ILLUSTRATIVE PROBLEM- LIABILITIES
The Jolina Slaydangal Co. sold P6,000,000 of 9% bonds on October 1, 1999, at P5,747,280 plus accrued interest.
The bonds were dated July 1, 1999; interest payable semiannually on January 1 and July 1; redeemable after June
30, 2004 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible into P10 par value common
stock as follows:



Until June 30, 2004, at the rate of 6 shares for each P1,000 bond.
From July 1, 2004, to June 30, 2007, at the rate of 5 shares for each P1,000 bond.
After June 30, 2007, at the rate of 4 shares for each P1,000 bond.
The bonds mature 10 years form their issue date. The company adjust its books monthly and closes its books as of
December 31 each year.
The following transactions occur in connection with the bonds:
2005
July 1
2006
Dec 31
2007
July 1
P2,000,000 of bonds were converted into stock.
P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued interest. These were
immediately retired.
The remaining bonds were called for redemption and accrued interest was paid. For purposes of
obtaining funds for redemption and business expansion, an P8,000,000 issue of 7% bonds was
sold at 97. These bonds are dated July 1, 2007, and are due in 20 years.
Questions
1. What is the carrying value of bonds payable at December 31, 1999?
a.
P 5,747,280
b. P 6,000,000
c. P 5,753,760
CA of bonds- Oct. 1, 1999
Amortization of bond discount
CA of bonds- Dec. 31, 1999
5,747,280
6,480
5,753,760
2. What is the total interest expense for 1999?
a.
P 128,520
b. P 47,160
Interest expense
Amortization of bond discount
Total interest expense
d. P 5,749,440
c. P 141,480
d. P 135,000
135,000
6,480
141,480
3. In recording the bond conversion on July 1, 2005, how much should be credited to the additional paid-in capital
account?
a.
P 1,796,320
b. P 1,965,440
c. P 1,845,440
d. P 1,865,440
Bond discount
Amort. (1999)
(2000-2004)
(2005)
Unamortized bond disc.
252,720
(6,480)
(129,600)
(12,960)
103,680 (as of Jul. 1, 2005)
(34,560)
REMAINING MOS. = 48
30
Bonds Payable
Disc. on B/P
Common stock
APIC
69,120 -25,920= 43,200* ¼ = 10,800= 32,400 (AS OF DEC. 31, 2006)
32,400 – 6,480 = 25,920- remaining bond discount
2,000,000
34,560
100,000
1,865,440
4. What is the gain or loss on bond conversion on July 1, 2005?
a.
P0
b. P 1,796,320
c. P 1,865,440
5. What is the carrying value of the bonds reacquired on December 31, 2006?
a.
P 989,200
b. P 957,880
c. P 1,010,800
Bonds payable
Unamortized disc. (12/31/06)
B/P – Dec. 31, 2006
d. (P 34,620)
1,000,000
45,000
3,300
10,800
1,037,500
7. What is the carrying value of the bonds retired on July 1, 2007?
a.
P 3,000,000
b. P 2,974,080
B/P- Jan. 1, 2007
Amortization of bond disc.
B/P- Jul. 1, 2007
d. P 981,700
4M
(43,200)
3,956,800 *1/4 = 989,200
6. What is the gain (loss) on bond reacquisition on December 31, 2006?
a.
P 3,300
b. (P 3,300)
c. P 34,620
Bonds Payable
Interest expense
Loss on bond reacquisition
Disc. on B/P
Cash
d. P 34,560
c. P 2,873,640
d. P 3,025,920
c. (P 12,960)
d. P 0
2,967,600
6,480
2,974,080
8. What is the gain (loss) on bond retirement on July 1, 2007?
a.
(P 25,920)
b. P 25,920
Bonds Payable
3,000,000
Interest expense
135,000
Loss on bond retirement
25, 920
Disc. on B/P
25,920
Cash
3,135,000
JOURNAL ENTRIES:
Oct. 1, 1999
Cash
5,882,280
Discount on B/P
252,720
Bonds Payable
6,000,000
Interest Expense
135,000
Dec. 31, 1999
Interest Expense
276,480
Discount on B/P
Interest Payable
6,480
270,000