1. The result on the year-end balance sheet of an issue of a 10-year term bond sold at face amount four
years ago with interest payable June 1 and December 1 each year, is a(an)
a. liability for accrued interest
c. increase in deferred charges
b. addition to bonds payable
d. contingent liability
2. Unamortized bond discount should be reported on the financial statements of the issuer as a
a. Direct deduction from the face amount of the bond
b. Direct deduction from the present value of the bond
c. Deferred charge
d. Part of the issue costs
3. Straight-line amortization of bond premium or discount:
a. can be used as an optional method of amortization in all situations.
b. provides the same total amount of interest expense and interest revenue as the effective interest
method over the life of the bonds.
c. provides the same amounts of interest expense and interest revenue each interest period as the
effective interest method.
d. is appropriate when the bond term is especially long.
e. is appropriate for deep discount bonds.
4. For a bond issue which sells for less than its face amount, the market rate of interest is
a. Dependent on the rate stated on the bond.
b. Equal to rate stated on the bond.
c. Less than rate stated on the bond.
d. Higher than rate stated on the bond.
5. The market price of a bond issued at a discount is the present value of its principal amount at the
market (effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.
6. Which of the following is not a relevant consideration when evaluating whether to derecognize a
financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether substantially all the risks and rewards of the obligation have been transferred.
7. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments (i.e.,
similar remaining maturity, cash flow pattern, currency, credit risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts through the
expected life of the debt instrument or, when appropriate, a shorter period to the net carrying
amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.
8. Which of the following statements is false?
a.
b.
c.
d.
Bonds carry no corporate ownership privileges.
A bond is a financial contract.
Bond prices remain fixed over time.
A bond issuer must pay periodic interest.
9. Most bonds:
a. are money market securities.
b. are floating-rate securities.
c. give bondholders a voice in the affairs of the corporation.
d. are interest-bearing obligations of governments or corporations.
10. On January 2, 20x1, Nast Co. issued 8% bonds with a face amount of ₱1,000,000 that mature on
January 2, 20x7. The bonds were issued to yield 12%, resulting in a discount of ₱150,000. Nast
incorrectly used the straight-line method instead of the effective interest method to amortize the
discount. How is the carrying amount of the bonds affected by the error?
At Dec. 31, 20x1 At Jan. 2, 20x7
At Dec. 31, 20x1 At Jan. 2, 20x7
a. Overstated
Understated
c. Understated
Overstated
b. Overstated
No effect
d. Understated
No effect
Straight Problem
1. Lagota Co. issued a total of P4 million par value bonds on January 01, Year 1. Nominal interest is
9% and effective interest is 10%. Interest is payable annually every December 31. Likewise, the
bonds mature annually for four years in equal installments beginning December 31, Year 1.
Pertinent present value factors are as follows:
Present value of ordinary annuity of 1 for 4
periods
Present value of 1 for 1 period
Present value of 1 for 2 periods
Present value of 1 for 3 periods
Present value of 1 for 4 periods
9%
10%
3.23972
0.91743
0.84168
0.77218
0.70843
3.16987
0.90909
0.82645
0.75131
0.68301
a. What is the issue price of the bonds?
b. Refer to the preceding problem. What is the interest expense for Year 2
c. Prepare the amortization table for bonds.
2. A 12%, P1 million total par value bonds were issued for P1,049,737 and yielded 10% effective
rate. The bond was issued on March 1, Year 1 and matures after 3 years. Interest is payable every
March 31. What is the interest expense to be recognized for Year 2?