02a Bonds Payable Compound Financial Instrument

FINANCIAL ACCOUNTING
THEORY & PRACTICE

BONDS PAYABLE & COMPOUND FINANCIAL INSTRUMENT
QUIZZER
Bonds Payable
BONDS PAYABLE
Essay Questions
1. What is a bond?
A bond is a formal unconditional promise, made under seal, to pay a specified sum of money
at a determinable future date, and to make periodic interest payments at a stated rate until
the principal sum is paid. In simple language, a bond is a contract of debt whereby one party
called the borrower or issuer borrows funds from another party called the investor or
bondholder. A bond indenture or deed of trust is the document which shows in detail the
terms of the bond and the rights and duties of the borrower and other parties to the contract.
2. Define or describe the following types of bonds:

1. Term bonds 7. Coupon or bearer bonds
2. Serial bonds 8. Convertible bonds
3. Mortgage bonds 9. Callable bonds
4. Collateral trust bonds 10. Guaranteed bonds
5. Debenture bonds 11. Junk bonds
6. Registered bonds 12. Commodity-backed bonds
1. Term bonds are bonds with a single date of maturity.

2. Serial bonds are bonds with a series of maturity dates or bonds that mature by
installments.
3. Mortgage bonds are bonds secured by mortgage of real properties.
4. Collateral trust bonds are bonds secured by investments in stocks and bonds.
5. Debenture bonds are bonds without collateral security.
6. Registered bonds require the registration of the name of the bondholder on the books
of the corporation. Consequently, when the bondholder sells a bond, the old bond
certificate is surrendered and a new bond certificate is issued to the buyer. Interest is
paid periodically to the bondholder of record.
7. Coupon or bearer bonds - The name of the bondholder is not registered. Accordingly,
interest is paid periodically to the bearer of the bond or the person submitting a
detachable interest coupon.
8. Convertible bonds are bonds that can be exchanged for equity shares of the issuing
entity.
9. Callable bonds are bonds that can be called in for payment before the date of maturity.
10. Guaranteed bonds are bonds issued whereby another party promises to make payment
if the borrower fails to do so.
11. Junk bonds are high risk and high yield bonds issued by entities that are heavily indebted
or otherwise in weak financial position.
Essay Questions: Bonds Payable Page 3

12. Commodity-backed bonds are bonds which are redeemable in terms of commodities
such as oil or precious metals.
3. Explain a "premium on bonds payable".
If the sales price of the bonds is more than the face value of the bonds, the bonds are said
to be sold at a premium. The "premium on bonds payable" is in effect gain on the part of the
issuing entity or borrower, because it receives more than what it is obligated to pay under the
bond issue. The obligation of the issuing entity is limited only to the face value of the bonds.
The premium on bonds payable, however, is not treated as an outright gain but amortized
over the life of the bond by debiting premium on bonds payable and crediting interest
expense.
4. Explain a "discount on bonds payable".
If the sales price of the bonds is less than the face value of the bonds, the bonds are said to
be sold at a discount. The "discount on bonds payable" is in effect a loss to the issuing entity
because it receives less than what it is obligated to pay which is equal to the face value.
However, the discount on bonds payable is not treated as outright loss but amortized over
the life of the bonds by debiting interest expense and crediting discount on bonds payable.
5. Explain "bond issue costs".
Bond issue costs or "transaction costs" are incremental costs that are directly attributable to
the issue of bonds payable. Such costs include printing and engraving cost, promotion cost,
legal and accounting fee, registration fee with regulatory authorities, commission paid to
agents and underwriters and other similar charges. Bond issue costs are not treated as
outright expense but amortized over the life of the bond issue in a manner similar to that used
for discount on bonds payable. Bond issue costs are conceived as cost of borrowing and
therefore will increase interest expense. The amortization of bond issue costs is recorded by
debiting interest expense and crediting bond issue costs.
6. Explain the measurement of bonds payable.
PFRS 9, paragraph 5.1.1, provides that bonds payable not designated at fair value through
profit or loss shall be measured initially at fair value minus transaction costs that are directly
attributable to the issue of the bonds' payable. The fair value of the bonds payable is equal
to the present value of the future cash payments to settle the bond liability. Bond issue costs
shall be deducted from the fair value or issue price of the bonds payable in measuring initially

Bonds Payable
the bonds payable. However, if the bonds are designated and accounted for "at fair value
through profit or loss", the bond issue costs are treated as expense immediately. Actually,
the fair value of the bonds payable is the same as the issue price or net proceeds from the
issue of the bonds, excluding accrued interest.
7. Explain the subsequent measurement of bonds payable.
PFRS 9, paragraph 5.3.1, provides that after initial recognition, bonds payable shall be
measured either:
a. At amortized cost, using the effective interest method
b. At fair value through profit or loss
8. Explain the "amortized cost" of bonds payable.
The "amortized cost" of bonds payable is the amount at which the bond liability is measured
initially minus principal repayment, plus or minus the cumulative amortization using the
effective interest method of any difference between the initial amount and the maturity
amount. Simply stated, the difference between the face amount and present value of the
bonds payable is amortized using the effective interest method. Actually, the difference
between the face amount and present value is either discount or premium on the issue of the
bonds payable. Accordingly, discount on bonds payable and bond issue cost are presented
as deduction from bonds payable and premium on bonds payable is an addition to bonds
payable.
9. Explain the "fair value option" of measuring bonds payable.

PFRS 9, paragraph 4.2.2, provides that at initial recognition, bonds payable may be
irrevocably designated as at fair value through profit or loss. In other words, under the fair
value option, the bonds payable shall be measured initially at fair value and remeasured at
every year-end at fair value and any changes in fair value are recognized in profit or loss.
There is no more amortization of bond issue cost, bond discount and bond premium. As a
matter of fact, interest expense is recognized using the nominal or stated interest rate and
not the effective interest rate.
10. On January 1, 2013, an entity issued bonds with face amount of P5,000,000 and 12% stated
interest rate for P5,379,100. The bonds are sold to yield 10%. Interest is payable annually on
December 31. The entity paid bond issue cost of P100,000. On December 31, 2013, the fair
value of the bonds is determined to be P5,300,000.
Prepare the journal entries for 2013 assuming the entity elects the fair value option of
measuring the bonds payable.

Jan. 1 Cash 5,379,100

Bonds payable 5,379,100
1 Transaction cost 100,000
Cash 100,000
Dec. 31 Interest expense 600,000
Cash (12% x 5,000,000) 600,000
31 Bonds payable 79,100
Gain from change in fair value 79,100
Bonds payable-January 1, 2013 5,379,100
Fair value - December 31, 2013 5,300,000
Decrease in fair value of bonds - gain 79,100
11. What is the meaning of treasury bonds?
Treasury bonds are an entity's own bonds originally issued and reacquired but not canceled.
12. Explain the accounting for treasury bonds.
When treasury bonds are acquired, the "treasury bonds account" is debited at face value and
any related unamortized premium or discount or issue cost is canceled. The difference
between the acquisition cost and the carrying amount of the treasury bonds is treated as gain
or loss on acquisition of treasury bonds. Any accrued interest paid is charged to interest
expense. Treasury bonds are reported in the statement of financial position as a deduction
from bonds payable.
13. What is meant by bond refunding?
Bond refunding is the floating of new bonds payable the proceeds from which are used in
paying the original bonds payable. Simply stated, bond refunding is the premature retirement
of the old bonds payable through the issuance of new bonds payable.
14. What is the treatment of bond refunding charges?
The refunding charges include the unamortized bond discount or premium, unamortized bond
issue cost and redemption premium on the old bonds being refunded. PFRS 9, paragraph
3.3.1, provides that bond refunding is an extinguishment of a financial liability. Paragraph
3.3.3 further provides that the difference between the carrying amount of the financial liability
extinguished and the consideration paid shall be included in profit or loss. Accordingly, the
refunding charges shall be accounted for as loss on early extinguishment of debt.

Bonds Payable
15. Explain the "effective interest" method of amortizing discount on bonds payable, premium on
bonds payable and bond issue cost.
The effective interest method or simply "interest method" or scientific method recognizes two
kinds of interest rate - nominal rate and effective rate. The nominal rate is the rate appearing
on the face of the bonds while the effective rate is the actual interest incurred on the bond
issue. The effective rate is the rate that exactly discounts estimated cash future payments
through the expected life of the bonds payable or when appropriate, a shorter period to the
net carrying amount of the bonds payable. The nominal rate is also known as coupon or
stated rate. The effective rate is also known as yield or market rate. If the bonds are sold at
face value, the nominal rate and effective rate are the same. If the bonds are sold at a
discount, the effective rate is higher than nominal rate. If the bonds are sold at a premium,
the effective rate is lower than nominal rate.
Amortization of bond premium or discount. The annual amortization of premium or discount

is the difference between the effective interest expense and nominal interest expense. The
effective interest expense is computed by multiplying the carrying amount of the bonds
payable at the beginning of the year by the effective rate. The nominal interest expense is
computed by multiplying the face value of the bonds payable by the nominal rate. The
effective interest method provides for an increasing amount of discount amortization and
increasing amount of interest expense. The effective interest method provides for an
increasing amount of premium amortization but a decreasing amount of interest expense.
The calculation of effective interest rate shall include all transaction costs, premiums and
discounts. Thus, bond issue costs will increase discount on bonds payable and will decrease
premium on bonds payable. Under the effective interest method, bond issue cost must be
"lumped" with the discount on bonds payable and "netted" against the premium on bonds
payable.

COMPOUND FINANCIAL INSTRUMENT

Essay Questions
1. Define a "compound financial instrument".
PAS 32, paragraph 28, defines a compound financial instrument as "a financial instrument
that contains both a liability and an equity element from the perspective of the issuer". In
other words, one component of the financial instrument meets the definition of a financial
liability and another component of the financial instrument meets the definition of an equity
instrument.
The common examples of compound financial instrument are as follows:
a. Bonds payable issued with share warrants
b. Convertible bonds payable
2. Explain the accounting for a compound financial instrument.
The issuer of a financial instrument shall evaluate the terms of the instrument whether it
contains both a liability and an equity component.
If the financial instrument contains both a liability and an equity component, PAS 32,
paragraph 29, mandates that such components shall be accounted for separately in
accordance with the substance of the contractual arrangement and the definition of a financial
liability and an equity.
The approach in accounting for a compound financial instrument is to apply "split accounting".
This means that the consideration received from the issuance of the compound financial
instrument shall be allocated between the liability and equity components.
In other words, the fair value of the liability component is first determined.
The fair value of the liability component is then deducted from the total consideration received
from issuing the compound financial instrument.
The residual amount is allocated to the equity component. QUESTION 5-3
3. Explain bonds payable issued with share warrants.
When the bonds are sold with share warrants, the bondholders are given the right to acquire
shares of the issuing entity at a specified price at some future time.
Actually, when bonds are sold with share warrants two securities are sold - the bonds and
the share warrants.
Share warrants attached to a bond may be detachable or nondetachable.
Detachable share warrants can be traded separately from the bond while nondetachable
share warrants cannot be traded separately.
Essay Questions: Compound Financial Instrument Page 8

Compound Financial Instrument
4. Explain the accounting for bonds payable issued with share warrants.
Bonds issued with share warrants are considered as compound financial instrument.
Accordingly, the proceeds from the issuance of the bonds payable with share warrants shall
be accounted for as partly liability and partly equity.
The proceeds shall be allocated between the bonds payable and the share warrants.
PAS 32 does not differentiate whether the equity component is detachable or nondetachable.
Whether detachable or nondetachable, share warrants have a value and therefore shall be
accounted for separately.
PAS 32, paragraph 31, provides that equity instruments are instruments that evidence a
residual interest in the assets of an entity after deducting all of its liabilities.
Therefore, the bonds are assigned an amount equal to the "market value of the bonds ex-
warrant", regardless of the market value of the warrants.
The residual amount or remainder of the issue price shall then be allocated to the share
warrants.
If the bonds have no known market value ex-warrant, the amount allocated to the bonds is
equal to the present value of the bonds payable.
The present value of bonds payable is the sum of the present value of the principal bond
liability and the present value of the future interest payments using the effective or market
interest rate for similar bonds without the share warrants.
5 Explain the accounting for convertible bonds at the "time of original issuance".
Convertible bonds are conceived as compound financial instrument.

Accordingly, the issuance of convertible bonds shall be accounted for as partly liability and
partly equity.
The issue price of the convertible bonds shall be allocated between the bonds payable and
the conversion privilege.
6. Explain the allocation of the "original issue price" of convertible bonds payable.
The economic effect of issuing convertible bonds is substantially the same as issuing
simultaneously bonds payable with share warrants.
Accordingly, the bonds are assigned an amount equal to the market value of the bonds
without the conversion privilege.
In the absence of market value of the bonds without conversion privilege, the amount
allocated to the bonds is equal to the present value of the bonds payable.

The present value of bonds payable is the sum of the present value of the principal bond
liability and the present value of future interest payments using the effective or market interest
rate for similar bonds without conversion privilege
The residual amount or remainder of the issue price shall then be allocated to the conversion
privilege or equity component.
7. Explain the accounting for the conversion of convertible bonds into share capital.
If bonds are converted into share capital of the issuing entity, the accounting problem is the
measurement of the share capital issued.
Application Guidance 32 of PAS 32 provides that on conversion of a convertible instrument
at maturity, the entity derecognizes the liability component and recognizes it as equity.
There is no gain or loss on conversion at maturity.
The reason is that the convertible bond is viewed in substance as an equity and the
conversion is really an exchange of one type of equity capital for another.
The conversion is not considered a significant economic transaction and therefore no gain or
loss would be recognized.
Accordingly, the carrying amount of the bonds payable is the measure of the share capital
issued because the carrying amount is the "effective price" for the shares issued as a result
of the conversion.
Any cost incurred in connection with the bond conversion shall be deducted from share
premium, if any. Otherwise, the cost incurred is treated as expense.
The carrying amount of the bonds payable is equal to the face value plus accrued interest if
not paid, plus unamortized premium or minus unamortized discount and bond issue cost.
8. Explain the treatment of the "share premium from the conversion privilege" that was
recognized at the original issuance of the bonds.
The share premium from the conversion privilege that was recognized at the original issuance
of convertible bonds payable shall form part of equity.
If the bonds are later converted, the "share premium from conversion privilege" should be
canceled because this would effectively form part of the total consideration paid for the shares
ultimately issued as a result of the bond conversion.

Bonds Payable
MCQ – Theory: Bonds Payable

Basic concepts
1. Debentures are
A. Ordinary bonds C. Serial bonds
B. Secured bonds D. Unsecured bonds FA 2 © 2014
2. Bonds for which the bondholders' names are not registered with the issuer are called
A. Bearer bonds C. Serial bonds
B. Debenture bonds D. Term bonds FA 2 © 2014
3. Bonds that pay no interest unless the issuer is profitable are known as
A. Income bonds C. Mortgage bonds
B. Junk bonds D. Registered bonds FA 2 © 2014
4. Bonds issued with scheduled maturities at various dates are called

A. Callable bonds C. Serial bonds
B. Convertible bonds D. Terms bonds FA 2 © 2014
5. Bonds that mature on a single date are called

A. Callable bonds C. Serial bonds
B. Convertible bonds D. Term bonds FA 2 © 2014
6. What is the contract between the issuer of bonds and the bondholders?
A. Bond coupon C. Bond indenture
B. Bond debenture D. Registered bond FA 2 © 2014
7. What is the interest rate written on the face of the bond?

A. Stated rate
B. Coupon rate
C. Nominal rate
D. Coupon rate, nominal rate or stated rate FA 2 © 2014
8. What is the rate of interest actually incurred?

A. Effective rate C. Market, yield or effective rate
B. Market rate D. Yield rate FA 2 © 2014
9. When interest expense for the current year is more than interest paid, the bonds were issued
at
A. A discount C. Face amount
B. A premium D. Cannot be determined FA 2 © 2014
MCQ – Theory: Bonds Payable Page 11

10. When interest expense for the current year is less than interest paid, the bonds were issued
at
A. A discount C. Face amount
B. A premium D. Cannot be determined FA 2 © 2014
11. For a bond issue which sells for less than face value, the market rate of interest is Wiley 2011
A. Dependent on rate stated on the bond C. Higher than rate stated on the bond
B. Equal to rate stated on the bond D. Less than rate stated on the bond
12. What is the market rate of interest for a bond issue which sells for more than face value?
A. Equal to rate stated on the bond C. Independent of rate stated on the bond
B. Higher than rate stated on the bond D. Less than rate stated on the bond FA 2 © 2014
13. If bonds are issued at a premium, this indicates that

A. The yield and nominal rates coincide
B. The yield rate of interest exceeds the nominal rate
C. The nominal rate of interest exceeds the yield rate
D. No necessary relationship exists between the two rates Valix 2012
14. Which of the following is true of a premium on bonds payable?

A. The premium or bonds payable is a contra shareholders' 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. S&S 19e
Initial Measurement
15. Bonds payable not designated at fair value through profit loss shall be measured initially at
A. Face amount C. Fair value minus bond issue cost
B. Fair value D. Fair value plus bond issue cost FA 2 © 2014
Bond issue cost

16. Cost of issuing bonds payable
I. Is included in the measurement of the bonds payable measured at amortized cost.
II. Is amortized using the "interest" method over the life of the bonds.
III. Will effectively increase the market rate of interest.
A. I and II only C. II and III only
B. I and III only D. I, II and III FA 2 © 2014

Bonds Payable
Issued at interest date

17. The market price of a bond issued at a discount is the present value of the principal amount
at the market rate of interest AICPA 1191
A. Less the present value of all future interest payments at the market rate of interest.
B. Plus the present value of all future interest payments at the market rate of interest.
C. Less the present value of all future interest payments at the rate of interest stated on the
bond.
D. Plus the present value of all future interest payments at the rate of interest stated on the
bond.
18. The proceeds from the sale of bonds

A. Will always be equal to the face amount.
B. Will always be less than the face amount.
C. Will always be more than the face amount. FA 2 © 2014
D. May be equal to or more or less than the face amount depending on market interest rate.
19. In theory, the proceeds from the sale of a bond would be equal to
A. The face amount of the bond
B. The sum of the face amount of the bond and the periodic interest payments.
C. The face amount of the bond plus the present value of the interest payments made during
the life of the bond
D. 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 S&S 19e
Issued between interest dates

20. 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. Increased by accrued interest from May 1 to June 1
B. Decreased by accrued interest from May 1 to June 1
C. Increased by accrued interest from June 1 to November 1
D. Decreased by accrued interest from June 1 to November 1 K, W & W
21. When bonds are sold between interest dates, any accrued interest is credited to
A. Bonds payable C. Interest receivable
B. Interest payable D. Interest revenue S&S 19e

22. Which of the following is true of accrued interest on bonds that are sold between interest
dates?
A. The accrued interest is extra income to the buyer.
B. The accrued interest is computed at the effective rate.
C. The accrued interest will be paid to the seller when the bonds mature. S&S 19e
D. None of the above
23. A bond issued on June 1 of the current year has interest payment dates of April 1 and October
1. Bond interest expense for the current year ended December 31 is for a period of
A. Three months C. Six months
B. Four months D. Seven months FA 2 © 2014
After initial measurement

24. After initial recognition, bonds payable shall be measured at
I. Amortized cost using the effective interest method.
II. Fair value through profit or loss.
A. I only C. Either I or II
B. II only D. Neither I nor II FA 2 © 2014
25. Under international accounting standard, the valuation method used for bonds payable is
A. Historical cost
B. Maturity amount
C. Discounted cash flow valuation at current yield rate
D. Discounted cash flow valuation at yield rate at issuance FA 2 © 2014
Fair value option

26. Under the fair value option, bonds payable shall be measured initially at FA 2 © 2014
A. Face amount C. Fair value minus bond issue cost
B. Fair value D. Fair value plus bond issue cost
27. Which of the following statements is true in relation to the fair value option of measuring a
bond payable?
I. At initial recognition, an entity may revocably designate a bond payable at fair value
through profit or loss.
II. The bond payable is remeasured at every year-end at fair value and any changes in fair
value are recognized in other comprehensive income.
A. I only C. Both I and II
B. II only D. Neither I nor II FA 2 © 2014

Bonds Payable
Amortized cost option

28. The "amortized cost" of bonds payable means
A. Face amount minus bond issue cost
B. Face amount plus premium on bonds payable
C. Face amount minus discount on bonds payable
D. Face amount plus premium on bonds payable, minus discount on bonds payable and
minus bond issue cost FA 2 © 2014
Straight-line amortization
29. If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years [1]
A. Will be less than the coupon rate of interest.
B. Will exceed what it would have been had the effective interest method of amortization
been used.
C. Will be less than what it would have been had the effective interest method of
amortization been used.
D. Will be the same as what it would have been had the effective interest method of
amortization been used. K, W & W
Effective interest method

30. What is the effective interest rate of a bond measured at amortized cost?
A. The stated rate of the bond.
B. The interest rate currently charged by the entity or by others for similar bond. Valix 12
C. The basic risk-free interest rate that is derived from observable government bond prices.
D. The interest rate that exactly discounts estimated future cash payments through the
expected life of the bond or when appropriate, a shorter period to the net carrying amount
of the bond.
31. When interest expense is calculated using the effective interest method, interest expense
equals
A. Actual amount of interest paid.
B. Maturity value of the bonds multiplied by the effective interest rate.
C. Carrying amount of the bonds multiplied by the stated interest rate.
D. Carrying amount of the bonds multiplied by the effective interest rate. Valix 12
32. Under the effective interest method of amortization, the interest expense is equal to
A. The stated rate of interest multiplied by the face amount of the bonds.
B. The market rate of interest multiplied by the face amount of the bonds. FA 2 © 2014
C. The stated rate of interest multiplied by the beginning carrying amount of the bonds.
D. The market rate of interest multiplied by the beginning carrying amount of the bonds.

33. An entity issued a bond with a stated rate of interest that is less than the effective interest
rate on the date of issuance. The bond was issued on one of the interest payment dates.
What should the entity report on the first interest payment date?
A. A debit to the unamortized bond discount.
B. A debit to the unamortized bond premium. Becker 2013
C. An interest expense that is less than the cash payment made to bondholders.
D. An interest expense that is greater than the cash payment made to bondholders.
Discount & premium amortization

34. A discount on bond payable is charged to interest expense FA 2 © 2014
A. Equally over the life of the bond C. Only in the year the bond matures
B. Only in the year the bond is issued D. Using the effective interest method
35. Which of the following statements is true for a bond maturing on a single date when the
effective interest method of amortizing bond discount is used?
A. Interest expense increases each six-month period
B. Nominal interest rate exceeds effective interest rate
C. Interest expense remains constant each six-month period FA 2 © 2014
D. Interest expense as a percentage of the bond carrying amount varies from period to
period
36. When the effective interest method is used, the periodic amortization would
A. Increase if the bonds were issued at a discount.
B. Increase if the bonds were issued at a premium.
C. Decrease if the bonds were issued at a premium.
D. Increase if the bonds were issued at either a discount or a premium. FA 2 © 2014
Carrying amount
37. A five-year term bond was issued on January 1, 2012 at a premium. The carrying amount of
the bond on December 31, 2013 would be
A. Higher than the carrying amount on January 1, 2013
B. The same as the carrying amount on January 1, 2013
C. Lower than the carrying amount on December 31, 2014
D. Higher than the carrying amount on December 31, 2014 Valix 12
38. A five-year term bond was issued on January 1, 2012 at a discount. The carrying amount of
the bond on December 31, 2013 would be
A. Lower than the carrying amount on January 1, 2013
B. Higher than the carrying amount on January 1, 2013
C. The same as the carrying amount on January 1, 2013
D. Higher than the carrying amount on December 31, 2014 Valix 12

Bonds Payable
Early extinguishment of debt

39. A 20-year bond was issued at a premium with a call provision to retire the bond. When the
bond issuer exercised the call provision on an interest date, the call price exceeded the
carrying amount of the bond. The amount of bond liability removed from the accounts should
have equaled the
A. Cash paid
B. Current market price
C. Call price plus unamortized premium
D. Face amount plus unamortized premium
40. A ten-year term bond was issued at a discount with a call provision to retire the bond. When
the bond issuer exercised the call provision on an interest date, the carrying amount of the
bond was less than the call price. The amount of bond liability removed from the accounts
should have equaled the
A. Call price C. Face amount less unamortized discount
B. Call price less unamortized discount D. Face amount plus unamortized discount
41. When bonds are retired prior to maturity with proceeds from a new bond issue, any gain or
loss from the early extinguishment of debt should be
A. Recognized in retained earnings.
B. Amortized over the life of the new bond issue.
C. Recognized in income from continuing operations.
D. Amortized over the remaining original life of the retired bond issue. FA 2 © 2014
42. An extinguishment of bonds payable originally issued at a premium is made by purchase of
the bonds between interest dates. Which of the following statements is true at the time of
extinguishment?
A. The premium must be amortized up to the purchase date.
B. Interest must be accrued from the last interest date to the purchase date.
C. Any costs of issuing the bonds must be amortized up to the purchase date.
D. All of these statements are true. FA 2 © 2014
Derecognition
43. A ten-year term bond was issued at a discount with a call provision to retire the bond. When
the bond issuer exercised the call provision on an interest date, the carrying amount of the
bond was less than the call price. The amount of bond liability derecognized should have
equaled the
A. Call price
B. Call price less unamortized discount
C. Face amount less unamortized discount
D. Face amount plus unamortized discount FA 2 © 2014

Effect of transactions
Amortization of bond discount
44. The amortization of discount on bonds payable
A. Decreases the amount of interest expense.
B. Decreases the face amount of bonds payable.
C. Increases the carrying amount of bonds payable.
D. Decreases the carrying amount of bonds payable. FA 2 © 2014
45. How would the amortization of discount on bonds payable affect each of the following?
Wiley 2011 A. B. C. D.
Carrying amount of bond Increase Increase Decrease Decrease
Net income Increase Decrease Increase Decrease
Amortization of bond premium

46. How would the amortization of premium on bonds payable affect each of the following?
Wiley 2011 A. B. C. D.
Carrying amount of bond Increase Increase Decrease Decrease
Net income Increase Decrease Increase Decrease
Accounting error
47. At the beginning of the current year, an entity issued bonds at a discount. The entity
incorrectly used the straight-line method instead of the effective interest method to amortize
the discount. What is the effect of the error on the following amounts at the current year-end?
[2]
AICPA 0591 A. B. C. D.
Bond carrying Overstated Overstated Understated Understated
amount
Retained earnings Overstated Understated Overstated Understated
48. When an entity failed to recognize amortization of discount on bond payable for the current
year, what is the effect of the error on liabilities and equity, respectively?
A. Overstated and Overstated C. Understated and Overstated FA 2 © 2014
B. Overstated and Understated D. Understated and Understated
49. 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?
FA 2 © 2014 A. B. C. D.
Interest expense Overstated Overstated Understated Understated
Bond carrying amount Overstated Understated Overstated Understated

Bonds Payable
50. 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?
S&S 6e A. B. C. D.
Interest expense Overstated Overstated Understated Understated
Bond carrying amount Overstated Understated Overstated Understated
51. On January 1, 2013, an entity issued bonds at a discount. The bonds mature on December
31, 2017. The entity incorrectly used the straight-line method instead of the effective interest
method to amortize the discount. How is carrying amount of the bonds affected by the error?
AICPA 0595 A. B. C. D.
December 31, 2013 Overstated Overstated Understated Understated
December 31, 2017 Understated No effect Overstated No effect
Presentation & disclosure

52. Bond issue costs should be
A. Expensed in the period when incurred.
B. Deferred and amortized over the life of the bonds.
C. Expensed in the period when the bonds are retired.
D. Recorded as a reduction in the carrying amount of bonds payable. FA 2 © 2014
53. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight
premium shall be
A. Capitalized as organization cost
B. Expensed in the year in which incurred
C. Charged to retained earnings when the bonds are issued Valix 12
D. Reported as a deduction from bonds payable and amortized over the ten-year bond term
54. Unamortized debt discount should be reported as

A. Deferred charge
B. Part of the bond issue cost
C. Direct deduction from the face value of the debt
D. Direct deduction from the present value of the debt FA 2 © 2014
55. The carrying amount of a bond liability is the

A. Call price of the bond plus bond discount or minus bond premium.
B. Face amount of the bond plus related discount or minus related premium.
C. Face amount of the bond plus related premium or minus related discount.
D. Maturity value of the bond plus related discount or minus related premium. FA 2 © 2014

56. The issuer of a 10-year bond sold at par three years ago with interest payable February 1
and August 1 should report in the year-end statement financial position
A. An addition to bonds payable C. Increase in deferred charge
B. Contingent liability D. Liability for accrued interest FA 2 © 2014
Journal entries
57. If bonds are issued between interest dates, the entry of the issuer could include a
A. Debit to interest payable C. Credit to interest receivable
B. Credit to interest expense D. Credit to unearned interest FA 2 © 2014

MCQ – Theory: Compound Financial Instrument

Basic concepts
58. It is any contract that gives rise to both a financial asset of one entity and a financial liability
or equity instrument of another entity.
A. Debt instrument C. Equity instrument
B. Derivative instrument D. Financial instrument FA2 © 2014
59. Which of the following is not classified as a financial instrument?

A. Convertible bond C. Loan receivable
B. Foreign currency contract D. Warranty provision FA2 © 2014
60. A financial liability is a contractual obligation

I. To deliver cash or other financial asset to another entity.
II. To exchange financial instruments with another entity under conditions that are
potentially unfavorable.
B. II only D. Neither I nor II FA2 © 2014
61. Which of the following should be considered a financial liability?

A. A constructive obligation C. Deferred revenue FA2 © 2014
B. A warranty obligation D. Redeemable preference share
62. Financial liabilities include all of the following, except

A. Bonds payable C. Notes payable
B. Income taxes payable D. Trade accounts payable FA2 © 2014
63. It is any contract that evidences residual interest in the assets of an entity after deducting all
of its liabilities.
A. Debt instrument
B. Loan receivable
C. Equity instrument
D. Financial asset with indeterminable fair value FA2 © 2014
64. Equity instruments include all of the following, except

A. Ordinary shares
B. Preference shares
C. Corporate bonds and other debt instruments issued by the entity.
D. Warrants or options that allow the holder to purchase a fixed number of ordinary shares
of the issuing entity in exchange for a fixed amount of cash. FA2 © 2014
MCQ – Theory: Compound Financial Instrument Page 21

Compound financial instrument

65. A bond or similar instrument convertible by the holder into a fixed number of ordinary shares
of the entity is
A. A compound financial instrument C. A primary financial instrument
B. A derivative financial instrument D. An equity instrument FA2 © 2014
66. What is the principal accounting for a compound financial instrument?

A. The issuer shall classify a compound instrument as a liability in its entirety, until
converted into equity.
B. The issuer shall classify the liability and equity components of a compound instrument
separately as financial liability or equity instrument.
C. The issuer shall classify a compound instrument as either liability or equity based on
evaluation of the predominant characteristics of the contractual arrangement.
D. The issuer shall classify a compound instrument as a liability in its entirety, until
converted into equity, unless the equity component is detachable and separately
transferable, in which case the liability and equity components shall be presented
separately. FA2 © 2014
67. How are the proceeds from issuing a compound financial 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. 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.
D. 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 value. FA2 © 2014
Convertible bonds
68. Convertible bonds
A. Are usually secured by a mortgage.
B. May be exchanged for equity shares.
C. Have priority over other indebtedness.
D. Pay interest only in the event earnings are sufficient. KW&W 1e

69. Convertible bonds

A. Allow an entity to issue debt financing at lower rate.
B. Are separated into their components based on relative fair value.
C. Are separated into the liability component and the expense component.
D. All of the choices are correct. FA2 © 2014
70. When an entity issued bonds payable that can be converted into ordinary shares, what will
be the effect on liabilities and equity?
Valix 2012 A. B. C. D.
Liabilities Increase Increase No effect Decrease
Equity No effect Increase Increase Increase
71. The conversion of bonds is usually recorded by
A. Carrying amount method C. Incremental method
B. Fair value method D. Proportional method FA2 © 2014
72. When an entity issued convertible bonds, how will share premium be computed if 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 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
conversion privilege and the total par or stated value of the shares issued. Valix 2012
73. Bondholders exchanged their convertible bonds for ordinary shares. The carrying amount of
these bonds was lower than market value but greater than the par value of the ordinary
shares issued. If the book value or carrying amount method is used, which of the following
correctly states an effect of the conversion?
A. A loss is recognized. C. Share premium is decreased. Valix 2012
B. Retained earnings account increased. D. Shareholders' equity is increased.
74. When convertible bond is not converted but paid at maturity

A. The amount allocated to equity is recorded as a gain.
B. The amount allocated to equity is recorded as a loss.
C. The carrying amount of the bond equal to face value is derecognized.
D. A gain or loss is recorded for the difference between the carrying amount of the bond
and the present value of the cash flows. FA2 © 2014

Bonds with share warrants

75. The major difference between convertible bonds and bonds issued with share warrants is
that upon exercise of the warrants
A. The shares involved are restricted.
B. No share premium can be part of the transaction.
C. The holder has to pay a certain amount to obtain the shares.
D. The shares are held by the issuer for a certain period before they are issued to the
warrant holder. FA2 © 2014
76. The proceeds from a bond issued with share warrants shall be accounted for as
A. Entirely bonds payable
B. Entirely shareholders' equity
C. Partly bonds payable and partly unearned revenue
D. Partly bonds payable and partly shareholders' equity FA2 © 2014
77. When bonds are issued with share warrants, a portion of the proceeds should be allocated
to equity when the bonds are issued with
I. Detachable share warrants
II. Nondetachable share warrants
B. II only D. Neither I nor II Valix 2012
78. When bonds are issued with share warrants, the equity component is equal to
A. Zero
B. The market value of the share warrants.
C. The excess of the proceeds over the face value of the bonds. FA2 © 2014
D. The excess of the proceeds over the fair value of the bonds without the share warrants.
79. When the cash proceeds from bonds issued with share warrants exceed the fair value of the
bonds without the warrants, the excess should be credited to
A. Liability account C. Share premium - ordinary FA2 © 2014
B. Retained earnings D. Share premium - share warrants
80. The proceeds from an issue of bonds with share warrants should not be allocated between
the liability and equity components when
A. The warrants issued are nondetachable.
B. The fair value of the warrants is not readily available.
C. The exercise of the warrants within the next reporting period seems remote.
D. The proceeds should be allocated between liability and equity under all of these
circumstances. KW&W 1e

81. The proceeds from bonds issued with nondetachable share warrants shall be accounted for
A. Entirely as bonds payable
B. Entirely as shareholders' equity
C. Partly us unearned revenue and partly as bonds payable
D. Partly as bonds payable and partly as shareholders' equity Valix 2012
82. An entity issued bonds payable with non-detachable share warrants. In computing interest
expense for the first year, the effective interest rate is multiplied by the
A. Face value of the bonds
B. Share warrants outstanding
C. Fair value of the bonds ex-warrant
D. Proceeds received from sale of the bonds Valix 2012
83. When an entity issued bonds payable with detachable share warrants, how will share
premium be computed if the warrants are exercised by the bondholders?
A. It is the balance of the share warrants outstanding.
B. It is the sum of the share warrants outstanding and total par or stated value of the shares
issued.
C. It is the difference between the proceeds received based on the exercise price and the
total par or stated value of the shares issued. Valix 2012
D. It is the difference between the proceeds received based on the exercise price plus the
share warrants outstanding and the total par or stated value of the shares issued.

MCQ – Problems: Bonds Payable

Time Value of Money
3. A cash flow of P2,000,000 may be received by Marvin Company in one year, two years, or
three years, with probabilities of 20%, 50%, and 30%, respectively. The rate of interest on
default risk-free investments is 5%. The present value factors are:
PV of 1 at 5% for 1 year .952
PV of 1 at 5% for 2 years .907
PV of 1 at 5% for 3 years .864
What is the expected present value of the cash flow?
A. 1,728,000 C. 1,814,000
B. 1,806,200 D. 1,904,000 FA 2 © 2014
Types of bonds
4. Glen Company had the following long-term debt:
Sinking fund bonds, maturing in installments 1,100,000
Industrial revenue bonds, maturing in installments 900,000
Subordinated bonds, maturing on a single date 1,500,000
What is the total amount of serial bonds?
A. 1,500,000 C. 2,400,000
B. 2,000,000 D. 3,500,000 FA 2 © 2014
5. Blue Company reported the following financial liabilities on December 31, 2014:
9% debentures, callable in 2015, due in 2016 3,500,000
11% collateral trust bonds, convertible into share
capital beginning in 2015, due in 2016 3,000,000
10% debentures (P300.000 maturing annually) 1,500,000
What is the total amount of term bonds?
A. 3,000,000 C. 5,000,000
B. 3,500,000 D. 6,500,000 FA 2 © 2014
6. Zola Company had the following long-term debt:

Bonds maturing in installments, secured by machinery 1,000,000
Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000
What is the total amount of debenture bonds?
A. 0 C. 1,800,000
B. 1,000,000 D. 2,000,000 FA 2 © 2014
MCQ – Problems: Bonds Payable Page 26

Bonds Payable
7. Hancock Company reported the following noncurrent liabilities on December 31, 2014:
Unsecured
9% registered bonds (P250,000 maturing annually beginning in 2015) 2,750,000
11% convertible bonds, callable beginning in 2015, due 2016 1,250,000
Secured
12% guaranty security bonds, due 2016 2,500,000
10% commodity backed bonds (P500,000 maturing
annually beginning in 2015) 2,000,000
What total amount of serial bonds and debenture bonds should be reported?
A. B. C. D.
Serial bonds 2,000,000 4,500,000 4,750,000 4,750,000
Debenture bonds 6,500,000 4,000,000 1,250,000 4,000,000
Effective interest rate
8. On January 1, 2014, Rizal Company issued 4-year bonds with face value of P4,000,000 at
P4,395,800. The 12% stated rate is payable semiannually every June 30 and December 31.
In addition, the entity paid P137,430 in connection with the issuance of the bonds. What is
the effective rate of interest on the bonds on the date of issue?
A. 9% C. 11%
B. 10% D. 12% FA 2 © 2014
Bond issue cost
9. During the current year, Cain Company incurred the following costs in connection with the
issuance of bonds:
Promotion cost 200,000
Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration information 100,000
Commissions paid to underwriter 900,000
What total amount should be recorded as bond issue cost to be amortized over the term of
the bonds?
A. 1,800,000 C. 2,000,000
B. 1,950,000 D. 2,150,000 FA 2 © 2014
Bond premium
10. Aye Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2014
with interest payments on June 30 and December 31. When the bonds are issued on
November 1, 2014, the entity received cash of P5,150,000 including accrued interest. What
is the discount or premium from the issuance of the bonds?
A. 50,000 bond premium C. 150,000 bond premium FA 2 © 2014
B. 150,000 bond discount D. No bond premium and discount

Issue Price
11. White Company issued P2,000,000 face value of 10-year bonds on January 1. The bonds
pay interest on January 1 and July 1 and had a stated rate of 10%. If the market rate of
interest is 8%, what is the issue price of the bonds?
A. 2,113,000 C. 2,262,000
B. 2,159,000 D. 2,279,000 FA 2 © 2014
12. On January 1, 2013, Colt Company issued ten-year bonds with a face amount of P5,000,000
and a stated interest rate of 8% payable annually on January 1. The bonds were priced to
yield 10%.
PV of 1 for 10 periods at 10% 0.3855
PV of an ordinary annuity of 1 for 10 periods at 10% 6.145
What is the issue price of the bonds?
A. 1,927,500 C. 5,000,000
B. 4,385,500 D. 5,614,500 FA 2 © 2014
13. Margaret Company provided the following information in relation to the issuance of bonds on
July 1, 2013.
Face amount P800,000
Term Ten years
Stated interest rate 6%
Interest payment date Annually on July 1
Yield 9%
At 6% At 9%
Present value of 1 for 10 periods 0.558 0.422
Future value of 1 for 10 periods 1.791 2.367
Present value of an ordinary annuity of 1 for 10 periods 7.360 6.418
What is the issue price for each P1,000 bond?
A. 700 C. 864
B. 807 D. 1,000 FA 2 © 2014
Proceeds
14. On October 1, 2014, Shane Company issued 5,000 of the PI,000 face value 12% bonds at
110. The bonds which mature on January 1, 2019, pay interest semiannually on January 1
and July 1. The entity paid bond issue cost of P200,000. How much cash was received from
the issuance of the bonds?
A. 5,300,000 C. 5,550,000
B. 5,450,000 D. 5,650,000 FA 2 © 2014

Bonds Payable
15. On April 1, 2014, Greg Company issued, at 99 plus accrued interest, 4,000 of 8% P1,000
bonds. The bonds are dated January 1, 2014, mature on January 1/2024, and pay interest
on January 1 and July 1. The entity paid bond issue cost of P140,0Q0. How much cash was
received from the bond issuance?
A. 3,820,000 C. 3,960,000
B. 3,900,000 D. 4,040,000 FA 2 © 2014
16. On March 1, 2014, Cain Company issued at 103 plus accrued interest 4,000 of 9%, Pl,000
face value bonds. The bonds are dated January 1, 2014 and mature on January 1, 2024.
Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of
P200,000. How much cash was received from the bond issuance?
A. 3,980,000 C. 4,180,000
B. 4,120,000 D. 4,320,000 FA 2 © 2014
Initial measurement
17. On January 1, 2013, Borg Company issued 4,000 of 8% P2,000 face value bonds at 97 plus
accrued interest. The bonds are dated October 1, 2012 and mature on October 1, 2022.
Interest is payable semiannually on April 1 and October 1. Accrued interest for the period
October 1,2012 to January 1, 2013 amounted to P160,000. On January 1, 2013, what is the
carrying amount of bonds payable?
A. 7,606,000 C. 7,766,000
B. 7,760,000 D. 7,840,000 P1 © 2013
18. On June 30, 2014, Huff Company issued at 99, four thousand of 8% P1,000 bonds. The
bonds were issued through an underwriter to whom the entity paid bond issue cost of
P340,000. On June 30, 2014, what is the carrying amount of the bonds payable?
A. 3,620,000 C. 3,960,000
B. 3,820,000 D. 4,000,000 FA 2 © 2014
19. On June 30, 2013, Huff Company issued at 99, five thousand of 8%, P1,000 face value
bonds. The bonds were issued through an underwriter to whom the entity paid bond issue
cost of P425,000. On June 30, 2013, what amount should be reported as bond liability?
A. 4,525,000 C. 4,950,000
B. 4,575,000 D. 5,000,000 P1 © 2013
20. On July 1, 2014, Carol Company issued at 104, five thousand of 10% PI,000 bonds. The
bonds were issued through an underwriter to whom the entity paid bond issue cost of
P125,000. On July 1, 2014, what is the carrying amount of the bonds payable?
A. 4,875,000 C. 5,200,000
B. 5,075,000 D. 5,325,000 FA 2 © 2014

Interest payable
21. On November 1, 2014, Mason Company issued P4,000,000 of 10-year, 8% term bonds dated
October 1, 2014. The bonds were sold to yield 10% with total proceeds of P3,500,000 plus
accrued interest. Interest is paid every April 1 and October 1. What amount should be
reported as accrued interest payable on December 31, 2014?
A. 53,333 C. 87,500
B. 80,000 D. 100,000 FA 2 © 2014
22. On January 31, 2014, Beau Company issued P3,000,000 maturity value, 12% bonds for
P3,000,000 cash. The bonds are dated December 31, 2013, and mature on December 31,
2023. Interest will be paid semiannually on June 30 and December 31. What amount of
accrued interest payable should be reported on September 30, 2014?
A. 90,000 C. 240,000
B. 180,000 D. 270,000 FA 2 © 2014
Effective interest method – Term Bonds

23. On July 1,2013, Tara Company issued 4,000 of 8%, PI,000 face value bonds payable for
P3,504,000. The bonds were.issued to yield 10%. The bonds are dated July 1,2013 and
mature on July 1, 2023. Interest is payable semiannually on January 1 and July 1. Using the
effective interest method, what amount of the bond discount should be amortized for the six
months ended December 31,2013?
A. 15,200 C. 24,800
B. 19,840 D. 30,400 FA 2 © 2014
24. On January 1, 2014, Ward Company issued 9% bonds in face amount of P4,000,000, which
mature on January 1, 2024. The bonds were issued for P3,756,000 to yield 10%, resulting in
bond discount of P244,000. The entity used the interest method of amortizing bond discount.
Interest is payable annually on December 31. On December 31, 2014, what is the balance of
the unamortized bond discount?
A. 204,000 C. 208,000
B. 206,440 D. 228,400 FA 2 © 2014
25. On January 1, 2014, Wolf Company issued 10% bonds in the face amount of P5,000,000,
which mature on January 1, 2024. The bonds were issued for P5,675,000 to yield 8%,
resulting in bond premium of P675,000. The entity used the interest method of amortizing
bond premium. Interest is payable annually on December 31. On December 31, 2014, what
is the balance of the unamortized bond premium?
A. 507,500 C. 629,000
B. 607,500 D. 675,000 FA 2 © 2014

Bonds Payable
26. On January 1, 2013, Carrow Company issued 10% bonds in the face amount of P1,000,000
that mature on January 1, 2023. The bonds were issued for P886,000 to yield 12%, resulting
in bond discount of P114,000. The entity used the interest method of amortizing bond
discount. Interest is payable on January 1 and July.
For the year ended December 31,2013, what amount should be reported as bond interest
expense?
A. 50,000 C. 100,000
B. 53,160 D. 106,510 P1 © 2013
27. On January 1, 2014, Moon Company issued 10% bonds payable in the face amount of
P4,500,000. The bonds mature on January 1, 2024. The bonds were issued for P3,987,000
to yield 12%, resulting in bond discount of P513,000. The entity used the effective interest
method of amortizing bond discount. Interest is payable semiannually on January 1 and July
1. For the six months ended June 30, 2014, what amount should be reported as bond interest
expense?
A. 225,000 C. 250,650
B. 239,220 D. 255,780 FA 2 © 2014
28. On January 1, 2014, Marsh Company issued 10% bonds payable in the face amount of
P6,000,000. The bonds mature on January 1, 2024. The bonds were issued for P5,316,000
to yield 12%, resulting in bond discount of P684,000. The entity used the effective interest
method of amortizing bond discount. Interest is payable semiannually on January 1 and July
1. For the six months ended June 30, 2014, what amount should be reported as bond interest
expense?
A. 300,000 C. 334,200
B. 318,960 D. 341,040 FA 2 © 2014
29. On January 1, 2014, Carol Company issued 10% bonds in the face amount of P5,000,000
that mature on January 1, 2020. The bonds were issued for P4,580,000 to yield 12%,
resulting in bond discount of P420,000. The entity used the interest method. Interest is
payable semiannually on January 1 and July 1. What amount should be reported as interest
expense for 2014?
A. 274,800 C. 549,600
B. 500,000 D. 551,088 FA 2 © 2014
30. On January 1, 2013, Taguig Company issued 3-year bonds with face value of P5,000,000 at
99. The nominal rate is 10% and the interest is payable annually on December 31.
Additionally, the entity paid bond issue cost of P150,000. What is the interest expense for
2013 using the effective interest method?
A. 528,000 C. 559,680
B. 550,000 D. 576,000 P1 © 2013

31. On January 1, 2014, Taguig Company issued 3-year bonds with face value of P5,000,000 at
99. The nominal rate is 10% and the interest is payable annually on December 31. The entity
paid bond issue cost of P150,000.
The PV of 1 at 11% for 3 periods is .7312, and the PV of an ordinary annuity of 1 at 11% for
3 periods is 2.4437. The present value of the bonds using 11% is:
PV of principal (5,000,000 x .7312) 3,656,000
PV of annual interest payments (500,000 x 2.4437) 1,221,850
Total present value of bonds 4,877,850
PV of principal (5,000,000 x .7118) 3,559,000
What is the interest expense for 2014 using the effective interest method?
A. 528,000 C. 559,680
B. 550,000 D. 576,000 FA 2 © 2014
32. Webb Company has outstanding 7%, 10-year P5,000,000 face value bond. The bond was
originally sold to yield 6% annual interest. The entity used the effective interest method to
amortize bond premium. On January 1, 2014, the carrying amount of the outstanding bond
was P5,250,000. What amount of premium on bond payable should be reported on
December 31, 2014?
A. 52,500 C. 215,000
B. 172,500 D. 225,000 FA 2 © 2014
33. On January 1,2013, Wolf Company issued 10% bonds in the face amount of P5,000,000,
which mature on January 1,2023. The bonds were issued for P5,675,000 to yield 8%,
resulting in bond premium of P675,000. The entity used the interest method of amortizing
bond premium. Interest is payable annually on December 31. On December 31, 2013, what
is the adjusted unamortized bond premium?
A. 507,500 C. 629,000
B. 607,500 D. 675,000 P1 © 2013
34. On January 1, 2013, Ward Company issued 9% bonds in face amount of P4.000.000, which
mature on January 1,2023. The bonds | were issued for P3.756,000 to yield 10%, resulting
in bond discount of P244,000. The entity used the interest method of amortizing bond
discount. Interest is payable annually on December 31. On December 31,2013, what is the
unamortized bond discount?
A. 204,000 C. 208,000
B. 206,440 D. 228,400 P1 © 2013

Bonds Payable
35. On January 1, 2014, West Company issued 9% bonds in the amount of P5,000,000, which
mature on January 1, 2024. The bonds were issued for P4,695,000 to yield 10%. Interest is
payable annually on December 31. The entity used the interest method. What is the carrying
amount of the bonds payable on June 30, 2014?
A. 4,695,000 C. 4,710,250
B. 4,704,750 D. 5,000,000 FA 2 © 2014
36. On January 1, 2013, West Company issued 9% bonds in the face amount of P5,000,000,
which mature on January 1, 2023. The bonds were issued for P4,695,000 to yield 10%.
Interest is payable annually on December 31. The entity used the interest method of
amortizing bond discount. On December 31, 2013, what is the carrying amount of the bonds
payable?
A. 4,695,000 C. 4,714,500
B. 4,704,750 D. 5,000,000 P1 © 2013
37. On January 1, 2014, Luyang Company issued 3-year bonds with face value of P5,000,000 at
98. Additionally, the entity paid bond issue cost of P140,000. The nominal rate is 10% and
the effective rate after considering the bond issue cost is 12%. The interest is payable
annually on December 31. The entity used the effective interest method. What is the carrying
amount of the bonds payable on December 31, 2014?
A. 4,831,200 C. 4,848,000
B. 4,840,000 D. 5,000,000 FA 2 © 2014
38. On January 1, 2014, Masbate Company issued 5-year bonds with face value of P5,000,000
at 110. The entity paid bond issue cost of P80,000 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 after considering the bond issue cost. The entity used the effective interest method of
amortization.
On December 31, 2014, what is the carrying amount of the bonds payable?
A. 5,000,000 C. 5,400,000
B. 5,345,200 D. 5,430,000 FA 2 © 2014
39. On January 1, 2014, Bontoc Company issued P5,000,000, 8% serial bonds to be repaid in
the amount of Pi,000,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. The bond proceeds were P4,757,000 based on the present
value at January 1, 2014 of five annual payments. The entity amortized the bond discount by
the interest method.
In the December 31, 2014 statement of financial position, what is the carrying amount of the
bonds payable?
A. 3,805,600 C. 4,805,600
B. 3,832,700 D. 4,832,700 FA 2 © 2014

Effective Interest Method – Serial Bonds

40. On January 1,2013, Samal Company issued P5,000,000, 8% serial bonds, to be repaid in
the amount of P1,000,000 each year. Interest is payable annually on December 31. The
bonds were issued to yield 10% a year. The bond proceeds were P4,757,000 based on the
present value at January 1,2013 of five annual payments. The entity amortized the bond
discount by the interest method. On December 31, 2013, what is the carrying amount of the
bonds payable?
A. 3,805,600 C. 4,805,600
B. 3,832,700 D. 4,832,700 P1 © 2013
41. On January 1,2013, Dome Company issued P4,000,000, 8% serial bonds, to be repaid in the
amount of P800,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. The entity amortized the bond discount by the interest
method. The bond proceeds totaled P3,805,600 based on the present value on January
1,2013 of five annual payments as follows:
Due date Principal Interest PV at 1/1/2013

12/31/2013 800,000 320,000 1,018,000
12/31/2014 800,000 256,000 872,200
12/31/2015 800,000 192,000 745,000
12/31/2016 800,000 128,000 633,800
12/31/2017 800,000 64,000 536,600
On December 31,2013, what is the carrying amount of the bonds payable?

A. 2,787,600 C. 3,005,600
B. 2,982,000 D. 3,066,160 P1 © 2013
Fair value option

42. On January 1, 2014, Carmina Company received P5,385,000 for a P5,000,000 face amount
12% bond, a price that yields 10%. The bond pays interest semiannually. The entity elected
the fair value option. On December 31, 2014, the fair value of the bond is determined to he
P5,125,000. The entity recognized interest expense of P600,000 in 2014. What is the gain or
loss that should be recognized in 2014 to report this bond at fair value?
A. 260,000 gain C. 340,000 loss
B. 260,000 loss D. 600,000 loss FA 2 © 2014

Bonds Payable
43. On January 1, 2014, Mariel Company issued bonds payable with face amount of P8,000,000
and 10% stated interest rate at 95. The bonds have a 5-year term and interest is payable
annually every December 31. The entity elected the fair value option. On December 31, 2014,
the fair value of the bonds is 105. It is reliably determined that the fair value increase
comprised P 150,000 attributable to credit risk and the remainder attributable to change in
the market interest rate. What amount of gain or loss should be recognized in profit or loss
for 2014 to conform with the fair value option?
A. 650,000 gain C. 800,000 gain
B. 650,000 loss D. 800,000 loss FA 2 © 2014
Gain (loss) on early extinguishment of debt

44. On June 30, 2014, King Company had outstanding 9%, P5,000,000 face value bonds
maturing on June 30, 2019. Interest is payable semiannually every June 30 and December
31. On June 30, 2014, after amortization was recorded for the period, the unamortized bond
premium and bond issue cost were P30,000 and P50,000, respectively. On that date, the
entity acquired all outstanding bonds on the open market at 98 and retired them. On June
30, 2014, what amount should be recognized as gain before tax on redemption of bonds?
A. 20,000 C. 120,000
B. 80,000 D. 180,000 FA 2 © 2014
45. In the December 31, 2013 statement of financial position, Nilo Company reported bonds
payable of P8,000,000 and related unamortized bond issue cost of P430,000. The bonds had
been issued at par. On January 1, 2014, the entity retired P4,000,000 of the outstanding
bonds at par plus a call premium of P 100,000. What amount should be reported in the 2014
income statement as loss on early extinguishment of debt?
A. 0 C. 215,000
B. 100,000 D. 315,000 FA 2 © 2014
46. On January 1, 2015, Harlet Company redeemed the 15-year bonds of P5,000,000 par value
for 102. The bonds were originally issued on January 1, 2002 at 98 with a maturity date of
January 1, 2017. The bond issue cost relating to this transaction was P200,000. The entity
amortized discounts, premiums and bond issue cost using the straight line method. What
amount of loss should be recognized on the redemption of the bonds payable?
A. 0 C. 120,000
B. 100,000 D. 160,000 FA 2 © 2014

47. Marie Company reported the following balances on December 31, 2014:
Interest payable 200,000
The bonds are retired on January 1, 2015 for P8,160,000 excluding interest. What amount
should be reported as gain or loss on redemption?
A. 600,000 gain C. 800,000 gain
B. 600,000 loss D. 800,000 loss FA 2 © 2014
48. Moon Company reported on December 31, 2013 9% bonds payable of P4,000,000 less
unamortized discount of P320,000. These bonds were issued to yield 10%. The effective
interest method is used. Semiannual interest was paid on January 1 and July 1 of each year.
On July 1, 2014, the entity retired the bonds at 103 before maturity. What is the loss on
retirement of the bonds payable on July T, 2014?
A. 120,000 C. 436,000
B. 432,000 D. 440,000 FA 2 © 2014
49. Bohol Company reported on December 31, 2014 9% bonds payable due December 31, 2020
with a carrying amount of P15,405,000. The bonds were issued on December 31, 2010 and
have a face amount of P15,000,000 with interest payable semiannually on June 30 and
December 31. On January 1, 2015, the entity retired P5,000,000 of these bonds at 98. What
amount should be reported in the 2015 income statement as gain or loss on the retirement
of the bonds?
A. 100,000 gain C. 235,000 gain
B. 100,000 loss D. 235,000 loss FA 2 © 2014
50. In order to finance a planned expansion, Verna Company issued 10% P5,000,000 face value
bonds for P5,300,000 plus accrued interest on December 1, 2011. Interest is payable
November 1 and May 1. On December 31, 2013, the carrying amount of the bonds payable
was reported at P5,150,000. The straight line amortization method is used. On September 1,
2014, the entity decided to reacquire the bonds at face value plus accrued interest. What
amount should be recorded as gain or loss on the extinguishment of debt?
A. 102,000 gain C. 198,000 gain
B. 102,000 loss D. 198,000 loss FA 2 © 2014
51. On December 31, 2013, Marie Company reported bonds payable of P4,800,000 and accrued
interest payable of P300,000. The face amount of the bonds payable is P5,000,000. The
bonds are retired on January 1, 2014 at 88 excluding accrued interest. What amount should
be reported as gain or loss on extinguishment?
A. 400,000 gain C. 700,000 gain
B. 400,000 loss D. 700,000 loss FA 2 © 2014

Bonds Payable
52. Nixon Company reported 10% bonds payable with carrying amount of P5,700,000 on
December 31, 2013. The bonds had a face amount of P6,000,000 and were issued to yield
12%. The interest method of amortization is used. Interest was paid on January 1 and July 1
of each year. On July 1, 2014, the entity retired the bonds at 102. The interest payment on
July 1, 2014 was made as scheduled. What amount should be recorded as loss on the early
extinguishment of the bonds?
A. 120,000 C. 378,000
B. 336,000 D. 462,000 FA 2 © 2014
Comprehensive
Questions 53 & 54 are based on the following information. FA 2 © 2014
On January 1, 2014, Davao Company issued 6% bonds with face amount of P4,000,000 for net
proceeds of P3,677,600, a price that yields 8%. Interest is payable annually every December 31.
The entity elected the fair value option. On December 31, 2014, the bonds are quoted at 95.
53. What amount should be reported as interest expense for 2014?

A. 120,000 C. 240,000
B. 220,656 D. 294,208
54. What amount should be reported as gain or loss from change in fair value for 2014?
A. 122,400 gain C. 322,400 gain
B. 122,400 loss D. 322,400 loss
Questions 55 thru 58 are based on the following information. FA 2 © 2014

On January 1, 2014, Trisha Company received P1,077,200 for Pl.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 valuing financial liabilities. On December 31, 2014,
the fair value of the bonds is PI,064,600. The change in fair value of the bonds is attributable to
market factors.
55. What is the carrying amount of the bonds payable on January 1, 2014?
A. 500,000 C. 1,000,000
B. 538,600 D. 1,077,200
56. What is the interest expense for 2014?

A. 100,000 C. 120,000
B. 107,720 D. 129,264

57. What is the gain or loss from change in fair value of the bonds payable for 2014?
A. 12,600 gain C. 64,600 gain
B. 12,600 loss D. 64,600 loss
58. What is the carrying amount of the bonds payable on December 31, 2014?
A. 1,000,000 C. 1,064,920
B. 1,064,600 D. 1,077,200
MCQ – Problems: Compound Financial Instrument

Bonds with Warrants
59. On March 1, 2014, Fence Company issued 12% P5,000,000 nonconvertible bonds at 103
which are due on February 28, 2019. In addition, each P1,000 bond was issued 30 share
warrants, each of which entitled the bondholder to purchase for P50 one share of Fence
Company, par value P25. Interest is payable annually every February 28. On March 1, 2014,
the market value of the share was P40 and the market value of the warrant was P4. The
market rate of interest for similar bonds ex-warrants is 14%. The present value of 1 at 14%
for 5 periods is 0.52 and the present value of an ordinary annuity of 1 at 14% for 5 periods is
3.43.
What amount should be recognized on March 1, 2014 as discount or premium on the
issuance of the bonds?
A. 342,000 discount C. 450,000 discount
B. 342,000 premium D. 450,000 premium FA2 © 2014
60. On December 31, 2013, Moses Company issued P5,000,000 face value, 5-year bonds at
109. Each P 1,000 bond was issued with 50 detachable share warrants, each of which entitled
the bondholder to purchase one ordinary share of P5 par value at P25. Immediately after
issuance, the market value of each warrant was P5. The stated interest rate on the bonds is
11% payable annually every December 31.
However, the prevailing market rate of interest for similar bonds without warrants is 12%. The
present value of 1 at 12% for 5 periods is 0.57 and the present value of an ordinary annuity
of 1 at 12% for 5 periods is 3.60. On December 31, 2013, what amount should be recorded
as discount or premium on bonds payable?
A. 170,000 discount C. 450,000 premium
B. 450,000 discount D. 800,000 discount P1 © 2013
MCQ – Problems: Compound Financial Instrument Page 38

Convertible Preference Shares

61. At the beginning of the current year, Ria Company issued 10,000 ordinary shares of P20 par
value and 20,000 convertible preference shares of P20 par value for a total of P800,000. At
this date, the ordinary share was selling for P36, and the convertible preference share was
selling for P27. What amount of the proceeds should be allocated to the convertible
preference shares?
A. 440,000 C. 540,000
B. 480,000 D. 600,000 P1 © 2013
62. In 2012, Hyatt Company issued for P110 per share, 15,000 convertible preference shares of
P100 par value. One preference share may be converted into three ordinary shares of P25
par value at the option of the preference shareholder. On December 31,2013, all of the
preference shares were converted into ordinary shares. The market value of the ordinary
share at the conversion date was P40. What amount should be credited to ordinary share
capital on December 31, 2013?
A. 1,125,000 C. 1,650,000
B. 1,500,000 D. 1,800,000 P1 © 2013
63. During 2013, Brad Company issued 5,000 convertible preference shares of P100 par value
for P110 per share. One preference share can be converted into three ordinary shares of P25
par value at the option of the preference shareholder. On December 31,2013, when the
market value of the ordinary share was P40, all of the preference shares were converted.
What amount should be credited to ordinary share capital and share premium as a result of
the conversion, respectively?
A. 375,000 and 175,000 C. 500,000 and 50,000
B. 375,000 and 225,000 D. 600,000 and 0 P1 © 2013
64. In 2013, Orlando Company issued for P105 per share, 8,000 convertible preference shares
of P100 par value. One preference share can be converted into three ordinary shares of P25
par value at the option of the preference shareholder. In August 2013, all of the preference
shares were converted into ordinary shares. The market value of the ordinary share at the
date of the conversion was P30. What total amount should be credited to share premium as
a result of the issuance of the preference shares and their subsequent conversion into
ordinary shares?
A. 80,000 C. 200,000
B. 120,000 D. 240,000 P1 © 2013

Convertible Bonds - Issuance

65. Moriones Company issued P5,000,000 face value 12% convertible bonds at 110 on January
1, 2013, maturing on January 1,2018 and paying interest semiannually on January 1 and July
1. It is estimated that the bonds would sell only at 103 without the conversion feature. Each
P 1,000 bond is convertible into 10 ordinary shares with PI00 par value. What is the increase
in shareholders' equity arising from the issuance of the convertible bonds on January 1,
2013?
A. 0 C. 350,000
B. 150,000 D. 500,000 P1 © 2013
66. On March 1, 2013, Case Company issued P5,000,000 of 12% nonconvertible bonds at 103
which are due on February 28,2018. In addition, each P1,000 bond was issued with 30
detachable share warrants, each of which entitled the bondholder to purchase, for P50, one
ordinary share of Case Company, par value P25. On March 1, 2013, the quoted market value
of each warrant was P4. The market value of the bonds ex-warrants at the time of issuance
is 95. What amount of the proceeds from the bond issue should be recognized as an increase
in shareholders' equity?
A. 200,000 C. 400,000
B. 300,000 D. 600,000 P1 © 2013
67. On December 31, 2014, Armada Company issued P5,000,000 face value, 5-ypar bonds at
109. Each P1,000 bond was issued with 10 share warrants, each of which entitled the
bondholder to purchase one share of P100 par value at P120. Immediately after issuance,
the market value of each warrant was P5. The stated interest rate on the bonds is 11%
payable annually every December 31. However, the prevailing market rate of interest for
similar bonds without warrants is 12%. The present value of 1 at 12% for 5 periods is 0.57
and the present value of an ordinary annuity of 1 at 12% for 5 periods is 3.60.
On December 31, 2014, what amount should be recorded as increase in shareholders' equity
as a result of the bond issuance?
A. 0 C. 440,000
B. 250,000 D. 620,000 FA2 © 2014
68. Susan Company issued 5,000 convertible bonds on January 1, 2014. The bonds have a
three-year term and are issued at 110 with a face value of Pi,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 P5. When the bonds are issued, the
prevailing market interest rate for similar debt instrument without conversion option is 9%.
The present value of 1 at 9% for 3 periods is .77 and the present value of an ordinary annuity
of 1 at 9% for 3 periods is 2.53.

What is the equity component of the issuance of the convertible bonds on January 1, 2014?
A. 391,000 C. 1,150,000
B. 891,000 D. 1,650,000 FA2 © 2014
69. On December 31, 2014, Green Company issued 2,000 convertible bonds with a nominal
interest rate of 7% at P2,000 each. Each bond can be converted into five equity shares or
redeemed for cash, at the option of the holder, in 5 years' time. The fair value at the date of
issuance of similar bonds without the convertibility option was estimated at PI,500 each. What
is the amount recognized in equity in respect of the issuance of convertible bonds on
December 31, 2014?
A. 0 C. 3,000,000
B. 1,000,000 D. 4,000,000 FA2 © 2014
70. Moriones Company issued P5,000,000 face value 12% convertible bonds at 110 on January
1, 2014, maturing on January 1, 2019 and paying interest semiannually on January 1 and
July 1. It is estimated that the bonds would sell only at 103 without the conversion feature.
Each PI,000 bond is convertible into 10 ordinary shares with P100 par value.
What is the increase in shareholders' equity arising from the issuance of the convertible
bonds on January 1, 2014?
A. 0 C. 350,000
B. 150,000 D. 500,000 FA2 © 2014
71. On December 30, 2014, Fort Company issued 5,000 of 8%, 10-year, P 1,000 face value
bonds with share warrants at 110. Each bond carried a warrant for one share of Fort
Company at a specified option price of P25 per share. Immediately after issuance, the market
value of the bonds without the warrants was P5,400,000 and the market value of the warrants
was P600,000.
In the December 31, 2014 statement of financial position, what should be reported as carrying
amount of bonds payable?
A. 4,400,000 C. 4,875,000
B. 4,500,000 D. 5,400,000 FA2 © 2014
72. On December 1, 2014, Lancaster Company issued at 103, five thousand of 9%, P1,000 face
value bonds. Attached to each bond was one share warrant entitling the holder to purchase
10 ordinary shares of the entity. On December 1, 2014, the fair value of the bonds without
the share warrants was 95, and the fair value of each share warrant was P50. What amount
of the proceeds from the bond issuance should be accounted for as the initial carrying amount
of the bonds payable?
A. 4,750,000 C. 5,000,000
B. 4,892,500 D. 5,150,000 FA2 © 2014

Convertible bonds - conversion

Ordinary share
73. In 2014, Hyatt Company issued for P110 per share, 15,000 convertible preference shares of
P100 par value. One preference share may be converted into three ordinary shares with P25
par value at the option of the preference shareholder. On December 31, 2015, all of the
preference shares were converted into ordinary shares. The market value of the ordinary
share at the conversion date was P40. What amount should be credited to ordinary share
capital on December 31, 2015?
A. 1,125,000 C. 1,650,000
B. 1,500,000 D. 1,800,000 FA 2 © 2014
Share premium
74. On December 31, 2013, Cey Company had outstanding 10%, P1,000,000 face amount
convertible bonds payable maturing on December 31,2016. Interest is payable on June 30
and December 31. Each P1,000 bond is convertible into 50 shares of P10 par value. On
December 31,2013, the unamortized premium on bonds payable was P60,000. On
December 31,2013,400 bonds were converted when Cey's share had a market price of P24.
The entity incurred P4,000 in connection with the conversion. No equity component was
recognized when the bonds were originally issued. What is the share premium from the
issuance of shares as a result of the bond conversion on December 31, 2013?
A. 176,000 C. 276,000
B. 220,000 D. 280,000 P1 © 2013
75. On December 31, 2014, Cey Company had outstanding 12%, P5,000,000 face amount
convertible bonds maturing on December 31, 2019. Interest is payable on June 30 and
December 31. Each Pi,000 bond is convertible into 50 shares of Cey Company with P10 par
value. On December 31, 2014, the unamortized balance in the premium on bonds payable
account was P300,000. No equity component was recognized from the original issuance of
the convertible bonds. On December 31, 2014, 2,000 bonds were converted when the share
had a market price of P24. The entity incurred P20,000 in connection with the conversion.
What is the share premium arising from the bond conversion?
A. 1,100,000 C. 1,380,000
B. 1,120,000 D. 1,400,000 FA2 © 2014
76. Spare Company had an outstanding share capital with par value of P50,000,000 and a 12%
convertible bond issue in the face amount of P10,000,000. Interest payment dates of the
bond issue are June 30 and December 31. The conversion clause in the bond indenture
entitled the bondholders to receive 40 shares of Spare Company with P20 par value in
exchange for each P1,000 bond. The holder of P5,000,000 face value bonds exercised the

conversion privilege at year-end. The market price of the bonds at year-end was PI, 100 per
bond and the market price of the share was P30. The total unamortized bond discount was
P500,000 and the share premium from conversion privilege has a balance of P2,000,000 at
the date of conversion. What amount of share premium should be recognized by reason of
the conversion of bonds payable into share capital?
A. 1,750,000 C. 2,750,000
B. 2,000,000 D. 3,000,000 FA2 © 2014
77. Orlando Company issued 8,000 convertible preference shares with P100 par value at P105
per share. One preference share can be converted into three ordinary shares with P25 par
value at the option of the shareholder. Subsequently, all of the preference shares were
converted into ordinary shares. The market value of the ordinary share on the date of
conversion was P30.
What amount should be credited to share premium as a result of the issuance of the
preference shares and the subsequent conversion into ordinary shares?
A. 80,000 C. 200,000
B. 120,000 D. 240,000 FA 2 © 2014
Share capital & share premium

78. Clay Company had P600,000 convertible 8% bonds payable outstanding on June 30, 2014.
Each PI,000 bond was convertible into 10 ordinary shares of P50 par value. On July 1, 2014,
the interest was paid to bondholders, and the bonds were converted into ordinary shares
which had a fair value of P75 per share. The unamortized premium on these bonds was
P12,000 at the date of conversion. No equity component was recognized when the bonds
were originally issued. What is the increase in the share capital and share premium,
respectively, as a result of the bond conversion?
A. 300,000 and 312,000 C. 450,000 and 162,000
B. 306,000 and 306,000 D. 600,000 and 12,000 FA2 © 2014
79. During 2014, Brad Company issued 5,000 convertible preference shares of P100 par value
for P110 per share. One share can be converted into three ordinary shares with P25 par
value at the option of the preference shareholder. When the market value of the ordinary
share was P40, all of the preference shares were converted. What amount should be credited
respectively to ordinary share capital and share premium as a result of the conversion?
A. 375,000 and 175,000 C. 500,000 and 50,000
B. 375,000 and 225,000 D. 600,000 and 0 FA 2 © 2014

Convertible bonds - payment

80. Young Company issued 5,000 convertible bonds at the beginning of the current year. The
bonds have a four-year term with a stated rate of interest of 6%, and are issued at par with a
face value of PI,000 per bond. Interest is payable annually on December 31. Each bond is
convertible into 50 ordinary shares with a par value of P10. The market rate of interest on
similar nonconvertible bond is 9%. At the issuance date, the amount of P485,000 was
credited to share premium from conversion privilege. The bonds were not converted and
instead, the entity paid off the convertible bondholders at maturity. What amount should be
recorded as gain or loss on the full payment of the convertible bonds at maturity?
A. 0 C. 485,000 loss
B. 485,000 gain D. 2,500,000 gain FA2 © 2014
81. On January 1, 2013, Arlene Company issued convertible bonds with a face value of
P5,000,000 for P6,000,000. The bonds are convertible into 50,000 shares with P100 par
value. The bonds have a 5-year life with 10% stated interest rate payable annually every
December 31. The fair value of the convertible bonds without conversion option is computed
at P5,399,300 on January 1, 2013. On December 31, 2015, the convertible bonds were not
converted but fully paid for P5,550,000. On such date, the fair value of the bonds without
conversion privilege is P5,400,000 and the carrying amount is P5,178,300. What is the loss
on the extinguishment of the convertible bonds on December 31, 2015?
A. 0 C. 221,700
B. 150,000 D. 371,700 P1 © 2013
82. On December 31, 2014, Tamia Company showed the following balances:
Discount on bonds payable 500,000
Share premium - issuance 5,000,000
Share premium - conversion privilege 700,000
The interest is payable annually every December 31. The convertible bonds are not
converted but fully paid on December 31, 2014. On such date, the quoted price of the
convertible bonds with conversion option is 105 which is the payment to the bondholders plus
interest. However, the quoted price of the bonds without the conversion privilege is 95. What
is the gain or loss from extinguishment of bonds?
A. 300,000 gain C. 700,000 gain
B. 300,000 loss D. 700,000 loss FA2 © 2014

Bonds Payable & Compound Financial Instrument
ANSWER KEY THEORY

1.D 26.B 51.B 76.D
2.A 27.D 52.D 77.C
3.A 28.D 53.D 78.D
4.C 29.B 54.C 79.D
5.D 30.D 55.C 80.D
6.C 31.D 56.D 81.D
7.D 32.D 57.B 82.C
8.C 33.D 58.D 83.D
9.A 34.D 59.D
10.B 35.A 60.C
11.C 36.D 61.D
12.D 37.D 62.B
13.C 38.B 63.C
14.D 39.D 64.C
15.C 40.C 65.A
16.D 41.C 66.B
17.B 42.D 67.A
18.D 43.C 68.B
19.D 44.C 69.A
20.A 45.B 70.B
21.B 46.C 71.A
22.D 47.B 72.C
23.D 48.C 73.D
24.C 49.D 74.C
25.D 50.A 75.C
Answer Key Page 45

ANSWER KEY PROBLEMS

26.D 51.A 76.A
27.B 52.C 77.D
3.B 28.B 53.C 78.A
4.B 29.D 54.B 79.A
5.D 30.C 55.D 80.A
6.A 31.C 56.C 81.C
7.D 32.C 57.A 82.B
8.B 33.C 58.B
9.D 34.D 59.A
10.A 35.B 60.A
11.D 36.C 61.B
12.B 37.A 62.A
13.B 38.B 63.A
14.B 39.B 64.D
15.B 40.B 65.C
16.A 41.D 66.C
17.B 42.A 67.D
18.A 43.B 68.B
19.A 44.B 69.B
20.B 45.D 70.C
21.B 46.D 71.D
22.A 47.D 72.A
23.A 48.C 73.A
24.D 49.C 74.B
25.C 50.A 75.A
Answer Key Page 46

ANSWER EXPLANATION
1. Answer is (B). The straight-line method provides for uniform discount amortization but the
effective interest method provides for increasing discount amortization. Accordingly, the
straight-line interest expense is higher than effective interest expense in the earlier years.
2. Answer is (B).
Since the straight-line amortization of discount on bonds payable is higher than the
discount amortization under the effective interest method, the carrying amount of the
bonds payable will be overstated under the straight-line method. Consequently, in the
earlier years, the straight line interest expense is higher than the effective interest
expense, resulting to lower net income and understated retained earnings.
3. Answer is (B).
2,000,000 x 20% x .952 380,800
2,000,000 x 50% x .907 907,000
2,000,000 x 30% x.864 518,400
Total present value of cash flow 1,806,200
4. Answer is (B).
Sinking fund bonds, maturing in installments 1,100,000
Industrial revenue bonds, maturing in installments 900,000
Total serial bonds 2,000,000
5. Answer is (D).
9% debentures, callable in 2015, due in 2016 3,500,000
11% collateral trust bonds 3,000,000
Total term bonds 6,500,000
6. Answer is (A). Debenture bonds are unsecured bonds or bonds without collateral security.
Collateral trust bonds are bonds secured by investments in shares and bonds.
7. Answer is (D).
Serial bonds Debenture bonds
9% registered bonds 2,750,000 2,750,000
11% convertible bonds 1,250,000
10% commodity backed bonds 2,000,000 .
Total 4,750,000 4,000,000
Answer Explanations & Solutions Page 47

8. Answer is (B)
Issue price 4,395,800
Bond issue cost (137,430)
Net proceeds 4,258,370
Using an interest rate of 5%, the relevant PV factors are:
PV of 1 at 5% for 8 periods .6768
PV of an ordinary annuity of 1 at 5% for 8 periods 6.4632
The market price of the bonds is determined as follows:
PV of principal (4,000,000 x .6768) 2,707,200
PV of semi-annual interest payment(240,000 – 6.4632) – rounded1,551,170
Market price of bonds 4,257,370
Since the maturity is 4 years and the interest is payable semi-annually, there are 8 interest
periods. Since the market price of using 5% for 8 periods is equal to the net proceeds, the
effective rate of interest must be 10% annually for 4 years.
9. Answer is (D). All costs incurred.
10. Answer is (A).

Cash received 5,150,000
Accrued interest (5,000,000 x 6% x 4/12) (100,000)
Issue price of bonds payable 5,050,000
Face value 5,000,000
Premium on bonds payable 50,000
11. Answer is (D).

PV of 1 at 4% for 20 periods .46
PV of an ordinary annuity of 1 at 4% for 20 periods 13.59
PV of principal (2,000,000 x .46) 920,000

PV of semiannual interest payments (100,000 x 13.59) 1,359,000
Issue price of bonds 2,279,000
The term of the bonds is 10 years and the interest is payable semiannually. Therefore, there
are 20 interest periods. Accordingly, the present value factor should be for the semiannual
effective rate of 4% for 20 interest periods.
12. Answer is (B).

PV of principal (5,000,000 x .3855) 1,927,500
Total present value or issue price of bonds 4,385,500

13. Answer is (B).

PV of principal (1,000 x.422) 422
PV of interest (1,000 x 6% = 60 x 6.418) 385
Issue price 807
14. Answer is (B).

Issue price (5,000,000 x 110) 5,500,000
Accrued interest (5,000,000 x 12% x 3/12) 150,000
Total 5,650,000
Less: Bond issue cost 200,000
Net cash received 5,450,000
15. Answer is (B).

Issue price (4,000,000 x 99%) 3,960,000
Total 4,040,000
16. Answer is (A).

Issue price (4,000,000 x 103%) 4,120,000
Total 4,180,000
17. Answer is (B).

Issue price (8,000,000 x 97%) 7,760,000
Bonds payable (4,000 x P2,000) 8,000,000

Discount on bonds payable (240,000)
Carrying amount of bonds payable 7,760,000
18. Answer is (A).

Issue price (4,000,000 x 99%) 3,960,000
Bond liability 3,620,000

19. Answer is (A).

Issue price (5,000,000 x 99%) 4,950,000
PFRS 9, paragraph 5.1.1, provides that transaction costs shall be included in the initial
measurement of a financial liability not at fair value through profit or loss. Accordingly, bond
issue cost is a deduction from bonds payable.
20. Answer is (B).

Premium on bonds payable (4% x 5,000,000) 200,000
Bond liability 5,075,000
21. Answer is (B).

Accrued interest payable (4,000,000 x 8% x 3/12) 80,000
The nominal interest of 8% is used in determining the accrued interest payable.
22. Answer is (A).

Accrued interest payable (3,000,000 x 12% x 3/12) 90,000
23. Answer is (A).

Interest expense (3,504,000 x 10% x 6/12) 175,200
Interest paid (4,000,000 x 8% x 6/12) 160,000
Discount amortization for six months 15,200
Effective interest method
 Under the effective interest method, the difference between the interest expense and
interest paid is the discount or premium amortization.
 The interest expense is equal to the carrying amount of bonds payable multiplied by the
effective interest rate.
 The interest paid is equal to the face value of bonds payable multiplied by the nominal
interest rate.
24. Answer is (D).

Interest expense (10% x 3,756,000) 375,600
Interest paid 360,000
Discount amortization 15,600


Less: amortization for 2014 15,600
Balance – December 31, 2014 228,400
25. Answer is (C).

Interest expense (5,676,000 x 8%) 454,000
Interest paid (5,000,000 x 10%) 500,000
Premium amortization 46,000

Less: Amortization for 2014 46,000
26. Answer is (D).

Interest Interest Discount Carrying
Date paid expense* amortization amount
1-1-2013 886,000
7-1-2013 50,000 53,160 3,160 889,160
1-1-2014 50,000" 53,350 3,350 892,510
100,000 106,510 6,510
Interest paid (1,000,000 x 10% x 6/12) 50,000
Interest expense for 2013:
886,000 x 12% x 6/12 53,160
889,160 x 12% x 6/12 (rounded) 53,350
106,510
27. Answer is (B).

Interest expense from Jan. 1 to June 30, 2014(3,987,000 x 12% x 6/12) 239,220
28. Answer is (B).

Interest expense from January 1 to June 30, 2014 (5,316,000 x 12% x 6/12) 318,960
29. Answer is (D).

Date Interest paid Interest expense Premium amortization Carrying amount
1/1/2014 4,580,000
7/1/2014 250,000 274,800 24,800 4,604,800
1/1/2015 250,000 276,288 26,288 4,631,088
551,088

30. Answer is (C).

Carrying amount of bonds (5,000,000 x 99% - 150,000) 4,800,000
Interest expense (4,800,000 x 11.66%) 559,680
Computation of effective rate by interpolation
The PV of 1 at 11% for 3 periods is .7312, and the PV of an ordinary annuity of 1 at 11 % for
3 periods is 2.4437.
The present value of the bonds using 11 % is:
PV of principal (5,000,000 x .7312) 3,656,000
PV of principal (5,000,000 x .7118) 3,559,000
Let X = the effective rate
X = 4,800,000
11% = 4,877,850
12% = 4,759,900
This means that the effective rate is higher than 11 % but lower than 12%. Thus, by
interpolation, the interest differential is determined as follows:
(X-11%) / 12%-11%
(4,800,000-4,877,850) ÷ (4,759,900-4,877,850)
77,850 ÷ 117,950= .66
Thus, the effective rate is 11 % plus the differential of .66 or 11.66%
31. Answer is (C).

Carrying amount of bonds(5,000,000 x 99% - 150,000)
Interest expense (4,800,000 x 11.66%)
Let X = the effective rate

X = 4,800,000
11% = 4,877,850
12% = 4,759,900
This means that the effective rate is higher than 11% but lower than 12%. Thus, by
interpolation, the interest differential is determined as follows:
X – 11% 4,800,000 – 4,877,850 77,850
12% - 11% = 4,759,900 – 4,877,850 = 117,950 = .66

Thus, the effective rate is 11% plus the differential of .66 or 11.66%.
32. Answer is (C).

Interest paid (5,000,000 x 7%) 350,000
Premium amortization for 2014 35,000
Premium on bonds payable, January 1, 2014 250,000

Less: Premium amortization for 2014 35,000
33. Answer is (C).

Interest paid (5,000,000 x 10%) 500,000
Premium amortization for 2013 46,000
Premium amortization for 2013 ( 46,000)
Premium on bonds payable - December 31, 2013 629,000
34. Answer is (D).

Interest paid ( 9% x 4,000,000) 360,000
Discount amortization for 2013 15,600
Discount amortization for 2013 ( 15,600)
Discount on bonds payable - December 31,2013 228,400
35. Answer is (B).

Interest expense (4,695,000 x 10% x 6/12) 234,750
Interest paid (5,000,000 x 9% x 6/12) 225,000
Amortization of discount January 1 to June 30, 2014 9,750

Discount on bonds payable (305,000 – 9,750) 295,250
Carrying amount – June 30, 2014 4,704,750

36. Answer is (C).

Interest expense (4,695,000x10%) 469,500
Interest paid (5,000,000 x 9%) 450,000
Amortization of discount for 2013 19,500

Discount on bonds payable (305,000 - 19,500) (285,500)
Carrying amount - December 31, 2013 4,714,500
37. Answer is (A).

Issue price (5,000,000 x .98) 4,900,000
Carrying amount 4,760,000
Interest paid (10% x 5,000,000) 500,000
Amortization of discount and issue cost 71,200
Bond discount and issue cost (240,000 – 71,200) (168,000)
Carrying amount, 12/31/2014 4,831,200
Note that under the effective interest method, the discount on bonds payable and bond issue
cost must be “lumped” together.
38. Answer is (B).

Issue price (5,000,000 x 110) 5,500,000
Interest paid (8% x 5,000,000) 400,000
Amortization of discount on issue cost 74,800
Premium on bonds payable (420,000 – 74,800) 345,200
Note that under the effective interest method, the bond issue cost must be “netted” against
the premium on bonds payable.

39. Answer is (B).


Payment on December 31, 2014 1,000,000
Discount on bonds payable (243,000 – 75,700) (167,300)
Carrying amount – December 31, 2014 3,832,700
40. Answer is (B).

Interest paid ( 8% x 5,000,000) 400,000
Amortization of discount 75,700

Annual payment on December 31, 2013 (1,000,000)
Face value - December 31, 2013 4,000,000
Discount on bonds payable - December 31, 2013 (243,000-75,700) ( 167,300)
Carrying amount - December 31, 2013 3,832,700
41. Answer is (D).

Interest expense for 2013 (3,805,600 x 10%) 380,560
Interest paid for 2013 320,000
Discount on bonds payable-January 1,2013 194,400

Amortization for 2013 60,560
Discount on bonds payable - December 31, 2013 133,840

Annual payment on December 31,2013 (800,000)
Face value - December 31, 2013 3,200,000
Carrying amount - December 31,2013 3,066,160
42. Answer is (A).
Carrying amount – 1/1/2014 5,385,000
Carrying amount – 12/31/2014 5,125,000
Decrease in liability – gain 260,000

43. Answer is (B).

Carrying amount – 1/1/2014 7,600,000
Carrying amount – 12/31/2014 8,400,000
Increase in liability – loss 800,000
Loss on credit risk 150,000
Loss from change in fair value 650,000
44. Answer is (B).

Retirement price (95,000,000 x 98%) 80,000
45. Answer is (D).

Carrying amount retired (4,000,000/8,000,000 x 7,570,000) 3,785,000

Retirement price (4,000,000 + 100,000) (4,100,000)
Loss on early extinguishment (315,000)
46. Answer is (D).

Discount on bonds payable (5,000,000 x 2%) 100,000
Amortization (100,000 x 12/150 (80,000)
Balance, January 1, 2014 20,000
Bond issue cost 200,000

Amortization (200,000 x 12/15) (160,000)
Balance, January 1, 2014 40,000

Less: Discount on bonds payable 20,000
Bond issue cost 40,000 60,000
Carrying amount, January 1, 2014 4,940,000
Retirement price (5,000,000 x 102%) (5,100,000)
Loss on retirement (160,000)

47. Answer is (D).
48. Answer is (C).

Interest paid (4,000,000 x 9%) 360,000
Annual amortization 8,000
Amortization from January 1, to July 1, 2014 (8,000 x 6/12) 4,000
Discount on bonds payable (320,000 – 4,000) (316,000)
Carrying amount – July 1, 2014 3,684,000
Retirement price (4,000,000 x 1.03) 4,120,000
Loss on retirement 436,000
49. Answer is (C).
50. Answer is (A)

Carrying amount, December 1, 2011 5,300,000
Amortization for 25 months 150,000
Monthly amortization (150,000/25) 6,000
Amortization of premium (6,000 x 8) ( 48,000)
Carrying amount, September 1, 2014 5,102,000
Retirement price at face (5,000,000)
Gain on early retirement 102,000
51. Answer is (A).

Gain on extinguishment (4,800,000 – 4,400,000) 400,000
52. Answer is (C).

Interest expense (12% x 5,700,000 x 6/12) 342,000
Interest paid (10% x 6,000,000 x 6/12) 300,000
Carrying amount – 1/1/2014 5,700,000
Carrying amount – 12/31/2014 5,742,000
Retirement price (6,000,000 x 1.02) 6,120,000
Loss on retirement (378,000)

53. Answer is (C).

54. Answer is (B).

Bonds payable, 1/1/2014 3,677,600
Fair value, 12/31/2014 (4,000,000 x 95%) 3,800,000
Increase in fair value of bonds payable – loss (122,400)
Loss from change in fair value 122,400

Bonds payable 122,400
55. Answer is (D).

Carrying amount – January 1, 2014 1,077,200
56. Answer is (C).

Interest expense for 2014 (12% x 1,000,000) 120,000
57. Answer is (A).

Fair value – January 1, 2014 1,077,200
Fair value – December 31, 2014 1,064,600
Gain from change in fair value 12,600
PFRS 9, paragraph 42.2, allows the measurement of a financial liability at fair value.
Under the fair value option, the bond payable is measured at fair value at every year-end and
any change in fair value is recognized generally in profit or loss. The accounting rules for
discount or premium amortization no longer apply.
58. Answer is (B).

Carrying amount – December 31, 2014 1,064,600
59. Answer is (B).

Present value of principal (5,000,000 x .52) 2,600,000
Present value of interest payments (600,000 x 3.43) 2,058,000
Issue price of bonds 4,658,000

60. Answer is (A).

PV of principal (5,000,000 x .57) 2,850,000
Total present value of bonds payable 4,830,000

Present value of bonds payable 4,830,000
If the market value of the bonds without warrants is unknown, the amount allocated to the
bonds is equal to the present value of the principal bond liability plus the present value of
future interest payments using the market rate of interest for similar bonds without the
warrants.
Issue price of bonds with warrants (5,000,000 x 109%) 5,450,000
Present value of bonds payable 4,830,000
Residual amount allocated to warrants 620,000
Journal entry to record the issue of bonds with share warrants

Cash 5,450,000
Share warrants outstanding 620,000
Journal entry to record the exercise of all of the share warrants
Cash (5,000 x 50 x P25) 6,250,000
Share capital (250,000 x P5) 1,250,000
Share premium 5,620,000
61. Answer is (B).

Market value Fraction Allocated proceeds
Ordinary shares (10,000 x 36) 360,000 36/90 320,000
Preference shares (20,000 x 27) 540,000 54/90 480,000
900,000 800,000
62. Answer is (A).

To record the issuance of preference shares:
Cash (15,000 x 110) 1,650,000
Preference share capital 1,500,000
Share premium - PS 150,000
To record the conversion of preference shares into ordinary shares:


Share premium - PS 150,000
Ordinary share capital (45,000 x 25) 1,125,000
Share premium - Ordinary 525,000
(15,000 preference shares x 3 = 45,000 ordinary shares)
63. Answer is (A).

Issue price of preference shares (5,000 x 110) 550,000
Ordinary shares at par (5,000 x 3 = 15,000 shares x 25) 375,000
Share premium 175,000
64. Answer is (D).

Issue price of preference shares (8,000 x PI05) 840,000
Par value of ordinary shares issued
(8,000 x 3 = 24,000 ordinary shares x P25) 600,000
65. Answer is (C).

The issue of convertible bonds payable is also accounted for as a compound financial
instrument. Accordingly, PAS 32, paragraph 29, mandates that the original issuance of
convertible bonds payable shall be accounted for as partly liability and partly equity. The
liability component is equal to the market value of the bonds without the conversion privilege.
The equity component is the remainder or residual of the issue price of the bonds with
conversion privilege.
Issue price of bonds with conversion privilege (5,000,000x110) 5,500,000
Market value of bonds without conversion privilege (5,000,000x103) 5,150,000
Residual amount allocated to conversion privilege 350,000
Actually, the journal entry to record the issuance of the convertible bonds payable is:
Cash 5,500,000
Premium bonds payable 150,000
66. Answer is (C).

Issue price of bonds with warrants (5,000,000 x 103%) 5,150,000
Market value of bonds without warrants (5,000,000 x 95%) 4,750,000
Residual amount allocated to warrants - equity component 400,000

67. Answer is (D).

Issue price (5,000,000 x 1.09) 5,450,000
PV of bonds payable:
PV of principal (5,000,000 x .57) 2,850,000
PV of interest (550,000 x 3.60) 1,980,000 4,830,000
68. Answer is (B).

Issue price (5,000,000 x 1.10) 5,500,000
PV of bonds payable
PV of principal (5,000,000 x .77) 3,850,000
PV of interest (300,000 x 2.53) 759,000 4,609,000
69. Answer is (B).

Issue price (2,000 x P2,000) 4,000,000
Fair value of bonds without option (2,000 x P1,500) 3,000,000
Equity component 1,000,000
70. Answer is (C).
Issue price of bonds with conversion privilege (5,000,000 x 1.10) 5,500,000
Market value of bonds without conversion privilege (5,000,000 x 1.03) 5,150,000
Residual amount allocated to conversion privilege 350,000
71. Answer is (D). PFRS requires that an amount is allocated to the bonds payable equal to the
market value of the bonds ex-warrants and any residual amount is allocated to the warrants.
72. Answer is (A). 5,000,000 x .95 = 4,750,000
73. Answer is (A).

To record the issuance of preference shares:
Cash (15,000 x 110) 1,650,000
Share premium – PS 150,000
To record the conversion of preference shares into ordinary shares:
Share premium – PS 150,000
Ordinary share capital (45,000 x 25) 1,125,000
Share premium – ordinary 525,000
(15,000 preference shares x 3 = 45,000 ordinary shares)

74. Answer is (B).

Carrying amount converted (400/1,000 x 1,060,000) 424,000
Par value of shares issued (400 x 50 x P10) 200,000
Conversion expenses (4,000)
Net share premium 220,000
75. Answer is (A).

Carrying amount converted (2,000/5,000 x 5,300,000) 2,120,000

Par value of share capital (2,000 x 50 x 10) 1,000,000
1,120,000
Conversion expenses 20,000
Share premium 1,100,000
76. Answer is (A).

Carrying amount of bonds converted (9,500,000 x 5/10) 4,750,000
Applicable share premium – conversion privilege (2,000,000 x 5/10) 1,000,000
Total consideration 5,750,000
Par value of shares issued (200,000 x 20) 4,000,000
Share premium – issuance 1,750,000
77. Answer is (D).

Issue price of preference shares (8,000 x 1.05) 840,000
Par value of ordinary shares (8,000 x 3 x 25) 600,000
78. Answer is (A).

Bonds payable 600,000
Carrying amount 612,000
Ordinary shares issued at par value (6,000 x shares x 50) 300,000

79. Answer is (A).

Issue price of preference shares (5,000 x 110) 550,000
Ordinary shares issued at par value (5,000 x 3 x 25) 375,000
80. Answer is (A).

Journal entries:
Cash 5,300,000
Share premium – conversion privilege 485,000

Share premium – issuance 485,000
81. Answer is (C).

Issue price 6,000,000
Fair value of bonds without conversion option 5,399,300
Total payment - December 31, 2015 5,550,000
Payment applicable to bonds payable (5,400,000)
Equity component 150,000
Payment applicable to bonds payable (5,400,000)
Loss on extinguishment ( 221,700)
Journal entries on December 31,2015
Loss on extinguishment 221,700
Cash 5,550,000

Cash 500,000

Share premium – issuance (600,700-150,000) 450,700

82. Answer is (D).

Fair value of bonds with conversion option (4,000,000 x 1.05) 4,200,000
Fair value of bonds without conversion option (4,000,000 x .95) 3,800,000
Equity component 400,000

Payment equal to fair value of bonds without conversion option 3,800,000
Loss on extinguishment 300,000

02a Bonds Payable Compound Financial Instrument

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02a Bonds Payable Compound Financial Instrument

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FINANCIAL ACCOUNTING

THEORY & PRACTICE

2. Define or describe the following types of bonds:

1. Term bonds are bonds with a single date of maturity.

Essay Questions: Bonds Payable Page 3

3. Explain a "premium on bonds payable".

4. Explain a "discount on bonds payable".

5. Explain "bond issue costs".

6. Explain the measurement of bonds payable.

Essay Questions: Bonds Payable Page 4

7. Explain the subsequent measurement of bonds payable.

8. Explain the "amortized cost" of bonds payable.

9. Explain the "fair value option" of measuring bonds payable.

Essay Questions: Bonds Payable Page 5

Jan. 1 Cash 5,379,100

11. What is the meaning of treasury bonds?

12. Explain the accounting for treasury bonds.

13. What is meant by bond refunding?

14. What is the treatment of bond refunding charges?

Essay Questions: Bonds Payable Page 6

Amortization of bond premium or discount. The annual amortization of premium or discount

Essay Questions: Bonds Payable Page 7

COMPOUND FINANCIAL INSTRUMENT

2. Explain the accounting for a compound financial instrument.

3. Explain bonds payable issued with share warrants.

Essay Questions: Compound Financial Instrument Page 8

Convertible bonds are conceived as compound financial instrument.

Essay Questions: Compound Financial Instrument Page 9

Essay Questions: Compound Financial Instrument Page 10

MCQ – Theory: Bonds Payable

4. Bonds issued with scheduled maturities at various dates are called

5. Bonds that mature on a single date are called

7. What is the interest rate written on the face of the bond?

8. What is the rate of interest actually incurred?

MCQ – Theory: Bonds Payable Page 11

13. If bonds are issued at a premium, this indicates that

14. Which of the following is true of a premium on bonds payable?

Bond issue cost

MCQ – Theory: Bonds Payable Page 12

Issued at interest date

18. The proceeds from the sale of bonds

Issued between interest dates

MCQ – Theory: Bonds Payable Page 13

After initial measurement

Fair value option

MCQ – Theory: Bonds Payable Page 14

Amortized cost option

Effective interest method

MCQ – Theory: Bonds Payable Page 15

Discount & premium amortization

MCQ – Theory: Bonds Payable Page 16

Early extinguishment of debt

MCQ – Theory: Bonds Payable Page 17

Amortization of bond premium

MCQ – Theory: Bonds Payable Page 18

Presentation & disclosure

54. Unamortized debt discount should be reported as

55. The carrying amount of a bond liability is the

MCQ – Theory: Bonds Payable Page 19

MCQ – Theory: Bonds Payable Page 20

MCQ – Theory: Compound Financial Instrument

59. Which of the following is not classified as a financial instrument?

60. A financial liability is a contractual obligation

61. Which of the following should be considered a financial liability?