Ia 3 Prelim

BSA 2201- INTERMEDIATE ACCOUNTING 3 PRELIM DEPARTMENTAL EXAM REVIEWER MULTIPLE CHOICE

1. Which of the following statements are true? I. The determination of the initial amount of the premium or discount on bonds payable is based on the difference between the face value and the net proceeds. The net proceeds are not reduced by the incurrence of bond issue cost II. The amount of the premium amortization decreases each period as the difference between the nominal interest and the effective interest becomes smaller. III. The other terms for the effective interest rate are market rate, yield, and contract rate. a. I only c. All statements are true b. I, II only d. None of the statements are true 2. An entity uses the calendar year as its reporting period. When the interest payment dates of a bond issue are March 1 and September 1, and the bond is issued on May 1, the amount of interest expense during the year of issuance would be for a. Ten months c. Six months b. Eight months d. Five months 3. 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? a. Understated and Understated b. Understated and Overstated c. Overstated and Overstated d. Overstated and Understated 4. In theory, the proceeds from the sale of a bond would equal to a. The face amount of the bond b. 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

c. The face amount of the bond plus the present value of the interest payments made during the life of the bond d. The sum of the face amount of the bond and the periodic interest payments 5. How are the proceeds from issuing a compound 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. 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 values. d. 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. 6. Which of the following statements are true? I. Term bonds are bonds that mature on a single date II. Serial bonds are bonds that mature in series of installments III. Callable bonds are bonds issued that may be retired at the option of the bondholder IV. Debenture bonds are unsecured bonds not protected by the pledge of any specific asset of the issuing corporation a. I only c. I, II only b. I, II, IV only d. All statements are true 7. After initial recognition, bonds payable shall be measured at a. Amortized cost using the effective interest method b. Fair value through profit or loss c. Either amortized cost using the effective interest method or fair value through other comprehensive income d. Either amortized cost using the effective interest method or fair value through profit or loss

8. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be a. Decreased by accrued interest from June 1 to November 1 b. Decreased by accrued interest from May 1 to June 1 c. Increased by accrued interest from June 1 to November 1 d. Increased by accrued interest from May 1 to June 1 9. Under the effective interest method of bond discount or premium amortization, the periodic interest expense is equal to the a. Stated (nominal) rate of interest multiplies by the face value of the bonds b. Effective (yield) rate of interest multiplies by the face value of the bonds c. Stated (nominal) rate of interest multiplies by the beginning-of-period carrying amount of the bonds d. Effective (yield) rate of interest multiplies by the beginning-of-period carrying amount of the bonds 10. When bonds are issued with share warrants, a portion of the proceeds should be allocated to equity when the bonds are issued with a. Detachable share warrants b. Nondetachable share warrants c. Both detachable and nondetachable share warrants d. Neither detachable and nondetachable share warrants 11. When convertible bond is not converted but paid at maturity a. A gain or loss is recorded for the difference between the carrying amount of the bond and the present value of the cash flows b. The amount allocated to equity is recorded as a gain c. The amount allocated to equity is recorded as a loss d. The carrying amount of the bond equal to face amount is derecognized 12. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight premium should be a. Charged to retained earnings when the bonds are issued b. Expensed in the year in which incurred c. Capitalized as organization cost d. Reported as a deduction from bonds payable and amortized over the tenyear bond term

13. On April 1, 2019, Gretel Corp. Issued at 99, 2,000 of its 8%, 1,000 bonds. The bonds are dated April 1, 2019, to mature on April 1, 2029, and pay interest on April 1 and November 1. Gretel paid transaction cost of P20,000. From the issuance, how much net cash did Gretel receive? a. P1,960,000 b. P1,980,000 c. P2,000,000 d. P2,020,000 14. On March 1, 2019, Mother Goose Corporation issued at 103 excluding accrued interest, 1,000 of its 15%, P1,000 bonds. The bonds are dated January 1, 2019 and mature on January 1, 2029. Interest is payable semi-annually on January 1 and July 1. Mother Goose paid transaction costs of P60,000. Mother Goose would realize net cash receipts from the bond issuance of a. P995,000 b. P1,030,000 c. P1,055,000 d. P1,095,000 15. On April 1, 2019, Aladdin, Inc. Issued, at 97 including accrued interest. 2,000 of its 10% P1,000 bonds. The bonds are dated January 1, 2019, to mature on January 1, 2029. Interest is payable semi-annually on January 1 and July 1. From the bond issuance, how much net cash did Aladdin receive? a. P1,890,000 b. P1,940,000 c. P1,965,000 d. P1,990,000 16. On July 1, 2019, Glamorous Corporation issued 11% bonds in the face amount of P2,000,000 that mature on June 30, 2018. The bonds were issued to yield 5%, and the interest is payable every January 1 and July 1. Glamorous Corporation uses the effective interest method of amortizing bond premium or discount. The following are the present value factors: PV of 5% for an ordinary annuity of P1 after 8 periods 6.463 PV of 5% after 8 interest periods .677

What is the carrying value of the debt instrument as of December 31, 2019? a. P2,043,640 b. P2,051,086 c. P2,058,176 d. P2,064,930 17. On January 2, 2014, Anger Company issued its 9% bonds in the face amount of P 4,000,000 which mature on January 1, 2024. The bonds were issued for P3,756,000 to yield 10%. Anger uses the interest method of amortizing bond discount. Interest is payable annually on December 31. At December 31, 2015, how much should be Anger's unamortized bond discount? a. P192,364 b. P211,240 c. P228,400 d. P244,000 18. On January 2, 2019, East Co. issued 9% bonds in the amount of P1,000,000 which mature on January 2, 2029. The bonds were issued for P939,000 to yield 10%. Interest is payable annually on December 31. East uses the interest method of amortizing bond discount. In its December 31, 2019 statement of financial position, what amount should East report as bonds payable? a. P939,000 b. P947,000 c. P942,900 d. P1,000,000 19. During 2019, Royal Corporation booed at 95, one thousand of its 8% P5,000 bonds due in ten years. One detachable stock purchase warrants entitling the holder to buy 20 shares of Royal’s ordinary shares was attached to each bond. Shortly after issuance, the bonds are selling at 10% ex-warrant, and each warrant was quoted at P60. The present value factors are the following: PV of 10% for an ordinary annuity of P1 after 10 periods PV of 10% after 10 interest periods

6.145 .385

What amount of any of the proceeds from the bond issuance should be recorded as part of Royal's shareholders' equity? a. None b. P250000 c. P225,000 d. P367,000 20. On January 1, 2019, Grader Company issued its 10%, 4 year convertible debt instrument with a face amount of P 4,000,000 for P4,400,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 35,000 ordinary shares with a par value of P100. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is 8%. PV of 8% for an ordinary annuity of P1 after 4 periods PV of 8% after 4 interest periods

3.312 .735

What is the balance of the unamortized premium on debt instrument as of December 31, 2019? a. P 73,860 b. P205,984 c. P142,463 d. P264,800 21. On January 1, 2019, Tudor Company issued its 10%, 5-year convertible debt instrument with a face amount of P10,000,000 for P10,000,000. Interest is payable every December 31 of each year. The debt instrument is convertible 90,000 ordinary shares with a par value of P100. When the debt instruments were issued, they were selling 97% without conversion option. Tudor Company incurred P80,000 transaction costs on the issue of the debt instruments. How much of the net proceeds represent the equity component? a. P297,600 b. P9,920,000 c. P9,622,400 d. P10,000,000

22. Based from the previous information, how much of the net proceeds represent the debt component? a. P297,600 b. P9,622,400 c. P9,920,000 d. P10,000,000 23. On January 1, 2014, Emilia Corporation issued its 5-year, 12% P5,000,000 face value convertible debt instrument for P 4,800,000. The debt instrument is convertible into 80,000 ordinary shares with a par value of P50 per share and can be converted anytime from January 2015 to maturity. At the time of issue, the market rate of interest for a similar instrument is 14%. Interest is payable every six months on January 1 and July 1. On July 1, 2015, the entire debt instrument was converted into equity instrument by the issuance of 80,000 ordinary shares of the enterprise. Transaction costs of P50,000 were incurred in relation to the issue of new shares. PV of 7% for an ordinary annuity of P1 after 10 periods PV of 7% after 10 interest periods

7.024 .508

What amount should be credited to the share premium account as a result of the conversion? a. None b. P831,349 c. P152,800 d. P881,549 24. On January 1, 2014, Wisdom Company issued its 10%, 6-year convertible debt instrument with a face amount of P 3,000,000 for P 3,500,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 30,000 ordinary shares with a par value of P100. The debt instrument is convertible into equity from the time of issue until maturity. Without the conversion feature, the debt instrument would have sold at 106.

On December 31, 2015, Wisdom Company converted 1,000,000 debt instruments by issuing 10,000 ordinary shares. As of December 31, 2015, the unamortized premium on the debt instrument is P135,000. What amount should be credited to the share premium account as a result of the conversion? a. None b. P151,667 c. P135,000 d. P180,000 25. During 2019, Clairo Company issued 3,000 of its 9%, P1,000 face value bonds at 102. In connection with the sale of these bonds, Clairo paid the following expenses: Promotion Costs P 50,000 Engraving and Printing 60,000 Underwriter’s Commission 200,000 What amount should Clairo record as bond issue costs to be amortized during the term of the bonds? a. b. c. d.

P50,000 P60,000 P110,000 P310,000

26. On July 1, 2019, Lamar Company issued at 104, 5,000 of 10% P1,000 face value bonds. The bonds were issued through an underwriter to whom the entity paid bond issue cost of P125,000. On July 1, 2019, what amount should be reported as liability? a. P4,875,000 b. P5,075,000 c. 5,200,000 d. 5,325,000

27. On January 30, 2014, Orient Company had outstanding 8%, P3,000,000 face amount, 15-year bonds maturing on June 30, 2021. Interest is payable on June 30 and December 31. The unamortized balances on June 30, 2014 in the bond discount and deferred bond issue costs accounts were P105,000 and P30,000, respectively. Orient re-acquired all of these bonds at 94 on June 30, 2014, and retired them. Ignoring income taxes, how much gain should Orient report on this early extinguishments of debt? a. P45,000 b. P75,000 c. P105,000 d. P180,000 28. On January 1, 2012, Faith company issued its 8%, 5-year convertible debt instrument with a face amount of P8,000,000 for P7,700,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 50,000 ordinary shares with a par value of P100. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is 10%. PV of 10% for a ordinary annuity of P1 after 5 periods 3.791 PV of 10% after 5 interest periods .621 On December 31, 2014, all the convertible debt instruments were retired for P8,000,000. The prevailing rate of interest on a 0similar debt instrument as of December 31, 2011 is 9% without the conversion option. PV of 9% for an ordinary annuity of P1 after 2 periods 1.759 PV of 9% after 2 interest periods .842 How much is the gain or loss that should be reported in the profit or loss on the retirement of the convertible debt instruments? a. b. c. d.

P138,240 P139,278 P168,160 P306,400

29. Based on the previous information, how much is the gain on cancellation of the equity component to be reported in the shareholders’ equity? a. P 138,240 b. P 139,278 c. P 168,160 d. P 306, 400 30. On January 1, 2013, Belief Company issued its 9%, 4-year convertible debt instrument with a face amount of P4,100,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 80,000 ordinary shares with a par value of P50. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is 10%. PV of 10% for an ordinary annuity of P1 after 4 periods 3.170 PV of 10% after 4 interest periods .683 On December 31, 2014, ¼ of the convertible debt instrument were retired for P1,000,000. Without the conversion option, the debt instrument can be retired at 97%. What amount of gain or loss should be reported in the profit or loss in the retirement of the convertible debt instruments? a. P12,643 b. P26,700 c. P30,000 d. P56,700 31. Miracle company’s December 31, 2019 statement of financial position contained the following items in the long-term liabilities section 9% registered debentures, callable in 2024 and 2029 ₱7,000,000 10% collateral trust bonds, convertible into ordinary shares, Beginning 2022 and due in 2025 6,000,000 10% subordinated debenture (₱300,000 maturing annually) 3,000,000 What is the total amount of Miracle’s term bonds? a. P6,000,000 b. P7,000,000 c. P10,000,000 d. P13,000,000

32. On January 1, 2014, Shredder company issued its 10%, 6- year convertible debt instrument with a face amount of ₱3,000,000 for ₱3,500,000. Interest is payable every December 31 of each year. The debt instrument is convertible into 30,000 ordinary shares with a par value of ₱100. The debt instrument is convertible into equity from the time of issue until maturity. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is 8%. PV of 8% for an ordinary annuity of ₱1 after 6 periods PV of 8% after 6 interest periods

4.623 .630

On December 31, 2015, Shredder company converted all the debt instruments by issuing 30,000 ordinary shares. What amount should be credited to the share premium account as a result of the conversion? a. None b. P198,176 c. P239,052 d. P421,276 33. In April 1, 2014, Blood corp. issued ₱3,000,000 of 10% nonconvertible bonds at 102 that are due on March 31, 2020. Each ₱1,000 bond was issued with 40 detachable stock warrants, each of which entitled the bondholders to purchase one share of Blood ₱10 par ordinary share for ₱25. On April 1, 2014, the market value of Blood’s ordinary was ₱20 per share, and the market value of the bonds exwarrant was ₱97. What is the assigned value of the ordinary stock warrants? a. P60,000 b. P75,000 c. P90,000 d. P150,000 34. On December 31, 2014, Green Inc. issued 1,000 of its 8%, 10-year, ₱1,000 face value bonds with detachable stock warrants for ₱1,200,000. Each bond carried a detachable warrant for one share of Green’s ordinary shares at a specified option price of ₱25 per share. Immediately after issuance, the market price of the bonds

without the warrants was ₱1,080,000. In its December 31, 2014 statement of financial position, what amount should Green report as equity reserve? a. P70,000 b. P80,000 c. P100,000 d. P120,000 35. On January 1, 2016, Masbate Company issued 5-year bonds with face value of ₱5,000,000 at 110. The entity paid bond issue cost of ₱80,000 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. The entity used the effective interest method of amortization. On December 31, 2016, what is the carrying amount of the bonds payable? a. P5,000,000 b. P5,400,000 c. P5,345,200 d. P5,430,000