connection with the issuance of bonds: Promotion cost 200,000 Printing and engraving 150,000 Legal fees 800,000 Fees paid to independent accountants for registration information 100,000 Commissions paid to underwriter 900,000 What total amount should be recorded as bond issue cost to be amortized over the term of the bonds? A. 1,800,000 C. 2,000,000 B. 1,950,000 D. 2,150,000 FA 2 © 2014 Bond premium 10. Aye Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2014 with interest payments on June 30 and December 31. When the bonds are issued on November 1, 2014, the entity received cash of P5,150,000 including accrued interest. What is the discount or premium from the issuance of the bonds? A. 50,000 bond premium C. 150,000 bond premium FA 2 © 2014 B. 150,000 bond discount D. No bond premium and discount MCQ – Problems: Bonds Payable

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FINANCIAL ACCOUNTING Issue Price 11. White Company issued P2,000,000 face value of 10-year bonds on January 1. The bonds pay interest on January 1 and July 1 and had a stated rate of 10%. If the market rate of interest is 8%, what is the issue price of the bonds? A. 2,113,000 C. 2,262,000 B. 2,159,000 D. 2,279,000 FA 2 © 2014 12. On January 1, 2013, Colt Company issued ten-year bonds with a face amount of P5,000,000 and a stated interest rate of 8% payable annually on January 1. The bonds were priced to yield 10%. PV of 1 for 10 periods at 10% 0.3855 PV of an ordinary annuity of 1 for 10 periods at 10% 6.145 What is the issue price of the bonds? A. 1,927,500 C. 5,000,000 B. 4,385,500 D. 5,614,500 FA 2 © 2014 13. Margaret Company provided the following information in relation to the issuance of bonds on July 1, 2013. Face amount P800,000 Term Ten years Stated interest rate 6% Interest payment date Annually on July 1 Yield 9% Present value of 1 for 10 periods Future value of 1 for 10 periods Present value of an ordinary annuity of 1 for 10 periods What is the issue price for each P1,000 bond? A. 700 C. 864 B. 807 D. 1,000

At 6% 0.558 1.791 7.360

At 9% 0.422 2.367 6.418 FA 2 © 2014

Proceeds 14. On October 1, 2014, Shane Company issued 5,000 of the PI,000 face value 12% bonds at 110. The bonds which mature on January 1, 2019, pay interest semiannually on January 1 and July 1. The entity paid bond issue cost of P200,000. How much cash was received from the issuance of the bonds? A. 5,300,000 C. 5,550,000 B. 5,450,000 D. 5,650,000 FA 2 © 2014 MCQ – Problems: Bonds Payable

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Bonds Payable 15. On April 1, 2014, Greg Company issued, at 99 plus accrued interest, 4,000 of 8% P1,000 bonds. The bonds are dated January 1, 2014, mature on January 1/2024, and pay interest on January 1 and July 1. The entity paid bond issue cost of P140,0Q0. How much cash was received from the bond issuance? A. 3,820,000 C. 3,960,000 B. 3,900,000 D. 4,040,000 FA 2 © 2014 16. On March 1, 2014, Cain Company issued at 103 plus accrued interest 4,000 of 9%, Pl,000 face value bonds. The bonds are dated January 1, 2014 and mature on January 1, 2024. Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of P200,000. How much cash was received from the bond issuance? A. 3,980,000 C. 4,180,000 B. 4,120,000 D. 4,320,000 FA 2 © 2014 Initial measurement 17. On January 1, 2013, Borg Company issued 4,000 of 8% P2,000 face value bonds at 97 plus accrued interest. The bonds are dated October 1, 2012 and mature on October 1, 2022. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1,2012 to January 1, 2013 amounted to P160,000. On January 1, 2013, what is the carrying amount of bonds payable? A. 7,606,000 C. 7,766,000 B. 7,760,000 D. 7,840,000 P1 © 2013 18. On June 30, 2014, Huff Company issued at 99, four thousand of 8% P1,000 bonds. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P340,000. On June 30, 2014, what is the carrying amount of the bonds payable? A. 3,620,000 C. 3,960,000 B. 3,820,000 D. 4,000,000 FA 2 © 2014 19. On June 30, 2013, Huff Company issued at 99, five thousand of 8%, P1,000 face value bonds. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P425,000. On June 30, 2013, what amount should be reported as bond liability? A. 4,525,000 C. 4,950,000 B. 4,575,000 D. 5,000,000 P1 © 2013 20. On July 1, 2014, Carol Company issued at 104, five thousand of 10% PI,000 bonds. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P125,000. On July 1, 2014, what is the carrying amount of the bonds payable? A. 4,875,000 C. 5,200,000 B. 5,075,000 D. 5,325,000 FA 2 © 2014 MCQ – Problems: Bonds Payable

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FINANCIAL ACCOUNTING Interest payable 21. On November 1, 2014, Mason Company issued P4,000,000 of 10-year, 8% term bonds dated October 1, 2014. The bonds were sold to yield 10% with total proceeds of P3,500,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should be reported as accrued interest payable on December 31, 2014? A. 53,333 C. 87,500 B. 80,000 D. 100,000 FA 2 © 2014 22. On January 31, 2014, Beau Company issued P3,000,000 maturity value, 12% bonds for P3,000,000 cash. The bonds are dated December 31, 2013, and mature on December 31, 2023. Interest will be paid semiannually on June 30 and December 31. What amount of accrued interest payable should be reported on September 30, 2014? A. 90,000 C. 240,000 B. 180,000 D. 270,000 FA 2 © 2014 Effective interest method – Term Bonds 23. On July 1,2013, Tara Company issued 4,000 of 8%, PI,000 face value bonds payable for P3,504,000. The bonds were.issued to yield 10%. The bonds are dated July 1,2013 and mature on July 1, 2023. Interest is payable semiannually on January 1 and July 1. Using the effective interest method, what amount of the bond discount should be amortized for the six months ended December 31,2013? A. 15,200 C. 24,800 B. 19,840 D. 30,400 FA 2 © 2014 24. On January 1, 2014, Ward Company issued 9% bonds in face amount of P4,000,000, which mature on January 1, 2024. The bonds were issued for P3,756,000 to yield 10%, resulting in bond discount of P244,000. The entity used the interest method of amortizing bond discount. Interest is payable annually on December 31. On December 31, 2014, what is the balance of the unamortized bond discount? A. 204,000 C. 208,000 B. 206,440 D. 228,400 FA 2 © 2014 25. On January 1, 2014, Wolf Company issued 10% bonds in the face amount of P5,000,000, which mature on January 1, 2024. The bonds were issued for P5,675,000 to yield 8%, resulting in bond premium of P675,000. The entity used the interest method of amortizing bond premium. Interest is payable annually on December 31. On December 31, 2014, what is the balance of the unamortized bond premium? A. 507,500 C. 629,000 B. 607,500 D. 675,000 FA 2 © 2014 MCQ – Problems: Bonds Payable

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Bonds Payable 26. On January 1, 2013, Carrow Company issued 10% bonds in the face amount of P1,000,000 that mature on January 1, 2023. The bonds were issued for P886,000 to yield 12%, resulting in bond discount of P114,000. The entity used the interest method of amortizing bond discount. Interest is payable on January 1 and July. For the year ended December 31,2013, what amount should be reported as bond interest expense? A. 50,000 C. 100,000 B. 53,160 D. 106,510 P1 © 2013 27. On January 1, 2014, Moon Company issued 10% bonds payable in the face amount of P4,500,000. The bonds mature on January 1, 2024. The bonds were issued for P3,987,000 to yield 12%, resulting in bond discount of P513,000. The entity used the effective interest method of amortizing bond discount. Interest is payable semiannually on January 1 and July 1. For the six months ended June 30, 2014, what amount should be reported as bond interest expense? A. 225,000 C. 250,650 B. 239,220 D. 255,780 FA 2 © 2014 28. On January 1, 2014, Marsh Company issued 10% bonds payable in the face amount of P6,000,000. The bonds mature on January 1, 2024. The bonds were issued for P5,316,000 to yield 12%, resulting in bond discount of P684,000. The entity used the effective interest method of amortizing bond discount. Interest is payable semiannually on January 1 and July 1. For the six months ended June 30, 2014, what amount should be reported as bond interest expense? A. 300,000 C. 334,200 B. 318,960 D. 341,040 FA 2 © 2014 29. On January 1, 2014, Carol Company issued 10% bonds in the face amount of P5,000,000 that mature on January 1, 2020. The bonds were issued for P4,580,000 to yield 12%, resulting in bond discount of P420,000. The entity used the interest method. Interest is payable semiannually on January 1 and July 1. What amount should be reported as interest expense for 2014? A. 274,800 C. 549,600 B. 500,000 D. 551,088 FA 2 © 2014 30. On January 1, 2013, Taguig Company issued 3-year bonds with face value of P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on December 31. Additionally, the entity paid bond issue cost of P150,000. What is the interest expense for 2013 using the effective interest method? A. 528,000 C. 559,680 B. 550,000 D. 576,000 P1 © 2013 MCQ – Problems: Bonds Payable

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FINANCIAL ACCOUNTING 31. On January 1, 2014, Taguig Company issued 3-year bonds with face value of P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on December 31. The entity paid bond issue cost of P150,000. The PV of 1 at 11% for 3 periods is .7312, and the PV of an ordinary annuity of 1 at 11% for 3 periods is 2.4437. The present value of the bonds using 11% is: PV of principal (5,000,000 x .7312) 3,656,000 PV of annual interest payments (500,000 x 2.4437) 1,221,850 Total present value of bonds 4,877,850 The PV of 1 at 12% for 3 periods is .7118, and the PV of an ordinary annuity of 1 at 12% for 3 periods is 2.4018. The present value of the bonds using 12% is: PV of principal (5,000,000 x .7118) 3,559,000 PV of annual interest payments (500,000 x 2.4018) 1,200,900 Total present value of bonds 4,759,900 What is the interest expense for 2014 using the effective interest method? A. 528,000 C. 559,680 B. 550,000 D. 576,000 FA 2 © 2014 32. Webb Company has outstanding 7%, 10-year P5,000,000 face value bond. The bond was originally sold to yield 6% annual interest. The entity used the effective interest method to amortize bond premium. On January 1, 2014, the carrying amount of the outstanding bond was P5,250,000. What amount of premium on bond payable should be reported on December 31, 2014? A. 52,500 C. 215,000 B. 172,500 D. 225,000 FA 2 © 2014 33. On January 1,2013, Wolf Company issued 10% bonds in the face amount of P5,000,000, which mature on January 1,2023. The bonds were issued for P5,675,000 to yield 8%, resulting in bond premium of P675,000. The entity used the interest method of amortizing bond premium. Interest is payable annually on December 31. On December 31, 2013, what is the adjusted unamortized bond premium? A. 507,500 C. 629,000 B. 607,500 D. 675,000 P1 © 2013 34. On January 1, 2013, Ward Company issued 9% bonds in face amount of P4.000.000, which mature on January 1,2023. The bonds | were issued for P3.756,000 to yield 10%, resulting in bond discount of P244,000. The entity used the interest method of amortizing bond discount. Interest is payable annually on December 31. On December 31,2013, what is the unamortized bond discount? A. 204,000 C. 208,000 B. 206,440 D. 228,400 P1 © 2013 MCQ – Problems: Bonds Payable

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Bonds Payable 35. On January 1, 2014, West Company issued 9% bonds in the amount of P5,000,000, which mature on January 1, 2024. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on December 31. The entity used the interest method. What is the carrying amount of the bonds payable on June 30, 2014? A. 4,695,000 C. 4,710,250 B. 4,704,750 D. 5,000,000 FA 2 © 2014 36. On January 1, 2013, West Company issued 9% bonds in the face amount of P5,000,000, which mature on January 1, 2023. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on December 31. The entity used the interest method of amortizing bond discount. On December 31, 2013, what is the carrying amount of the bonds payable? A. 4,695,000 C. 4,714,500 B. 4,704,750 D. 5,000,000 P1 © 2013 37. On January 1, 2014, Luyang Company issued 3-year bonds with face value 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 after considering the bond issue cost is 12%. The interest is payable annually on December 31. The entity used the effective interest method. What is the carrying amount of the bonds payable on December 31, 2014? A. 4,831,200 C. 4,848,000 B. 4,840,000 D. 5,000,000 FA 2 © 2014 38. On January 1, 2014, Masbate Company issued 5-year bonds with face value of P5,000,000 at 110. The entity paid bond issue cost of P80,000 on same date. The stated interest rate on the bonds is 8% payable annually every December 31. The bonds are issued to yield 6% per annum after considering the bond issue cost. The entity used the effective interest method of amortization. On December 31, 2014, what is the carrying amount of the bonds payable? A. 5,000,000 C. 5,400,000 B. 5,345,200 D. 5,430,000 FA 2 © 2014 39. On January 1, 2014, Bontoc Company issued P5,000,000, 8% serial bonds to be repaid in the amount of Pi,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, 2014 of five annual payments. The entity amortized the bond discount by the interest method. In the December 31, 2014 statement of financial position, what is the carrying amount of the bonds payable? A. 3,805,600 C. 4,805,600 B. 3,832,700 D. 4,832,700 FA 2 © 2014 MCQ – Problems: Bonds Payable

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FINANCIAL ACCOUNTING Effective Interest Method – Serial Bonds 40. On January 1,2013, Samal Company issued P5,000,000, 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 1,2013 of five annual payments. The entity amortized the bond discount by the interest method. On December 31, 2013, what is the carrying amount of the bonds payable? A. 3,805,600 C. 4,805,600 B. 3,832,700 D. 4,832,700 P1 © 2013 41. On January 1,2013, Dome Company issued P4,000,000, 8% serial bonds, to be repaid in the amount of P800,000 each year. Interest is payable annually on December 31. The bonds were issued to yield 10% a year. The entity amortized the bond discount by the interest method. The bond proceeds totaled P3,805,600 based on the present value on January 1,2013 of five annual payments as follows: Due date 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017

Principal 800,000 800,000 800,000 800,000 800,000

Interest 320,000 256,000 192,000 128,000 64,000

PV at 1/1/2013 1,018,000 872,200 745,000 633,800 536,600

On December 31,2013, what is the carrying amount of the bonds payable? A. 2,787,600 C. 3,005,600 B. 2,982,000 D. 3,066,160

P1 © 2013

Fair value option 42. On January 1, 2014, Carmina Company received P5,385,000 for a P5,000,000 face amount 12% bond, a price that yields 10%. The bond pays interest semiannually. The entity elected the fair value option. On December 31, 2014, the fair value of the bond is determined to he P5,125,000. The entity recognized interest expense of P600,000 in 2014. What is the gain or loss that should be recognized in 2014 to report this bond at fair value? A. 260,000 gain C. 340,000 loss B. 260,000 loss D. 600,000 loss FA 2 © 2014

MCQ – Problems: Bonds Payable

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Bonds Payable 43. On January 1, 2014, Mariel Company issued bonds payable with face amount of P8,000,000 and 10% stated interest rate at 95. The bonds have a 5-year term and interest is payable annually every December 31. The entity elected the fair value option. On December 31, 2014, the fair value of the bonds is 105. It is reliably determined that the fair value increase comprised P 150,000 attributable to credit risk and the remainder attributable to change in the market interest rate. What amount of gain or loss should be recognized in profit or loss for 2014 to conform with the fair value option? A. 650,000 gain C. 800,000 gain B. 650,000 loss D. 800,000 loss FA 2 © 2014 Gain (loss) on early extinguishment of debt 44. On June 30, 2014, King Company had outstanding 9%, P5,000,000 face value bonds maturing on June 30, 2019. Interest is payable semiannually every June 30 and December 31. On June 30, 2014, after amortization was recorded for the period, the unamortized bond premium and bond issue cost were P30,000 and P50,000, respectively. On that date, the entity acquired all outstanding bonds on the open market at 98 and retired them. On June 30, 2014, what amount should be recognized as gain before tax on redemption of bonds? A. 20,000 C. 120,000 B. 80,000 D. 180,000 FA 2 © 2014 45. In the December 31, 2013 statement of financial position, Nilo Company reported bonds payable of P8,000,000 and related unamortized bond issue cost of P430,000. The bonds had been issued at par. On January 1, 2014, the entity retired P4,000,000 of the outstanding bonds at par plus a call premium of P 100,000. What amount should be reported in the 2014 income statement as loss on early extinguishment of debt? A. 0 C. 215,000 B. 100,000 D. 315,000 FA 2 © 2014 46. On January 1, 2015, Harlet Company redeemed the 15-year bonds of P5,000,000 par value for 102. The bonds were originally issued on January 1, 2002 at 98 with a maturity date of January 1, 2017. The bond issue cost relating to this transaction was P200,000. The entity amortized discounts, premiums and bond issue cost using the straight line method. What amount of loss should be recognized on the redemption of the bonds payable? A. 0 C. 120,000 B. 100,000 D. 160,000 FA 2 © 2014

MCQ – Problems: Bonds Payable

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FINANCIAL ACCOUNTING 47. Marie Company reported the following balances on December 31, 2014: Bonds payable 7,360,000 Interest payable 200,000 The bonds are retired on January 1, 2015 for P8,160,000 excluding interest. What amount should be reported as gain or loss on redemption? A. 600,000 gain C. 800,000 gain B. 600,000 loss D. 800,000 loss FA 2 © 2014 48. Moon Company reported on December 31, 2013 9% bonds payable of P4,000,000 less unamortized discount of P320,000. These bonds were issued to yield 10%. The effective interest method is used. Semiannual interest was paid on January 1 and July 1 of each year. On July 1, 2014, the entity retired the bonds at 103 before maturity. What is the loss on retirement of the bonds payable on July T, 2014? A. 120,000 C. 436,000 B. 432,000 D. 440,000 FA 2 © 2014 49. Bohol Company reported on December 31, 2014 9% bonds payable due December 31, 2020 with a carrying amount of P15,405,000. The bonds were issued on December 31, 2010 and have a face amount of P15,000,000 with interest payable semiannually on June 30 and December 31. On January 1, 2015, the entity retired P5,000,000 of these bonds at 98. What amount should be reported in the 2015 income statement as gain or loss on the retirement of the bonds? A. 100,000 gain C. 235,000 gain B. 100,000 loss D. 235,000 loss FA 2 © 2014 50. In order to finance a planned expansion, Verna Company issued 10% P5,000,000 face value bonds for P5,300,000 plus accrued interest on December 1, 2011. Interest is payable November 1 and May 1. On December 31, 2013, the carrying amount of the bonds payable was reported at P5,150,000. The straight line amortization method is used. On September 1, 2014, the entity decided to reacquire the bonds at face value plus accrued interest. What amount should be recorded as gain or loss on the extinguishment of debt? A. 102,000 gain C. 198,000 gain B. 102,000 loss D. 198,000 loss FA 2 © 2014 51. On December 31, 2013, Marie Company reported bonds payable of P4,800,000 and accrued interest payable of P300,000. The face amount of the bonds payable is P5,000,000. The bonds are retired on January 1, 2014 at 88 excluding accrued interest. What amount should be reported as gain or loss on extinguishment? A. 400,000 gain C. 700,000 gain B. 400,000 loss D. 700,000 loss FA 2 © 2014 MCQ – Problems: Bonds Payable

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Bonds Payable 52. Nixon Company reported 10% bonds payable with carrying amount of P5,700,000 on December 31, 2013. 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, 2014, the entity retired the bonds at 102. The interest payment on July 1, 2014 was made as scheduled. What amount should be recorded as loss on the early extinguishment of the bonds? A. 120,000 C. 378,000 B. 336,000 D. 462,000 FA 2 © 2014 Comprehensive Questions 53 & 54 are based on the following information. FA 2 © 2014 On January 1, 2014, Davao Company issued 6% bonds with face amount of P4,000,000 for net proceeds of P3,677,600, a price that yields 8%. Interest is payable annually every December 31. The entity elected the fair value option. On December 31, 2014, the bonds are quoted at 95. 53. What amount should be reported as interest expense for 2014? A. 120,000 C. 240,000 B. 220,656 D. 294,208 54. What amount should be reported as gain or loss from change in fair value for 2014? A. 122,400 gain C. 322,400 gain B. 122,400 loss D. 322,400 loss Questions 55 thru 58 are based on the following information. FA 2 © 2014 On January 1, 2014, Trisha Company received P1,077,200 for Pl.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 valuing financial liabilities. On December 31, 2014, the fair value of the bonds is PI,064,600. The change in fair value of the bonds is attributable to market factors. 55. What is the carrying amount of the bonds payable on January 1, 2014? A. 500,000 C. 1,000,000 B. 538,600 D. 1,077,200 56. What is the interest expense for 2014? A. 100,000 B. 107,720

MCQ – Problems: Bonds Payable

C. 120,000 D. 129,264

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FINANCIAL ACCOUNTING 57. What is the gain or loss from change in fair value of the bonds payable for 2014? A. 12,600 gain C. 64,600 gain B. 12,600 loss D. 64,600 loss 58. What is the carrying amount of the bonds payable on December 31, 2014? A. 1,000,000 C. 1,064,920 B. 1,064,600 D. 1,077,200 MCQ – Problems: Compound Financial Instrument Bonds with Warrants 59. On March 1, 2014, Fence Company issued 12% P5,000,000 nonconvertible bonds at 103 which are due on February 28, 2019. In addition, each P1,000 bond was issued 30 share warrants, each of which entitled the bondholder to purchase for P50 one share of Fence Company, par value P25. Interest is payable annually every February 28. On March 1, 2014, the market value of the share was P40 and the market value of the warrant was P4. The market rate of interest for similar bonds ex-warrants is 14%. The present value of 1 at 14% for 5 periods is 0.52 and the present value of an ordinary annuity of 1 at 14% for 5 periods is 3.43. What amount should be recognized on March 1, 2014 as discount or premium on the issuance of the bonds? A. 342,000 discount C. 450,000 discount B. 342,000 premium D. 450,000 premium FA2 © 2014 60. On December 31, 2013, Moses Company issued P5,000,000 face value, 5-year bonds at 109. Each P 1,000 bond was issued with 50 detachable share warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P25. Immediately after issuance, the market value of each warrant was P5. The stated interest rate on the bonds is 11% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrants is 12%. The present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5 periods is 3.60. On December 31, 2013, what amount should be recorded as discount or premium on bonds payable? A. 170,000 discount C. 450,000 premium B. 450,000 discount D. 800,000 discount P1 © 2013

MCQ – Problems: Compound Financial Instrument

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Compound Financial Instrument Convertible Preference Shares 61. At the beginning of the current year, Ria Company issued 10,000 ordinary shares of P20 par value and 20,000 convertible preference shares of P20 par value for a total of P800,000. At this date, the ordinary share was selling for P36, and the convertible preference share was selling for P27. What amount of the proceeds should be allocated to the convertible preference shares? A. 440,000 C. 540,000 B. 480,000 D. 600,000 P1 © 2013 62. In 2012, Hyatt Company issued for P110 per share, 15,000 convertible preference shares of P100 par value. One preference share may be converted into three ordinary shares of P25 par value at the option of the preference shareholder. On December 31,2013, all of the preference shares were converted into ordinary shares. The market value of the ordinary share at the conversion date was P40. What amount should be credited to ordinary share capital on December 31, 2013? A. 1,125,000 C. 1,650,000 B. 1,500,000 D. 1,800,000 P1 © 2013 63. During 2013, Brad Company issued 5,000 convertible preference shares of P100 par value for P110 per share. One preference share can be converted into three ordinary shares of P25 par value at the option of the preference shareholder. On December 31,2013, when the market value of the ordinary share was P40, all of the preference shares were converted. What amount should be credited to ordinary share capital and share premium as a result of the conversion, respectively? A. 375,000 and 175,000 C. 500,000 and 50,000 B. 375,000 and 225,000 D. 600,000 and 0 P1 © 2013 64. In 2013, Orlando Company issued for P105 per share, 8,000 convertible preference shares of P100 par value. One preference share can be converted into three ordinary shares of P25 par value at the option of the preference shareholder. In August 2013, all of the preference shares were converted into ordinary shares. The market value of the ordinary share at the date of the conversion was P30. What total amount should be credited to share premium as a result of the issuance of the preference shares and their subsequent conversion into ordinary shares? A. 80,000 C. 200,000 B. 120,000 D. 240,000 P1 © 2013

MCQ – Problems: Compound Financial Instrument

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FINANCIAL ACCOUNTING Convertible Bonds - Issuance 65. Moriones Company issued P5,000,000 face value 12% convertible bonds at 110 on January 1, 2013, maturing on January 1,2018 and paying interest semiannually on January 1 and July 1. It is estimated that the bonds would sell only at 103 without the conversion feature. Each P 1,000 bond is convertible into 10 ordinary shares with PI00 par value. What is the increase in shareholders' equity arising from the issuance of the convertible bonds on January 1, 2013? A. 0 C. 350,000 B. 150,000 D. 500,000 P1 © 2013 66. On March 1, 2013, Case Company issued P5,000,000 of 12% nonconvertible bonds at 103 which are due on February 28,2018. In addition, each P1,000 bond was issued with 30 detachable share warrants, each of which entitled the bondholder to purchase, for P50, one ordinary share of Case Company, par value P25. On March 1, 2013, the quoted market value of each warrant was P4. The market value of the bonds ex-warrants at the time of issuance is 95. What amount of the proceeds from the bond issue should be recognized as an increase in shareholders' equity? A. 200,000 C. 400,000 B. 300,000 D. 600,000 P1 © 2013 67. On December 31, 2014, Armada Company issued P5,000,000 face value, 5-ypar bonds at 109. Each P1,000 bond was issued with 10 share warrants, each of which entitled the bondholder to purchase one share of P100 par value at P120. Immediately after issuance, the market value of each warrant was P5. The stated interest rate on the bonds is 11% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrants is 12%. The present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity of 1 at 12% for 5 periods is 3.60. On December 31, 2014, what amount should be recorded as increase in shareholders' equity as a result of the bond issuance? A. 0 C. 440,000 B. 250,000 D. 620,000 FA2 © 2014 68. Susan Company issued 5,000 convertible bonds on January 1, 2014. The bonds have a three-year term and are issued at 110 with a face value of Pi,000 per bond. Interest is payable annually in arrears at a nominal 6% interest rate. Each bond is convertible at anytime up to maturity into 100 ordinary shares with par value of P5. When the bonds are issued, the prevailing market interest rate for similar debt instrument without conversion option is 9%. The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity of 1 at 9% for 3 periods is 2.53. MCQ – Problems: Compound Financial Instrument

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Compound Financial Instrument What is the equity component of the issuance of the convertible bonds on January 1, 2014? A. 391,000 C. 1,150,000 B. 891,000 D. 1,650,000 FA2 © 2014 69. On December 31, 2014, Green Company issued 2,000 convertible bonds with a nominal interest rate of 7% at P2,000 each. Each bond can be converted into five equity shares or redeemed for cash, at the option of the holder, in 5 years' time. The fair value at the date of issuance of similar bonds without the convertibility option was estimated at PI,500 each. What is the amount recognized in equity in respect of the issuance of convertible bonds on December 31, 2014? A. 0 C. 3,000,000 B. 1,000,000 D. 4,000,000 FA2 © 2014 70. Moriones Company issued P5,000,000 face value 12% convertible bonds at 110 on January 1, 2014, maturing on January 1, 2019 and paying interest semiannually on January 1 and July 1. It is estimated that the bonds would sell only at 103 without the conversion feature. Each PI,000 bond is convertible into 10 ordinary shares with P100 par value. What is the increase in shareholders' equity arising from the issuance of the convertible bonds on January 1, 2014? A. 0 C. 350,000 B. 150,000 D. 500,000 FA2 © 2014 71. On December 30, 2014, Fort Company issued 5,000 of 8%, 10-year, P 1,000 face value bonds with share warrants at 110. Each bond carried a warrant for one share of Fort Company at a specified option price of P25 per share. Immediately after issuance, the market value of the bonds without the warrants was P5,400,000 and the market value of the warrants was P600,000. In the December 31, 2014 statement of financial position, what should be reported as carrying amount of bonds payable? A. 4,400,000 C. 4,875,000 B. 4,500,000 D. 5,400,000 FA2 © 2014 72. On December 1, 2014, Lancaster Company issued at 103, five thousand of 9%, P1,000 face value bonds. Attached to each bond was one share warrant entitling the holder to purchase 10 ordinary shares of the entity. On December 1, 2014, the fair value of the bonds without the share warrants was 95, and the fair value of each share warrant was P50. What amount of the proceeds from the bond issuance should be accounted for as the initial carrying amount of the bonds payable? A. 4,750,000 C. 5,000,000 B. 4,892,500 D. 5,150,000 FA2 © 2014 MCQ – Problems: Compound Financial Instrument

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FINANCIAL ACCOUNTING Convertible bonds - conversion Ordinary share 73. In 2014, Hyatt Company issued for P110 per share, 15,000 convertible preference shares of P100 par value. One preference share may be converted into three ordinary shares with P25 par value at the option of the preference shareholder. On December 31, 2015, all of the preference shares were converted into ordinary shares. The market value of the ordinary share at the conversion date was P40. What amount should be credited to ordinary share capital on December 31, 2015? A. 1,125,000 C. 1,650,000 B. 1,500,000 D. 1,800,000 FA 2 © 2014 Share premium 74. On December 31, 2013, Cey Company had outstanding 10%, P1,000,000 face amount convertible bonds payable maturing on December 31,2016. Interest is payable on June 30 and December 31. Each P1,000 bond is convertible into 50 shares of P10 par value. On December 31,2013, the unamortized premium on bonds payable was P60,000. On December 31,2013,400 bonds were converted when Cey's share had a market price of P24. The entity incurred P4,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued. What is the share premium from the issuance of shares as a result of the bond conversion on December 31, 2013? A. 176,000 C. 276,000 B. 220,000 D. 280,000 P1 © 2013 75. On December 31, 2014, Cey Company had outstanding 12%, P5,000,000 face amount convertible bonds maturing on December 31, 2019. Interest is payable on June 30 and December 31. Each Pi,000 bond is convertible into 50 shares of Cey Company with P10 par value. On December 31, 2014, the unamortized balance in the premium on bonds payable account was P300,000. No equity component was recognized from the original issuance of the convertible bonds. On December 31, 2014, 2,000 bonds were converted when the share had a market price of P24. The entity incurred P20,000 in connection with the conversion. What is the share premium arising from the bond conversion? A. 1,100,000 C. 1,380,000 B. 1,120,000 D. 1,400,000 FA2 © 2014 76. Spare Company had an outstanding share capital with par value of P50,000,000 and a 12% convertible bond issue in the face amount of P10,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitled the bondholders to receive 40 shares of Spare Company with P20 par value in exchange for each P1,000 bond. The holder of P5,000,000 face value bonds exercised the MCQ – Problems: Compound Financial Instrument

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Compound Financial Instrument conversion privilege at year-end. The market price of the bonds at year-end was PI, 100 per bond and the market price of the share was P30. The total unamortized bond discount was P500,000 and the share premium from conversion privilege has a balance of P2,000,000 at the date of conversion. What amount of share premium should be recognized by reason of the conversion of bonds payable into share capital? A. 1,750,000 C. 2,750,000 B. 2,000,000 D. 3,000,000 FA2 © 2014 77. Orlando Company issued 8,000 convertible preference shares with P100 par value at P105 per share. One preference share can be converted into three ordinary shares with P25 par value at the option of the shareholder. Subsequently, all of the preference shares were converted into ordinary shares. The market value of the ordinary share on the date of conversion was P30. What amount should be credited to share premium as a result of the issuance of the preference shares and the subsequent conversion into ordinary shares? A. 80,000 C. 200,000 B. 120,000 D. 240,000 FA 2 © 2014 Share capital & share premium 78. Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30, 2014. Each PI,000 bond was convertible into 10 ordinary shares of P50 par value. On July 1, 2014, the interest was paid to bondholders, and the bonds were converted into ordinary shares which had a fair value of P75 per share. The unamortized premium on these bonds was P12,000 at the date of conversion. No equity component was recognized when the bonds were originally issued. What is the increase in the share capital and share premium, respectively, as a result of the bond conversion? A. 300,000 and 312,000 C. 450,000 and 162,000 B. 306,000 and 306,000 D. 600,000 and 12,000 FA2 © 2014 79. During 2014, Brad Company issued 5,000 convertible preference shares of P100 par value for P110 per share. One share can be converted into three ordinary shares with P25 par value at the option of the preference shareholder. When the market value of the ordinary share was P40, all of the preference shares were converted. What amount should be credited respectively to ordinary share capital and share premium as a result of the conversion? A. 375,000 and 175,000 C. 500,000 and 50,000 B. 375,000 and 225,000 D. 600,000 and 0 FA 2 © 2014

MCQ – Problems: Compound Financial Instrument

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FINANCIAL ACCOUNTING Convertible bonds - payment 80. Young Company issued 5,000 convertible bonds at the beginning of the current year. The bonds have a four-year term with a stated rate of interest of 6%, and are issued at par with a face value of PI,000 per bond. Interest is payable annually on December 31. Each bond is convertible into 50 ordinary shares with a par value of P10. The market rate of interest on similar nonconvertible bond is 9%. At the issuance date, the amount of P485,000 was credited to share premium from conversion privilege. The bonds were not converted and instead, the entity paid off the convertible bondholders at maturity. What amount should be recorded as gain or loss on the full payment of the convertible bonds at maturity? A. 0 C. 485,000 loss B. 485,000 gain D. 2,500,000 gain FA2 © 2014 81. On January 1, 2013, Arlene Company issued convertible bonds with a face value of P5,000,000 for P6,000,000. The bonds are convertible into 50,000 shares with P100 par value. The bonds have a 5-year life with 10% stated interest rate payable annually every December 31. The fair value of the convertible bonds without conversion option is computed at P5,399,300 on January 1, 2013. On December 31, 2015, the convertible bonds were not converted but fully paid for P5,550,000. On such date, the fair value of the bonds without conversion privilege is P5,400,000 and the carrying amount is P5,178,300. What is the loss on the extinguishment of the convertible bonds on December 31, 2015? A. 0 C. 221,700 B. 150,000 D. 371,700 P1 © 2013 82. On December 31, 2014, Tamia Company showed the following balances: Bonds payable 4,000,000 Discount on bonds payable 500,000 Share premium - issuance 5,000,000 Share premium - conversion privilege 700,000 The interest is payable annually every December 31. The convertible bonds are not converted but fully paid on December 31, 2014. On such date, the quoted price of the convertible bonds with conversion option is 105 which is the payment to the bondholders plus interest. However, the quoted price of the bonds without the conversion privilege is 95. What is the gain or loss from extinguishment of bonds? A. 300,000 gain C. 700,000 gain B. 300,000 loss D. 700,000 loss FA2 © 2014

MCQ – Problems: Compound Financial Instrument

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Bonds Payable & Compound Financial Instrument ANSWER KEY THEORY

1.D 2.A 3.A 4.C 5.D 6.C 7.D 8.C 9.A 10.B 11.C 12.D 13.C 14.D 15.C 16.D 17.B 18.D 19.D 20.A 21.B 22.D 23.D 24.C 25.D

Answer Key

26.B 27.D 28.D 29.B 30.D 31.D 32.D 33.D 34.D 35.A 36.D 37.D 38.B 39.D 40.C 41.C 42.D 43.C 44.C 45.B 46.C 47.B 48.C 49.D 50.A

51.B 52.D 53.D 54.C 55.C 56.D 57.B 58.D 59.D 60.C 61.D 62.B 63.C 64.C 65.A 66.B 67.A 68.B 69.A 70.B 71.A 72.C 73.D 74.C 75.C

76.D 77.C 78.D 79.D 80.D 81.D 82.C 83.D

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FINANCIAL ACCOUNTING ANSWER KEY PROBLEMS

3.B 4.B 5.D 6.A 7.D 8.B 9.D 10.A 11.D 12.B 13.B 14.B 15.B 16.A 17.B 18.A 19.A 20.B 21.B 22.A 23.A 24.D 25.C

Answer Key

26.D 27.B 28.B 29.D 30.C 31.C 32.C 33.C 34.D 35.B 36.C 37.A 38.B 39.B 40.B 41.D 42.A 43.B 44.B 45.D 46.D 47.D 48.C 49.C 50.A

51.A 52.C 53.C 54.B 55.D 56.C 57.A 58.B 59.A 60.A 61.B 62.A 63.A 64.D 65.C 66.C 67.D 68.B 69.B 70.C 71.D 72.A 73.A 74.B 75.A

76.A 77.D 78.A 79.A 80.A 81.C 82.B

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Bonds Payable & Compound Financial Instrument ANSWER EXPLANATION 1.

Answer is (B). The straight-line method provides for uniform discount amortization but the effective interest method provides for increasing discount amortization. Accordingly, the straight-line interest expense is higher than effective interest expense in the earlier years.

2.

Answer is (B). Since the straight-line amortization of discount on bonds payable is higher than the discount amortization under the effective interest method, the carrying amount of the bonds payable will be overstated under the straight-line method. Consequently, in the earlier years, the straight line interest expense is higher than the effective interest expense, resulting to lower net income and understated retained earnings.

3.

Answer is (B). 2,000,000 x 20% x .952 2,000,000 x 50% x .907 2,000,000 x 30% x.864 Total present value of cash flow

380,800 907,000 518,400 1,806,200

4.

Answer is (B). Sinking fund bonds, maturing in installments Industrial revenue bonds, maturing in installments Total serial bonds

5.

Answer is (D). 9% debentures, callable in 2015, due in 2016 11% collateral trust bonds Total term bonds

6.

Answer is (A). Debenture bonds are unsecured bonds or bonds without collateral security. Collateral trust bonds are bonds secured by investments in shares and bonds.

7.

Answer is (D). 9% registered bonds 11% convertible bonds 10% commodity backed bonds Total

Answer Explanations & Solutions

1,100,000 900,000 2,000,000 3,500,000 3,000,000 6,500,000

Serial bonds 2,750,000 2,000,000 4,750,000

Debenture bonds 2,750,000 1,250,000 . 4,000,000 Page 47

FINANCIAL ACCOUNTING 8.

Answer is (B) Issue price 4,395,800 Bond issue cost (137,430) Net proceeds 4,258,370 Using an interest rate of 5%, the relevant PV factors are: PV of 1 at 5% for 8 periods .6768 PV of an ordinary annuity of 1 at 5% for 8 periods 6.4632 The market price of the bonds is determined as follows: PV of principal (4,000,000 x .6768) 2,707,200 PV of semi-annual interest payment(240,000 – 6.4632) – rounded1,551,170 Market price of bonds 4,257,370 Since the maturity is 4 years and the interest is payable semi-annually, there are 8 interest periods. Since the market price of using 5% for 8 periods is equal to the net proceeds, the effective rate of interest must be 10% annually for 4 years.

9.

Answer is (D). All costs incurred.

10. Answer is (A). Cash received Accrued interest Issue price of bonds payable Face value Premium on bonds payable

(5,000,000 x 6% x 4/12)

11. Answer is (D). PV of 1 at 4% for 20 periods PV of an ordinary annuity of 1 at 4% for 20 periods

5,150,000 (100,000) 5,050,000 5,000,000 50,000 .46 13.59

PV of principal (2,000,000 x .46) 920,000 PV of semiannual interest payments (100,000 x 13.59) 1,359,000 Issue price of bonds 2,279,000 The term of the bonds is 10 years and the interest is payable semiannually. Therefore, there are 20 interest periods. Accordingly, the present value factor should be for the semiannual effective rate of 4% for 20 interest periods. 12. Answer is (B). PV of principal (5,000,000 x .3855) PV of annual interest payments (400,000 x 6.145) Total present value or issue price of bonds Answer Explanations & Solutions

1,927,500 2,458,000 4,385,500 Page 48

Bonds Payable & Compound Financial Instrument 13. Answer is (B). PV of principal PV of interest Issue price

(1,000 x.422) (1,000 x 6% = 60 x 6.418)

14. Answer is (B). Issue price Accrued interest Total Less: Bond issue cost Net cash received 15. Answer is (B). Issue price Accrued interest Total Less: Bond issue cost Net cash received 16. Answer is (A). Issue price Accrued interest Total Less: Bond issue cost Net cash received 17. Answer is (B). Issue price Bonds payable Discount on bonds payable Carrying amount of bonds payable 18. Answer is (A). Bonds payable Discount on bonds payable Issue price Bond issue cost Bond liability Answer Explanations & Solutions

422 385 807

(5,000,000 x 110) (5,000,000 x 12% x 3/12)

5,500,000 150,000 5,650,000 200,000 5,450,000

(4,000,000 x 99%) (4,000,000 x 8% x 3/12)

3,960,000 80,000 4,040,000 140,000 3,900,000

(4,000,000 x 103%) (4,000,000 x 8% x 3/12)

4,120,000 60,000 4,180,000 200,000 3,980,000

(8,000,000 x 97%)

7,760,000

(4,000 x P2,000)

8,000,000 (240,000) 7,760,000

(4,000,000 x 99%)

4,000,000 (40,000) 3,960,000 (340,000) 3,620,000 Page 49

FINANCIAL ACCOUNTING 19. Answer is (A). Issue price (5,000,000 x 99%) 4,950,000 Bonds payable 5,000,000 Discount on bonds payable (50,000) Bond issue cost (425,000) Carrying amount of bonds payable 4,525,000 PFRS 9, paragraph 5.1.1, provides that transaction costs shall be included in the initial measurement of a financial liability not at fair value through profit or loss. Accordingly, bond issue cost is a deduction from bonds payable. 20. Answer is (B). Bonds payable Premium on bonds payable Bond issue cost Bond liability

(4% x 5,000,000)

5,000,000 200,000 (125,000) 5,075,000

21. Answer is (B). Accrued interest payable (4,000,000 x 8% x 3/12) The nominal interest of 8% is used in determining the accrued interest payable. 22. Answer is (A). Accrued interest payable

(3,000,000 x 12% x 3/12)

80,000

90,000

23. Answer is (A). Interest expense (3,504,000 x 10% x 6/12) 175,200 Interest paid (4,000,000 x 8% x 6/12) 160,000 Discount amortization for six months 15,200 Effective interest method  Under the effective interest method, the difference between the interest expense and interest paid is the discount or premium amortization.  The interest expense is equal to the carrying amount of bonds payable multiplied by the effective interest rate.  The interest paid is equal to the face value of bonds payable multiplied by the nominal interest rate. 24. Answer is (D). Interest expense Interest paid Discount amortization Answer Explanations & Solutions

(10% x 3,756,000)

375,600 360,000 15,600 Page 50

Bonds Payable & Compound Financial Instrument Discount on bonds payable Less: amortization for 2014 Balance – December 31, 2014 25. Answer is (C). Interest expense Interest paid Premium amortization

244,000 15,600 228,400 (5,676,000 x 8%) (5,000,000 x 10%)

Premium on bonds payable Less: Amortization for 2014 Balance – December 31, 2014 26. Answer is (D).

Interest paid

Date 1-1-2013 7-1-2013 1-1-2014 Interest paid Interest expense for 2013:

50,000 50,000" 100,000

454,000 500,000 46,000 675,000 46,000 629,000

Interest expense*

Discount amortization

53,160 3,160 53,350 3,350 106,510 6,510 (1,000,000 x 10% x 6/12) 886,000 x 12% x 6/12 889,160 x 12% x 6/12 (rounded)

Carrying amount 886,000 889,160 892,510 50,000 53,160 53,350 106,510

27. Answer is (B). Interest expense from Jan. 1 to June 30, 2014(3,987,000 x 12% x 6/12)

239,220

28. Answer is (B). Interest expense from January 1 to June 30, 2014 (5,316,000 x 12% x 6/12)

318,960

29. Answer is (D). Date 1/1/2014 7/1/2014 1/1/2015

Interest paid Interest expense Premium amortization Carrying amount 4,580,000 250,000 274,800 24,800 4,604,800 250,000 276,288 26,288 4,631,088 551,088

Answer Explanations & Solutions

Page 51

FINANCIAL ACCOUNTING 30. Answer is (C). Carrying amount of bonds (5,000,000 x 99% - 150,000) 4,800,000 Interest expense (4,800,000 x 11.66%) 559,680 Computation of effective rate by interpolation The PV of 1 at 11% for 3 periods is .7312, and the PV of an ordinary annuity of 1 at 11 % for 3 periods is 2.4437. The present value of the bonds using 11 % is: PV of principal (5,000,000 x .7312) 3,656,000 PV of annual interest payments (500,000 x 2.4437) 1,221,850 Total present value of bonds 4,877,850 The PV of 1 at 12% for 3 periods is .7118, and the PV of an ordinary annuity of 1 at 12% for 3 periods is 2.4018. The present value of the bonds using 12% is: PV of principal (5,000,000 x .7118) 3,559,000 PV of annual interest payments (500,000 x 2.4018) 1,200,900 Total present value of bonds 4,759,900 Let X = the effective rate X = 4,800,000 11% = 4,877,850 12% = 4,759,900 This means that the effective rate is higher than 11 % but lower than 12%. Thus, by interpolation, the interest differential is determined as follows: (X-11%) / 12%-11% (4,800,000-4,877,850) ÷ (4,759,900-4,877,850) 77,850 ÷ 117,950= .66 Thus, the effective rate is 11 % plus the differential of .66 or 11.66% 31. Answer is (C). Carrying amount of bonds(5,000,000 Interest expense (4,800,000

x

99% x

-

150,000) 11.66%)

Let X = the effective rate X = 4,800,000 11% = 4,877,850 12% = 4,759,900 This means that the effective rate is higher than 11% but lower than 12%. Thus, by interpolation, the interest differential is determined as follows: X – 11% 4,800,000 – 4,877,850 77,850 = = .66 12% - 11% = 4,759,900 – 4,877,850 117,950 Answer Explanations & Solutions

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Bonds Payable & Compound Financial Instrument Thus, the effective rate is 11% plus the differential of .66 or 11.66%. 32. Answer is (C). Interest expense Interest paid Premium amortization for 2014

(5,250,000 x 6%) (5,000,000 x 7%)

Premium on bonds payable, January 1, 2014 Less: Premium amortization for 2014 Balance – December 31, 2014

315,000 350,000 35,000 250,000 35,000 215,000

33. Answer is (C). Interest expense (5,675,000 x 8%) Interest paid (5,000,000 x 10%) Premium amortization for 2013 Premium on bonds payable Premium amortization for 2013 Premium on bonds payable - December 31, 2013

454,000 500,000 46,000 675,000 ( 46,000) 629,000

34. Answer is (D). Interest expense (10% x 3,756,000) Interest paid ( 9% x 4,000,000) Discount amortization for 2013 Discount on bonds payable Discount amortization for 2013 Discount on bonds payable - December 31,2013

375,600 360,000 15,600 244,000 ( 15,600) 228,400

35. Answer is (B). Interest expense (4,695,000 x 10% x 6/12) Interest paid (5,000,000 x 9% x 6/12) Amortization of discount January 1 to June 30, 2014 Bonds payable Discount on bonds payable Carrying amount – June 30, 2014

Answer Explanations & Solutions

(305,000 – 9,750)

234,750 225,000 9,750 5,000,000 295,250 4,704,750

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FINANCIAL ACCOUNTING 36. Answer is (C). Interest expense Interest paid Amortization of discount for 2013

(4,695,000x10%) (5,000,000 x 9%)

469,500 450,000 19,500

Bonds payable Discount on bonds payable (305,000 - 19,500) Carrying amount - December 31, 2013

5,000,000 (285,500) 4,714,500

37. Answer is (A). Issue price (5,000,000 x .98) 4,900,000 Bonds payable 5,000,000 Discount on bonds payable (100,000) Bond issue cost (140,000) Carrying amount 4,760,000 Interest expense (12% x 4,760,000) 571,200 Interest paid (10% x 5,000,000) 500,000 Amortization of discount and issue cost 71,200 Bonds payable 5,000,000 Bond discount and issue cost (240,000 – 71,200) (168,000) Carrying amount, 12/31/2014 4,831,200 Note that under the effective interest method, the discount on bonds payable and bond issue cost must be “lumped” together. 38. Answer is (B). Issue price (5,000,000 x 110) 5,500,000 Bonds payable 5,000,000 Premium on bonds payable 500,000 Bond issue cost (80,000) Carrying amount 5,420,000 Interest expense (6% x 5,420,000) 325,200 Interest paid (8% x 5,000,000) 400,000 Amortization of discount on issue cost 74,800 Bonds payable 5,000,000 Premium on bonds payable (420,000 – 74,800) 345,200 Carrying amount 5,345,200 Note that under the effective interest method, the bond issue cost must be “netted” against the premium on bonds payable. Answer Explanations & Solutions

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Bonds Payable & Compound Financial Instrument 39. Answer is (B). Interest expense Interest expense Discount amortization

(10% x 4,757,000) (8% x 5,000,000)

Bonds payable Payment on December 31, 2014 Discount on bonds payable Carrying amount – December 31, 2014 40. Answer is (B). Interest expense Interest paid Amortization of discount

(243,000 – 75,700)

475,700 400,000 75,700 5,000,000 1,000,000 (167,300) 3,832,700

(10% x 4,757,000) ( 8% x 5,000,000)

475,700 400,000 75,700

Bonds payable Annual payment on December 31, 2013 Face value - December 31, 2013 Discount on bonds payable - December 31, 2013 (243,000-75,700) Carrying amount - December 31, 2013

5,000,000 (1,000,000) 4,000,000 ( 167,300) 3,832,700

41. Answer is (D). Interest expense for 2013 Interest paid for 2013 Discount amortization

(3,805,600 x 10%)

Discount on bonds payable-January 1,2013 Amortization for 2013 Discount on bonds payable - December 31, 2013 Bonds payable Annual payment on December 31,2013 Face value - December 31, 2013 Discount on bonds payable Carrying amount - December 31,2013 42. Answer is (A). Carrying amount – 1/1/2014 Carrying amount – 12/31/2014 Decrease in liability – gain Answer Explanations & Solutions

380,560 320,000 60,560 194,400 60,560 133,840 4,000,000 (800,000) 3,200,000 (133,840) 3,066,160 5,385,000 5,125,000 260,000 Page 55

FINANCIAL ACCOUNTING 43. Answer is (B). Carrying amount – 1/1/2014 Carrying amount – 12/31/2014 Increase in liability – loss Loss on credit risk Loss from change in fair value

7,600,000 8,400,000 800,000 150,000 650,000

44. Answer is (B). Bonds payable Premium on bonds payable Bond issue cost Carrying amount Retirement price

5,000,000 30,000 (50,000) 4,980,000 80,000

45. Answer is (D). Bonds payable Bond issue cost Carrying amount

(95,000,000 x 98%)

8,000,000 (430,000) 7,570,000

Carrying amount retired (4,000,000/8,000,000 x 7,570,000) 3,785,000 Retirement price (4,000,000 + 100,000) (4,100,000) Loss on early extinguishment (315,000) 46. Answer is (D). Discount on bonds payable Amortization Balance, January 1, 2014 Bond issue cost Amortization Balance, January 1, 2014 Bonds payable Less: Discount on bonds payable Bond issue cost Carrying amount, January 1, 2014 Retirement price Loss on retirement Answer Explanations & Solutions

(5,000,000 x 2%) (100,000 x 12/150

(200,000 x 12/15)

100,000 (80,000) 20,000 200,000 (160,000) 40,000 5,000,000

20,000 40,000 (5,000,000 x 102%)

60,000 4,940,000 (5,100,000) (160,000) Page 56

Bonds Payable & Compound Financial Instrument 47. Answer is (D). 48. Answer is (C). Interest expense (3,680,000 x 10%) Interest paid (4,000,000 x 9%) Annual amortization Amortization from January 1, to July 1, 2014 (8,000 x 6/12) Bonds payable Discount on bonds payable (320,000 – 4,000) Carrying amount – July 1, 2014 Retirement price (4,000,000 x 1.03) Loss on retirement

368,000 360,000 8,000 4,000 4,000,000 (316,000) 3,684,000 4,120,000 436,000

49. Answer is (C). 50. Answer is (A) Carrying amount, December 1, 2011 Carrying amount, December 31, 2013 Amortization for 25 months Monthly amortization Carrying amount, December 31, 2013 Amortization of premium Carrying amount, September 1, 2014 Retirement price at face Gain on early retirement 51. Answer is (A). Gain on extinguishment 52. Answer is (C). Interest expense Interest paid Discount amortization Carrying amount – 1/1/2014 Carrying amount – 12/31/2014 Retirement price Loss on retirement

Answer Explanations & Solutions

5,300,000 5,150,000 150,000 (150,000/25) 6,000 5,150,000 (6,000 x 8) ( 48,000) 5,102,000 (5,000,000) 102,000 (4,800,000 – 4,400,000) (12% x 5,700,000 x 6/12) (10% x 6,000,000 x 6/12)

(6,000,000 x 1.02)

400,000 342,000 300,000 42,000 5,700,000 5,742,000 6,120,000 (378,000)

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FINANCIAL ACCOUNTING 53. Answer is (C). Interest expense

(4,000,000 x 6%)

240,000

54. Answer is (B). Bonds payable, 1/1/2014 Fair value, 12/31/2014 (4,000,000 x 95%) Increase in fair value of bonds payable – loss

3,677,600 3,800,000 (122,400)

Loss from change in fair value Bonds payable

122,400

55. Answer is (D). Carrying amount – January 1, 2014 56. Answer is (C). Interest expense for 2014

122,400 1,077,200

(12% x 1,000,000)

120,000

57. Answer is (A). Fair value – January 1, 2014 1,077,200 Fair value – December 31, 2014 1,064,600 Gain from change in fair value 12,600 PFRS 9, paragraph 42.2, allows the measurement of a financial liability at fair value. Under the fair value option, the bond payable is measured at fair value at every year-end and any change in fair value is recognized generally in profit or loss. The accounting rules for discount or premium amortization no longer apply. 58. Answer is (B). Carrying amount – December 31, 2014 59. Answer is (B). Present value of principal Present value of interest payments Issue price of bonds Face value Discount on bonds payable

Answer Explanations & Solutions

1,064,600 (5,000,000 x .52) (600,000 x 3.43)

2,600,000 2,058,000 4,658,000 5,000,000 342,000

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Bonds Payable & Compound Financial Instrument 60. Answer is (A). PV of principal PV of annual interest payments Total present value of bonds payable

(5,000,000 x .57) (550,000 x 3.60)

2,850,000 1,980,000 4,830,000

Bonds payable 5,000,000 Present value of bonds payable 4,830,000 Discount on bonds payable 170,000 If the market value of the bonds without warrants is unknown, the amount allocated to the bonds is equal to the present value of the principal bond liability plus the present value of future interest payments using the market rate of interest for similar bonds without the warrants. Issue price of bonds with warrants (5,000,000 x 109%) 5,450,000 Present value of bonds payable 4,830,000 Residual amount allocated to warrants 620,000 Journal entry to record the issue of bonds with share warrants Cash 5,450,000 Discount on bonds payable 170,000 Bonds payable Share warrants outstanding Journal entry to record the exercise of all of the share warrants Cash (5,000 x 50 x P25) 6,250,000 Share warrants outstanding 620,000 Share capital (250,000 x P5) Share premium

5,000,000 620,000

1,250,000 5,620,000

61. Answer is (B). Ordinary shares (10,000 x 36) Preference shares (20,000 x 27)

Market value 360,000 540,000 900,000

Fraction 36/90 54/90

Allocated proceeds 320,000 480,000 800,000

62. Answer is (A). To record the issuance of preference shares: Cash (15,000 x 110) 1,650,000 Preference share capital Share premium - PS To record the conversion of preference shares into ordinary shares: Answer Explanations & Solutions

1,500,000 150,000 Page 59

FINANCIAL ACCOUNTING Preference share capital 1,500,000 Share premium - PS 150,000 Ordinary share capital (45,000 x 25) Share premium - Ordinary (15,000 preference shares x 3 = 45,000 ordinary shares) 63. Answer is (A). Issue price of preference shares (5,000 x 110) Ordinary shares at par (5,000 x 3 = 15,000 shares x 25) Share premium 64. Answer is (D). Issue price of preference shares (8,000 x PI05) Par value of ordinary shares issued (8,000 x 3 = 24,000 ordinary shares x P25) Share premium

1,125,000 525,000

550,000 375,000 175,000 840,000 600,000 240,000

65. Answer is (C). The issue of convertible bonds payable is also accounted for as a compound financial instrument. Accordingly, PAS 32, paragraph 29, mandates that the original issuance of convertible bonds payable shall be accounted for as partly liability and partly equity. The liability component is equal to the market value of the bonds without the conversion privilege. The equity component is the remainder or residual of the issue price of the bonds with conversion privilege. Issue price of bonds with conversion privilege (5,000,000x110) 5,500,000 Market value of bonds without conversion privilege (5,000,000x103) 5,150,000 Residual amount allocated to conversion privilege 350,000 Actually, the journal entry to record the issuance of the convertible bonds payable is: Cash 5,500,000 Bonds payable 5,000,000 Premium bonds payable 150,000 Share premium - conversion privilege 350,000 66. Answer is (C). Issue price of bonds with warrants (5,000,000 x 103%) Market value of bonds without warrants (5,000,000 x 95%) Residual amount allocated to warrants - equity component

Answer Explanations & Solutions

5,150,000 4,750,000 400,000

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Bonds Payable & Compound Financial Instrument 67. Answer is (D). Issue price PV of bonds payable: PV of principal PV of interest Share warrants outstanding 68. Answer is (B). Issue price PV of bonds payable PV of principal PV of interest Share premium

(5,000,000 x 1.09) (5,000,000 x .57) (550,000 x 3.60)

5,450,000

2,850,000 1,980,000

(5,000,000 x 1.10) (5,000,000 x .77) (300,000 x 2.53)

4,830,000 620,000 5,500,000

3,850,000 759,000

4,609,000 891,000

69. Answer is (B). Issue price (2,000 x P2,000) 4,000,000 Fair value of bonds without option (2,000 x P1,500) 3,000,000 Equity component 1,000,000 70. Answer is (C). Issue price of bonds with conversion privilege (5,000,000 x 1.10) 5,500,000 Market value of bonds without conversion privilege (5,000,000 x 1.03) 5,150,000 Residual amount allocated to conversion privilege 350,000 71. Answer is (D). PFRS requires that an amount is allocated to the bonds payable equal to the market value of the bonds ex-warrants and any residual amount is allocated to the warrants. 72. Answer is (A). 5,000,000 x .95 = 4,750,000 73. Answer is (A). To record the issuance of preference shares: Cash (15,000 x 110) 1,650,000 Preference share capital Share premium – PS To record the conversion of preference shares into ordinary shares: Preference share capital 1,500,000 Share premium – PS 150,000 Ordinary share capital (45,000 x 25) Share premium – ordinary (15,000 preference shares x 3 = 45,000 ordinary shares) Answer Explanations & Solutions

1,500,000 150,000

1,125,000 525,000 Page 61

FINANCIAL ACCOUNTING 74. Answer is (B). Bonds payable Premium on bonds payable Carrying amount Carrying amount converted Par value of shares issued Share premium Conversion expenses Net share premium

(400/1,000 x 1,060,000) (400 x 50 x P10)

75. Answer is (A). Face value Premium on bonds payable Carrying amount Carrying amount converted Par value of share capital

5,000,000 300,000 5,300,000 (2,000/5,000 x 5,300,000) (2,000 x 50 x 10)

Conversion expenses Share premium 76. Answer is (A). Carrying amount of bonds converted Applicable share premium – conversion privilege Total consideration Par value of shares issued Share premium – issuance 77. Answer is (D). Issue price of preference shares Par value of ordinary shares Share premium

2,120,000 1,000,000 1,120,000 20,000 1,100,000

(9,500,000 x 5/10) (2,000,000 x 5/10) (200,000 x 20)

(8,000 x 1.05) (8,000 x 3 x 25)

78. Answer is (A). Bonds payable Premium on bonds payable Carrying amount Ordinary shares issued at par value (6,000 x shares x 50) Share premium Answer Explanations & Solutions

1,000,000 60,000 1,060,000 424,000 200,000 224,000 (4,000) 220,000

4,750,000 1,000,000 5,750,000 4,000,000 1,750,000 840,000 600,000 240,000 600,000 12,000 612,000 300,000 312,000 Page 62

Bonds Payable & Compound Financial Instrument 79. Answer is (A). Issue price of preference shares Ordinary shares issued at par value Share premium 80. Answer is (A). Journal entries: Bonds payable Interest expense Cash

(6% x 5,000,000)

Share premium – conversion privilege Share premium – issuance

(5,000 x 110) (5,000 x 3 x 25)

5,000,000 300,000 485,000

81. Answer is (C). Issue price Fair value of bonds without conversion option Share premium - conversion privilege Total payment - December 31, 2015 Payment applicable to bonds payable Equity component Carrying amount of bonds payable Payment applicable to bonds payable Loss on extinguishment Journal entries on December 31,2015 Bonds payable 5,000,000 Premium on bonds payable 178,300 Share premium - conversion privilege 150,000 Loss on extinguishment 221,700 Cash Interest expense Cash

(10% x 5,000,000)

500,000

Share premium - conversion privilege 450,700 Share premium – issuance (600,700-150,000)

Answer Explanations & Solutions

550,000 375,000 175,000

5,300,000 485,000 6,000,000 5,399,300 600,700 5,550,000 (5,400,000) 150,000 5,178,300 (5,400,000) ( 221,700)

5,550,000 500,000 450,700

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FINANCIAL ACCOUNTING 82. Answer is (D). Fair value of bonds with conversion option Fair value of bonds without conversion option Equity component

(4,000,000 x 1.05) (4,000,000 x .95)

Bonds payable Discount on bonds payable Carrying amount Payment equal to fair value of bonds without conversion option Loss on extinguishment

Answer Explanations & Solutions

4,200,000 3,800,000 400,000 4,000,000 (500,000) 3,500,000 3,800,000 300,000

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