1
BONDS & NOTES PAYABLE
Problem
1. On January 1, 2021, Mhel Co. issued eight-year bonds with a face value of 1,000,000 and a stated
interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to
yield 8%. Table values are:
Present value of 1 for 8 periods at 6% .........................................
Present value of 1 for 8 periods at 8% .........................................
Present value of 1 for 16 periods at 3% .......................................
Present value of 1 for 16 periods at 4% .......................................
Present value of annuity for 8 periods at 6%................................
Present value of annuity for 8 periods at 8%................................
Present value of annuity for 16 periods at 3%..............................
Present value of annuity for 16 periods at 4%..............................
1.
The present value of the principal is
a. 534,000.
b. 540,000.
c. 623,000.
d. 627,000.
2.
The present value of the interest is
a. 344,820.
b. 349,560.
c. 372,600.
d. 376,830.
3.
The issue price of the bonds is
a. 883,560.
b. 884,820.
c. 889,560.
d. 999,600.
.627
.540
.623
.534
6.210
5.747
12.561
11.652
2. Omar Company issues 20,000,000 of 10-year, 9% bonds on March 1, 2021 at 97 plus accrued
interest. The bonds are dated January 1, 2021, and pay interest on June 30 and December 31.
What is the total cash received on the issue date?
a. 19,400,000
b. 20,450,000
c. 19,700,000
d. 19,100,000
3. A company issues 20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2021. Interest is
paid on June 30 and December 31. The proceeds from the bonds are 19,604,145. Using effectiveinterest amortization, what will the carrying value of the bonds be on the December 31, 2021
statement of financial position?
a. 19,612,643
b. 20,000,000
c. 19,625,125
d. 19,608,310
4. On January 1, Emerson Inc. issued 5,000,000, 9% bonds for 4,695,000. The market rate of
interest for these bonds is 10%. Interest is payable annually on December 31. Emerson uses the
effective-interest method of amortizing bond discount. At the end of the first year, Emerson should
report unamortized bond discount of
a. 274,500
b. 285,500
c. 258,050
d. 255,000
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5. At the beginning of 2021, Mississauga Corporation issued 10% bonds with a face value of
600,000. These bonds mature in five years, and interest is paid semiannually on June 30 and
December 31. The bonds were sold for 555,840 to yield 12%. Mississauga uses a calendar-year
reporting period. Using the effective-interest method of amortization, what amount of interest
expense should be reported for 2021? (Round your answer to the nearest peso.)
a. 66,500
b. 66,700
c. 66,901
d. 68,832
6. At December 31, 2020 the following balances existed on the books of Queen Corporation:
Bonds Payable
2,000,000
Discount on Bonds Payable
160,000
Interest Payable
50,000
Unamortized Bond Issue Costs
120,000
If the bonds are retired on January 1, 2021, at 102, what will Queen report as a loss on
redemption?
a. 370,000
b. 320,000
c. 270,000
d. 200,000
7. On December 1, 2018, the King Corporation issued five-year, non-convertible 5,000,000 face
value 12% bonds for 5,386,072, a price that yields 10%. Interest is payable semi-annually on
June 1 and December 1. On August 1, 2021, the Emerald Corporation retired 3,000,000 of the
bonds at 105 plus interest. The Accounting period for the King Corporation is the calendar year.
1. What is the carrying value of the bonds on December 31, 2019?
a. 5,306,515
b. 5,309,000
c. 5,309,010
d. 5,317,505
2. What is the carrying value of the bonds retired on August 1, 2021?
a. 3,125,172
b. 3,127,008
c. 3,122,038
d. 3,200,061
3. What is the gain or loss on redemption of the bonds on August 1, 2021?
a. 24,828 loss
b. 24,848 loss
c. 24,828 gain
d. 24,848 gain
e. 27,962 loss
8. On January 1, 2021, Surrey Company received 1,077,200 for 1,000,000 face amount 12% bonds.
The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1.
The entity has elected the fair value option for measuring the financial liability.
On December 31, 2021, the fair value of the bonds is determined to be P1, 064,600 due to market
and interest factors.
1. What is the carrying amount of the bonds payable on January 1, 2021?
a. 1,000,000
b. 1,077,200
c. 500,000
d. 538,600
2. What is the interest expense for 2021?
a. 120,000
b. 100,000
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c. 107,000
d. 129,264
3. What is the gain or loss from change in fair value of the bonds for 2021?
a. 64,600
b. 64,600
c. 12,600
d. 12,000
4. What is the carrying amount of the bonds payable on December 31, 2021?
a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920
9. On January 2, 2021, the Balderama, Inc. issued 2,000,000 of 8% convertible bonds at par. The
bonds will mature on January 1, 2025 and interest is payable annually every January 1. The bond
contract entitles the bondholders to receive 6, P100 par value, ordinary shares in exchange for
each 1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without
the conversion option is 10%.
On January 1, 2025, the holders of the bonds with total face value of 1,000,000 exercised their
conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value
factors to 4 decimal places)
1. The proceeds from issuance of convertible bonds to be allocated to the liability component is
a. 1,366,000
b. 1,778,336
c. 1,873,184
d. 2,000,000
2. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. 634,000
b. 221,664
c. 126,816
d.
0
3. The carrying amount of the bonds payable on December 31, 2021 is
a. 2,000,000
b. 1,796,170
c. 1,389,400
d. 1,900,502
4. The interest expense for the year 2022 is
a. 160,000
b. 179,617
c. 138,940
d. 190,050
5. The gain to be recognized on conversion of the bonds is
a. 126,816
b. 400,000
c. 463,408
d.
0
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10. Hurontario Company had 600,000 convertible 8% bonds payable outstanding on June 30, 2021.
Each 1,000 bond was convertible into 10 ordinary shares of P50 par value. On July 1, 2021, the
interest was paid into bondholders, and the bonds were converted into ordinary shares, which
had a fair value of P70 per share. The unamortized premium on these bonds was 12,000 at the
date of conversion. No equity component was recognized when the bonds were originally issued.
What is the increased in the share capital and share premium, respectively, as a result of the
bond conversion?
a. 300,000 and 312,000
b. 306,000 and 306,000
c. 450,000 and 162,000
d. 600,000 and 12,000
11. Pickering Company issued 1,000,000 of 9% nonconvertible 2-year bonds at 108. Moreover,
each P1,000 bond was issued with 15 detachable share warrants, each of which entitled the
bondholder to purchase for P45, one ordinary share of Pickering Company, par value P20.
The quoted market value of each warrant was P5. The market value of the bonds ex-warrants at
the time of issuance is 92.
What amount of the proceeds from the bond issuance is allocated to the equity component?
a. P 150,000
b. P 190,000
c. P 170,000
d. P 160,000
12. On December 1, 2021, Eglinton Company issued at 103, one hundred of its 5%, 1000 bonds.
Attached to each bond was one detachable stock purchase warrant entitling the holder to
purchase 10 shares of Eglinton’s common stock. On December 1, 2021, the market value of the
bonds, without the stock purchase warrant was 94, and the market value of each stock purchase
warrant was 60. The amount of the proceeds from the issuance that should be accounted for as
initial carrying value of the bonds payable would be.
a. 940,000
b. 96,820
c. 97,000
d. 103,000
13. Your company has been engaged to examine the financial statements of Gloria Company for the
years ended in December 31, 2021 and December 31, 2020. You have been assigned to review
the liabilities and shareholders’ equity balances. You have learned that on January 1, 2019, Gloria
Company issued a five-year, 8% bonds P5,000,000 at 110. Each 1,000 bond is convertible into 8
shares of P100 par value ordinary share of Gloria Company, at the option of the bondholder.
Interest on the bonds is payable annually on December 31. Without the conversion feature, the
bonds would have sold to yield 10% to the holders. (Round present value factors to four decimal
places).
1. The issue price that was attributable to the debt is
a. 5,420,000
b. 5,399,350
c. 5,000,000
d. 4,620,820
2. What was the correct carrying value of the bonds on December 31, 2019?
a. 4,682,902
b. 4,744,984
c. 5,000,000
d. 5,467,402
3. What is the interest expense on these bonds for the year ending December 31, 2020?
a. 400,000
b. 437,932
c. 468,290
d. 500,000
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4. If 2,000,000 of the bonds were converted into ordinary shares on January 1, 2021. What
amount should have been credited to share premium upon conversion?
a. 652,149
b. 520,000
c. 400,000
d. 300,477
5. Disregard the information given in item 4. Assume, instead, that on January 1, 2021,
2,000,000 of the bonds were retired @ 109. The bonds without the conversion feature would
have sold @ 105 on this date. What amount of gain or loss should be recognized on the
retirement of bonds?
a. 40,000
b. 160,000
c. (59,523)
d. (199,523)
6. Disregard the assumption in item 4. Assume that on January 1, 2021, 2,000,000 of the bonds
were retired @ 109. The bonds without the conversion feature would have sold @ 105 on this
date. What should be the interest expense for the year ended in December 31, 2021?
a. 252,374
b. 285,072
c. 300,000
d. 475,119
14. On July 1, 2021, Winterton Co. borrowed 1,000,000 on a 10%, five year note payable. On
December 31, 2021, the fair value of the note is determined to be 795,000 based on market and
interest factors. The entity has a fair value option for reporting the financial liability.
1. What is the carrying amount of the note payable On December 31, 2021?
a. 1,000,000
b. 795,000
c. 500,000
d. 397,500
2. What should be reported as interest expense for 2021?
a. 100,000
b. 79,500
c. 50,000
d. 48,750
3. What is the loss or gain to be recognized in 2021 as a result of the fair value option?
a. 205,000 loss
b. 205,000 gain
c. 102,500 gain
d. 0
15. On January 1, 2021 Jonathan Company borrowed 500,000 8% interest bearing note due in 4
years. The entity has elected the fair value option for reporting the financial liability. On
December 31, 2021, the fair value of the note is 408,150.
1. What is the carrying amount of the note payable on December 31, 2021?
a. 500,000
b. 367,500
c. 408,150
d. 460,000
2. What amount should be reported as interest expense for 2021?
a. 40,000
b. 29,400
c. 32,562
d. 20,000
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3. What is the net gain from change in fair value to be recognized in 2021?
a. 132,500
b. 40,650
c. 91,850
d. 0
4. At what amount should the discount on note payable be presented on December 31,
2021?
a. 132,500
b. 103,100
c. 100,000
d. 0
16. Joshtin Co. purchased from Jerome Co. a 20,000, 8%, five-year note that required five equal
annual year-end payments of 5,009. The note was discounted to yield a 9% rate to Joshtin. At
the date of purchase, Joshtin recorded the note at its present value of 19,485. Joshtin does not
elect the fair value option for reporting its financial liabilities. What should be the total interest
revenue earned by Joshtin over the life of this note?
a. 5,045
b. 5,560
c. 8,000
d. 9,000
17. A note payable to the Bank of the Philippine Islands for 2,400,000 is outstanding on December
31, 2021. The note is dated October 1, 2020, bears interest at 18%, and is payable in three equal
annual installment of 800,000. The first interest and principal payment was made on October 1,
2021.
1. What should be reported as the current liability?
a. 800,000
b. 908,000
c. 72,000
d. 872,000
2. What should be reported as the accrued interest payable?
a. 800,000
b. 908,000
c. 72,000
d. 872,000
18. Dundas Company borrowed 1,000,000 on a 9% note payable on September 30, 2021. The entity
paid the first of four quarterly payments of 264,200 when due on December 31, 2021. What
amount should be reported as note payable on December 31, 2021?
a. 825,800
b. 758,300
c. 735,800
d. 750,000
19. Kaila Company after having experienced financial difficulties in 2021, negotiated with a major
creditor and arrived at an agreement to restructure note payable on December 31, 2021. The
creditor was owed principal of 5,350,000 and interest of 750,000 but agreed to accept machineries
worth 1,260,000 and note receivable from Kaila Company’s customer with a carrying amount
2,123,000. The equipment had an original cost of 1,500,000 and accumulated depreciation of
400,000.
What amount should be recognized as gain from debt extinguishment on December 31, 2021?
a. 1,087,700
b. 1,877,000
c. 2,877,000
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d. 2,087,000
20. Kaila Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditor to relieve its financial stress. Kaila Company has a 1,300,000 note payable to Krypton
Bank. The bank accepted an equity interest in Kaila Company in the form 100,000 ordinary shares
quoted at P10 per share. The par value of each is P8.50.
The fair value of the note payable on the date of restructuring is 1,100,000.
What amount should be recognized as share premium from the issuance of the shares?
a. 200,000
b. 150,000
c. 100,000
d. 50,000
21. Due to adverse economic circumstances and poor management, Tris Company had negotiated
a restructuring of its 9% 7,000,000 note payable to Kris Company due on January 1, 2021. There
is no accrued interest on the note. The bank has reduced the principal obligation from 7,000,000
to 6,000,000 and extend the maturity to 3 years or on December 31, 2023. However the new
interest rate is 13% payable annually every December 31. The present value of 1 at 9% for three
periods is .77 and the present value of an ordinary annuity of 1 at 9% for three periods is 2.53.
What is the gain on extinguishment of debt to be recognized for 2021?
a. 0
b. 206,000
c. 406,000
d. 406,600
22. Angel Company had an overdue 7% note payable to Piggy Bank at 1,300,000 and accrued
interest of 91,000.
As a result of restructuring agreement on January 1, 2021, Piggy Bank agreed to the following
provisions:
The principal obligation is reduced to 1,000,000.
The accrued interest of 91,000 is forgiven.
The date of maturity is extended to December 31, 2023.
Annual interest of 6% is to be paid for 3 years every December 31.
The present value of 1 at 7% for 3 periods is 0.816 and the present value of an ordinary annuity
of 1 at 7% for 3 periods is 2.62.
What is the interest expense to be recognized for 2021?
a. 68,124
b. 58,380
c. 60,000
d. 70,000
23. Herbert CORPORATION is having financial difficulty and therefore has asked TD
Bank to restructure its P3 million note outstanding. The presented note has 3 years remaining
and pays a current rate of interest of 10%. The present market rate for a loan of this nature is
12%. The note was issued at its face value.
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Presented below are four independent situations. Determine the journal entry that Herbert would
make for each of the following types of debt restructuring.
1. TD Bank agrees to take an equity interest in Herbert by accepting common stock valued at
2,400,000 in exchange for relinquishing its claim on this note. The common stock has a par value
of 1,200,000.
a. Notes payable
3,000,000
Common stock
3,000,000
b. Notes payable
3,000,000
Common stock
1,200,000
Gain
600,000
APIC
1,200,000
c. Notes payable
3,000,000
Common stock
1,200,000
Interest expense
300,000
APIC
1,500,000
d. No adjustment
2. TD Bank agrees to accept land in exchange for relinquishing its claim on this note. The land
has a book value of 2,000,000 and a fair value of 2,500,000.
a. Notes payable
3,000,000
Land
2,000,000
Gain on debt restructuring
1,000,000
b. Notes payable
3,000,000
Land
2,000,000
Interest expense
300,000
Gain on exchange
200,000
Gain on debt restructuring
500,000
c. Notes payable
3,000,000
Land
2,000,000
Gain on exchange
500,000
Gain on debt restructuring
500,000
d. No adjustment
3. TD Bank agrees to modify the terms of the note, indicating that Dolores does not have to
pay any interest on the note over the 3-year period.
a. Interest payable
Gain on debt restructuring
b. Loss on debt restructuring
Interest expense
c. Interest expense
Gain on debt restructuring
d. No adjustment
300,000
300,000
300,000
300,000
900,000
900,000
4. TD Bank agrees to reduce the principal balance due to 2,000,000 and require interest only
in the second and third year at a rate of 10%.
a. Notes payable – old
3,000,000
Notes payable – new
2,400,000
Gain on debt restructuring
600,000
b. Notes payable - old
3,000,000
Notes payable – new
3,000,000
c. Notes payable – old
3,000,000
Notes payable – new
2,600,000
Gain on debt restructuring
400,000
d. No adjustment
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24. On December 31, 2021, Robes Company was indebted to Angel Co. on a 2,000,000, 10% note.
Only interest had been paid to date. Due to its financial difficulties Robes Company has
negotiated a restructuring of its note payable. The parties agreed that Robes Company would
settle the debt on the following terms:
Settle one-half of the note by transferring land with a recorded value of 800,000 and a fair
value of 900,000.
Settle one-fourth of the note by transferring 20,000 shares of P10 par ordinary shares with a
fair market value of P15 per share.
Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5%,
extend the due date three years from the date of restructuring and reducing the principal to
P300,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following.
1. Gain on extinguishment of debt on the P1 million note
a. 300,000
c. 100,000
b. 200,000
d. 0
2. Share premium to be recognized on the settlement of 500,000 note by issuing ordinary shares
a. 2,500,000
c. 2,300,000
b.
100,000
d.
0
3. Total gain on extinguishment of debt
a. 637,306
c. 550,006
b. 337,306
d.
0
4. Interest expense in 2018
a. 15,000
b. 26,269
c.
d.
7,500
13,134
5. Carrying amount of the note payable as of December 31, 2018
a. 273,963
c. 142,494
b. 262,694
d. 300,000
25. At the year end, Dayrit Company showed the following data with respect to matured obligation:
Note payable
Accrued interest
5,000,000
500,000
The entity is threatened with a court suit if it could not pay a maturing debt. Accordingly, the
entity entered into an agreement with the creditor for the issuance of share capital in full
settlement of the note payable.
The agreement provided for the issue of 35,000 shares with par value of P100. The share is
currently quoted at P130.
The fair value of the note payable on the date of restructuring is 4,700,000.
1. What amount should be recognized as gain from extinguishment of debt?
a. 1,000,000
b. 2,000,000
c. 950,000
d. 800,000
2. If the shares do not have fair value, what amount should be recognized as gain from
extinguishment of debt?
a. 200,000
10
b. 800,000
c. 300,000
d. 0
3. If both shares and note payable do not have fair value, what amount should be recognized
as gain from extinguishment of debt?
a. 2,000,000
b. 1,500,000
c. 1,000,000
d. 0