FINANCIAL ACCOUNTING AND REPORTING
/RGP, CPA.
BONDS PAYABLE AND
COMPOUND FINANCIAL INSTRUMENTS
MULTIPLE CHOICE THEORIES:
1.
S1: Bond Certificate is known as the contract between the issuer of bonds and the bondholders.
S2: A bond is similar to term loans and notes except that the former is usually offered to the public and sold to investors.
a. True, false
c. False, false
b. False, true
d. True, true
2.
Which of the following types of bonds is properly defined or characterized?
I. Debenture bonds are bonds with collateral security in the form of real properties.
II. Convertible bonds are bonds that can be exchanged by the issuer for equity shares of the issuing entity.
III. Junk bonds are high risk and high yield bonds issued by the entities that are heavily indebted or otherwise in weak
financial position.
IV. Serial bonds are bonds with a single date of maturity.
a. I and IV
c. I and II
b. II and III
d. II and IV
3.
In relation to proper measurement of bonds payable, which of the following statements is correct?
a. Bonds payable at fair value through profit or loss is initially measured at fair value minus transaction costs.
b. Fair value of bonds payable shall include accrued interest if bonds are issued between interest payment dates.
c. For bonds measured at amortized cost, if the initial measurement of bonds is higher than its face value, the
amortization, the interest expense recorded is LOWER than the interest accrued or paid.
d. For bonds measured at amortized cost, if the initial measurement of bonds is lower than its face value, the amortization
is treated as a discount and amortized using the effective interest method. As a result of amortization, the interest
expense recorded is LOWER than the interest accrued or paid.
4.
Which of the following is true of a premium on bonds payable?
a. The premium on bonds payable is a contra shareholder’s 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.
5.
How would the amortization of discount on bonds payable affect each of the following?
Carrying amount of bonds
Net income
Carrying amount of bonds
a.
Increase
Decrease
c.
Decrease
b.
Decrease
Increase
d.
Increase
Net income
Decrease
Increase
6.
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?
a.
Overstated, overstated
c.
Understated, overstated
b.
Overstated, understated
d.
Understated, understated
7.
Bonds payable shall be measured initially at
a. Fair value
b. Fair value plus bond issue costs
c.
d.
Fair value minus bond issue costs
Face amount
After initial recognition, bonds payable shall be measured at
a. Face value
b. Fair value
c.
d.
Amortized cost
Fair value minus bond issue costs
8.
9.
What do you call the interest rate written on the face of the bonds?
I. Nominal interest rate
IV. Yield rate
II. Stated interest rate
V. Market interest rate
III. Effective interest rate
a.
b.
I or II
I or III
FINANCIAL ACCOUNTING AND REPORTING /RGP, CPA.
c.
d.
III or IV
III, IV or V
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10. For a bond issue which sells for more than the face amount, the market rate of interest i
a. Equal to the rate stated on the bond
b. Less than the rate stated on the bond
c. Higher than the rate stated on the bond
d. May be equal, less than or more than the rate stated on the bond
11. If bonds are issued at a premium, this indicates that
a. The yield rate of interest exceeds the nominal rate
b. The nominal rate of interest exceeds the yield rate
c. The yield and nominal rates coincide
d. No necessary relationship exists between the two rates
12. When interest expense for the current year is more than the interest paid, the bonds were issued at
a. A discount
c. At face amount
b. A premium
d. Either discount or premium
13. An entity retired an issued bond prior to the original maturity date. If the bond retirement price is lower than the carrying
amount of the bonds on the retirement date, the entity should report
a. Gain on bond retirement
c. Share premium
b. Loss on bond retirement
d. Other comprehensive income
14. When an entity issued convertible bonds, how will share premium be computed in 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 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 the conversion privilege and the
total par or stated value of the shares issued.
15. Which of the following is an equity item?
Ordinary Share Warrants Outstanding
a.
Yes
b.
No
c.
Yes
d.
No
Bond Conversion Privilege
No
Yes
Yes
No
16. Which of the following is a compound financial instrument?
Convertible Bonds
Convertible Preference Shares
a.
Yes
Yes
b.
Yes
No
c.
Yes
Yes
d.
No
Yes
e.
No
No
Bonds with Warrants
No
Yes
Yes
Yes
Yes
17. An entity issued bonds with warrants with net proceeds which is higher than the face value. The fair market value of the
bonds without warrants is lower than the face value. Based on the given information, which of the following is incorrect
regarding the journal entry upon issuance of bonds?
a. Ordinary share warrants outstanding is credited
b. Premium on bonds payable is credited
c. Discount on bonds payable is debited
d. Cash is debited equal to the net proceeds from issuance
18. In relation to early retirement of convertible bonds, which of the following statements is incorrect?
S1: Residual approach will also be applied in allocating the retirement price between the liability and equity component of
the compound financial instrument.
S2: The gain or loss on retirement on bond conversion privilege is to be presented within profit or loss.
a. S1 only
c. Both statements
b. S2 only
d. None of the statements
FINANCIAL ACCOUNTING AND REPORTING /RGP, CPA.
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PROBLEM 1
SAN MIGUEL INC. reported the following financial liabilities on December 31, 2021:
9% debentures, callable in 2023, due in 2024
12% collateral trust bonds, convertible into
share capital beginning in 2022, due in 2025
Industrial revenue bonds, maturing in installments
10% bonds maturing on a single date, secured
by realty
Unsecured 10% registered bonds,
(P250,000 maturing annually beginning in 2022)
Subordinated bonds, maturing on a single date
Bonds maturing in installments, secured by
a machinery
8% debentures (1,000,000 maturing annually)
12% guaranty security bonds, due 2023
P4,000,000
4,000,000
1,600,000
1,500,000
3,000,000
1,000,000
1,400,000
5,000,000
2,500,000
REQUIRED: (1) How much is the total amount of term bonds? (2) What is the total amount of debenture bonds?
PROBLEM 2
GINEBRA INC. issued P3,000,000, 5 years, 10% bonds at 110 including accrued interest on June 1, 2021, but dated March 1, 2021.
Interest is payable semi-annually on March 1 and September 1. Transaction costs of P35,000 were incurred by GINEBRA in
relation to the bond issuance.
REQUIRED: (a) The net amount that GINEBRA receive from the bond issuance is (b) What is the initial measurement of the
bonds? (c) Assuming the bonds were issued at 98 plus accrued interest, what is the net cash receipt from the bond issuance and
initial measurement, respectively?
PROBLEM 3
On January 1, 2021, RAIN OR SHINE CORP. is contemplating on issuing an 8% 3-year, P10,000,000 bonds. Principal is due at
maturity but interest is payable semi-annually every July 1 and December 31. The company determines that the market rate of
interest on that date is 10%.
REQUIRED:
(a) What is the initial measurement of the bonds issued by the company?
(b) If the transaction took effect, what is the carrying amount of the bonds on December 31, 2021?
(c) What is the balance of unamortized discount or premium on December 31, 2021?
PROBLEM 4
On January 1, 2021, MAGNOLIA COMPANY issued a 5%, P6,000,000 bonds. Principal on the bonds matures in three equal
installments. Interest is also due annually at each year-end. The market rate of interest on the bonds on January 1 is 6%.
REQUIRED:
(a) What is the initial measurement of the bonds issued by the company?
(b) If the transaction took effect, what is the carrying amount of the bonds on December 31, 2021?
(c) What is the balance of unamortized discount or premium on December 31, 2021?
(d) Redo requirements (a) to (c), but assuming the bonds matures in 6 equal semi-annual installments and the interest is
paid semi-annually.
PROBLEM 5
At the beginning of 2021, BLACKWATER CORP. issued a 10% 4-year, P2,000,000 bonds. Principal is due at maturity but interest is
payable semi-annually every July 1 and December 31. The company determines that the market rate of interest on the date of
issue is 12%. The bonds are quoted at 95 and 101 on December 31, 2022 and 2023, respectively. The bonds are measured at
amortized cost.
FINANCIAL ACCOUNTING AND REPORTING /RGP, CPA.
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REQUIRED: Answer the following independent questions:
(a) Determine the amount of gain or loss on early retirement to be presented in the 2022 statement of profit or loss
assuming the whole amount of bonds were retired on December 31, 2022 at a retirement price of P1,900,000.
(b) Assume that the whole amount of bonds was retired on March 31, 2023 at a retirement price of P1,887,500, determine
the gain or loss on retirement.
(c) Assume that only half of the bonds were retired on December 31, 2022 at a retirement price of P1,010,000, determine
the balance of unamortized discount or premium on December 31, 2023?
(d) Assume that only half of the bonds were retired on March 31, 2023 at a retirement price of P937,500, what is the net
amount presented in profit or loss on the income statement of 2023?
(e) Assume that the entity elected the fair value option in accounting for its bonds and half of the bonds were retired on
July 1, 2023 for a retirement price of P875,000, what is the net amount presented in profit or loss on the income
statement of 2023?
PROBLEM 6
On January 1, 2021, ALASKA CORP. issued 3-year, 10% P2,000,000 bonds at 110. The bonds pay interest every December 31.
Each P1,000 bond has 2 detachable warrants which entitles the holder to purchase one share of the Company for P300 per share.
On that date, the quoted market value of each warrant was P10. ALASKA’s share has a par value of P200. Without the warrants,
the bond has a market value at a yield of 8%. On November 30, 2021, all of the share warrants are exercised.
REQUIRED: (1) What is the increase in shareholders’ equity arising from the issuance of bonds on January 1, 2021? (2) What is the
net increase in equity as a result of the exercise of share warrants on November 30, 2021?
PROBLEM 7
PUREFOODS COMPANY issued 3,000 convertible bonds on January 1, 2021. The bonds have a three-year term and are issued at
105 with a face value of P1,000 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 P8. When the bonds are issued, the prevailing
market rate for similar debt instrument without the conversion option is 9%.
REQUIRED:
(a) On the date of issue, what amount of the proceeds represents the equity component?
(b) If the bonds were converted on June 30, 2023, what is the net increase in equity because of the conversion?
(c) Assuming 2,000 bonds were converted on June 30, 2023, what is the net increase in equity because of the conversion?
(d) Assuming on December 31, 2022 all the convertible debt instruments were retired for P3,120,000, the prevailing rate of
interest on a similar debt instruments as of December 31, 2022 is 8% without the conversion option, how much is the
gain or loss that should be reported in the profit or loss on retirement of the convertible debt instruments?
-END-
FINANCIAL ACCOUNTING AND REPORTING /RGP, CPA.
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