I.

THEORIES

Multiple Choice. Choose the best answer.

________ 1. Statement 1: Term bonds are bonds issued with scheduled maturities at various dates.

Statement 2: Coupon bonds are registered bonds with the name of the owner recorded on the issuing entity’s books.

A. Only Statement 1 is true

B. Only Statement 2 is true

C. Both statements are true

D. None of the statements are true

________ 2. Statement 1: Redeemable bonds grant bondholders the right to exchange their bond holdings for shares of
the issuing entity.

Statement 2: Convertible bonds grant the bondholders the right to call in the bonds for redemption prior to the maturity
date specified on the bond indenture.

A. Only Statement 1 is true

B. Only Statement 2 is true

C. Both statements are true

D. None of the statements are true

________ 3. Generally, which of the following items are specified in the bond indenture?

I. Characteristics of the bonds

II. Maturity date and provision for repayment

III. Deposit to cover interest payments

IV. Required debt-to-equity ratio

A. Only I and II

B. Only I, II, and III

C. Only I, II, and IV

D. All of the above

________ 4. Which of the following statement/s is/are correct about bonds retired at maturity date?

A. Any discount or premium on bonds payable is completely amortized.

B. The amount of cash paid to retire the bonds is simply equal to the bond’s face value.

C. No gain or loss on bond retirement is recognized.

D. All of these statements are correct.

________ 5. Statement 1: Bonds issued between interest payment dates are initially measured at issue price less
transaction costs incurred and accrued interest.

Statement 2: The amortization of a premium on bonds payables gradually decreases the bond's carrying value.

A. Only Statement 1 is true

B. Only Statement 2 is true

C. Both statements are true

D. None of the statements are true

________ 6. On January 1, 2022, an entity issued a 10% bond when the effective interest rate for similar bonds is 12%.
The principal is due on January 1, 2028, and the interest on the bond is payable every December 31. In the initial
recognition of the bond, which of the following is false?

A. Computation of the bond price involves multiplying the face value of the bond by the present value annuity factor of
P1 at 10% for six periods

B. The entry to record the bond involves a debit to discount on bonds payable

C. The bond issue price will be less than the face value of the bond

D. None of the above

________ 7. Statement 1: The interest expense for a given period is calculated by multiplying the carrying value of the
bond payable by the nominal rate.

Statement 2: When the effective interest method is used, the interest expense is the same for each interest period.

A. Only Statement 1 is true

B. Only Statement 2 is true

C. Both statements are true

D. None of the statements are true

________ 8. Using the effective interest method, the amortization of the premium on the bond payable

A. Remains constant in any period

B. Increases the interest expense each period

C. Decreases the interest expense each period

D. None of the above.

________ 9. The following statement are true about Serial bonds EXCEPT:

A. Bonds that mature on a single date.

B. Bonds that mature in series of installment.

C. Bonds that apply the effective interest method.

D. Bonds where both nominal and effective interest decrease every period.

________ 10. During the subsequent measurement of serial bonds, the following occurs EXCEPT:

A. The amount of periodic interest due adjusts after each installment.

B. The principal amount of serial bonds decreases after each installment payment.

C. Both the nominal and effective interest decrease after each installment payment.

D. The adjusted carrying value at the end of the reporting period is only affected by the amortization of
discount/premium.

________ 11. UWU CO. neglected to amortize the discount on the outstanding bonds payable. What would be the effect
of the failure to record discount amortization on interest expense and carrying amount of the bonds respectively??

A. Understated, Understated

B. Overstated, Overstated

C. Understated, Overstated

D. Overstated, Understated
________ 12. The following statements pertain to the initial recognition of convertible bonds, which one is true?

A. The difference between the face value of the bonds and the quoted price is presented in the equity section of the
statement of financial position.

B. The difference between the present value of the bond and the face value is presented in the equity section of the
statement of financial position.

C. The difference between the present value and the quoted price of the bonds is treated as either a discount or
premium on bonds payable.

D. Convertible bonds always recognize a conversion privilege upon its initial recognition.

________ 13. The following statements pertain to the subsequent measurement of convertible bonds, which one is
false?

A. Bonds payables are amortized in the same manner with notes payable.

B. Interest expense is always recognized every period.

C. If the rates are realistic, discount amortization is recognized every period.

D. There is a need to update the carrying value of the note every reporting date.

________ 14. Statement 1: Bond conversion privilege account is always derecognized at full amount upon conversion of
the bonds regardless of the amount converted.

Statement 2: Upon conversion of the bonds, the share capital and share premium account are debited to reflect the
effect of the conversion.

Statement 3: Gain or loss on conversion must be recognized upon conversion.

A. True, true, true

B. True false, true

C. False, true, true

D. False, false, false

________ 15. Which of the following statement is true?

A. Bonds with non-detachable share warrants issued gives the shareholder the right to acquire preference shares.

B. The issue price for bonds with non-detachable share warrants are allocated between ordinary share capital and share
premium.

C. When the share warrants are exercised, the account share warrants outstanding is credited.

D. Premium on Bonds Payable is credited on the date of issuance when the market price of the bonds without warrants
is more than the face value of the bonds.

________ 16. Which of the following statement/s is/are true about Share Warrants Outstanding?

A. It is part of retained earnings.

B. It is the difference between the total issue price of the bond and the market price of bonds without warrants.

C. It is debited during the issuance of the bonds.

D. All of the statements are correct.

________ 17. Statement 1: Asset swap is a form of debt restructuring which involves the transfer of non-cash assets by a
creditor to its debtor to settle a debt obligation.

Statement 2: If the carrying amount of the debt is more than the fair value of the asset given, there is a need to
recognize a gain on disposal.

A. Both statements are true.

B. Only statement 1 is true.

C. Only statement 2 is true.

D. None of the above

________ 18. All of the following disclosures based on IFRS 7 are not true, except:

A. Information about the extent and nature of the financial instruments, including non-significant terms and conditions
that may affect the amount, timing, and certainty of future cash flows.

B. Accounting policy and method adopted including the criteria for recognition and the basis of measurement applied.

C. Information about its exposure to credit risk including contractual repricing or maturity date and effective interest
rates.

D. Information about its exposure to interest rate risk including the amount that best represents its maximum credit risk
exposure and significant concentrations of credit risks.

________ 19. Which of the following information is true regarding the disclosure of Financial Liabilities?

I. The principal, stated face or other similar amount of the liability.

II. The amortized value of the class of financial liabilities in a way that permits it to be compared with the corresponding
fair value in the balance sheet.

III. The stated rated rate or amount of interest or other periodic return on principal and timing of payments.

IV. The fair value of financial assets that are pledged as collateral for liabilities.

V. Early settlement options, including the period in which the options can be exercised and the exercise price or range of
prices.

A. II and III only

B. I, II, and IV only

C. I, III, and V

D. I, II, III, IV, and V

________ 20. Statement 1: The entity shall disclose information about its exposure to interest rate risk including
contractual repricing or maturity dates, whichever is earlier, and effective interest rates, whenever applicable.

Statement 2: Disclosure of the total interest income which is computed using the stated interest method.

A. Only statement 1 is true.

B. Only statement 2 is true.

C. Both statements are true.

D. Neither statement is true.

II. PROBLEM SOLVING

PROBLEM 1

BONDS PAYABLE

On January 1, 2022, COOKIE MONSTER CORPORATION issued P5,000,000 of 12% bonds for P6,066,340 due December
31, 2028. Bond issue cost of P20,000 were incurred. Interest on the bonds is payable annually every December 31
starting December 31, 2022. The effective interest rate was determined to be 8% after considering the bond issue cost.
The bonds are callable at 120 and on December 31, 2025, after the settlement of the 2025 interest, the entity called
P2,500,000 face amount of the bonds and retired them.

____________ 1. How much is the interest gain or loss on retirement of the bonds on December 31, 2025?

____________ 2. At what amount shall the bonds be reported on December 31, 2026?

PROBLEM 2

TERM BONDS

On January 1, 2022, LOKI COMPANY issued an 8% bond payable with a face value of P3,000,000 to Thor Inc. The bond
matures on January 1, 2027, while periodic interest payments are due every December 31. The market rate of interest
for these bonds is 10%.

PVF of P1 at 10% for five periods is 0.62

PVAF of P1 at 10% for five periods is 3.8

____________ 3. How much is the issue price of the bond and the amount credited to bonds payable on the issue date?

____________ 4. Assuming that the carrying value of the bond at the end of the first year is P2,809,200. How much
LOKI COMPANY report as an unamortized bond discount?

PROBLEM 3

TERM BONDS

LITTLE WOMEN COMPANY issued a 5-year bond payable amounting to P2,000,000 with the stated interest rate of 9%
dated June 30, 2022. Bond interest payments are scheduled semi-annually every June 30 and December 31. The bond
payable yields 8%, and the company uses the effective interest method in amortizing bonds payable.

PV Factor of a Single Payment using 4% for 10 periods 0.6756

PV Factor of an Ordinary Annuity using 4% for 10 periods 8.1109

PV Factor of a Single Payment using 4.5% for 10 periods 0.6439

PV Factor of an Ordinary Annuity using 4.5% for 10 periods 7.9127

____________ 5. How much is the bond issue price?

____________ 6. How much is the nominal interest in 2022?

PROBLEM 4

SERIAL BONDS

On January 1, 2022, DAHYUN CO. issued serial bonds with face value of 6,000,000 and a stated rate of 10% payable
annually and has a price that yields 8%. The bonds mature at an annual installment of 2,000,000 every December 31.
The following are the rounded present value:

PV of an ordinary Annuity of 1 at 8 % for 3 periods 2.58

PV of an ordinary Annuity of 1 at 10 % for 3 periods 2.49

PV of 1 at 8% for ONE period 0.93

PV of 1 at 10% for ONE period 0.91

PV of 1 at 8% for TWO periods 0.86

PV of 1 at 10% for TWO periods 0.83

PV of 1 at 8% for THREE periods 0.79

PV of 1 at 10% for THREE periods 0.75

____________ 7. What is the issue price of the serial bonds on January 1, 2022?

____________ 8. How much is the carrying value of the bonds on December 31, 2023?

PROBLEM 5

SERIAL BONDS

On January 1, 2022, ICARUS CORP. issued bonds with a face amount of P5,000,000 and stated interest of 8%. The
contract requires the face amount to be paid in 5 equal annual installments and interest on the unpaid balance to be
paid annually every December 31 starting December 31, 2022. The market rate of interest on January 1, 2022 is 12%.
Use 4 decimal places for PV factors.

____________ 9. At what amount shall the bonds be initially recognized on January 1, 2022?

____________ 10. At what amount shall the bonds be reported on December 31, 2023?

PROBLEM 6

CONVERTIBLE BONDS

On April 1, 2021, TORIBIO COMPANY issued P 4,000,000, 7% convertible bonds at 106. Principal and interest is payable
semi-annually every October 1 and April 1 and the bonds will mature on April 1, 2026. Each P5,000 bond is convertible
into 4 shares of P200. Without the conversion feature the bonds would have sold to yield 9%. Use 4 decimal places for
PV factors.

____________ 11. How much should be taken to equity on the date of issuance?

____________ 12. How much is the carrying value of the bonds, and charged against revenue on December 31, 2024?

PROBLEM 7

CONVERTIBLE BONDS

On January 1, 2021, RAMOS COMPANY issued P 7,200,000, 10% convertible bonds at 103. Interest is payable semi-
annually every January 1 and July 1 and the bonds will mature on December 31, 2026. Each P1,000 bond is convertible
into 6 shares of P100. Without the conversion feature, the bonds would have sold to yield 12%. The bonds were all
converted on July 1, 2024.

____________ 13. Upon conversion of the bonds, how much should be credited to share premium and what is the total
amount charged against revenue for the year ended 2024?

____________ 14. Assuming that only P3,600,000 face value of the bonds were converted on July 1, 2025, how much
should be the net effect on equity upon conversion and the carrying of the bonds on December 31, 2025?

PROBLEM 8

BONDS WITH SHARE WARRANTS

On January 1, 2022, SIMS CO. issued 2,000 of its P10,000,000, 8%, 8-year bonds at 105. Each P5,000 bond has a one non-
detachable share warrant and each warrant gives the holder the right to purchase 15 ordinary shares for P18 each. At
the time of issuance, the par value of the ordinary is P12 while its market value is P15. The bonds without warrants sell
at 98.

____________ 15. How much should be credited to additional paid in capital at the date of issuance?

____________ 16. How much should be credited to equity upon the exercise of the warrants?

____________ 17. How much should be credited to Share Premium assuming that only 40% of the warrants were
exercised?
PROBLEM 9

TROUBLED DEBT RESTRUCTURING

After experiencing financial difficulties because of the faltering economy in 2022, DESIRE COMPANY negotiated with its
creditor, Dream Inc., the settlement of its obligation on December 31, 2022. Dream Inc. agreed to accept a piece of
equipment and cancel the entire debt. It was determined that the equipment has a carrying value of P2,800,000 and
accumulated depreciation of P700,000. The equipment has a fair value reliably determined at P2,500,000. Information
on the outstanding obligation of DESIRE COMPANY is provided below:

Note Payable → Principal of P3,000,000

Interest Payable → One year accrued interest at 10%

____________ 18. How much gain/loss on debt restructuring should DESIRE COMPANY recognize?

____________ 19. Assuming DESIRE COMPANY also used as a settlement (in addition to the equipment) a note
receivable from a customer amounting to P1,650,000, what amount should be taken to profit or loss as a result of debt
extinguishment?

PROBLEM 10

TROUBLED DEBT RESTRUCTURING

Due to unfavorable events, ALCHEMY COMPANY is experiencing financial difficulties and was in default of meeting
principal and interest payments on a note amounting to P 10,000,000 with accrued interest of P1,000,000 using an
annual interest rate of 10%.

ALCHEMY COMPANY accepted the following change in the terms of the note:

● Accrued interest is condoned.

● The maturity date is extended by 4 years.

● The interest rate must now be 12%, the prevailing rate at the time of restructuring.

PV Factor of a Single Payment using 10% for 4 periods 0.6830

PV Factor of an Ordinary Annuity using 10% for 4 periods 3.1699

PV Factor of a Single Payment using 12% for 4 periods 0.6355

PV Factor of an Ordinary Annuity using 12% for 4 periods 3.0373

____________ 20. At what amount should ALCHEMY COMPANY recognize as a gain on debt restructuring?