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Chapter 25
Bonds Payable & Other Concepts
NAME:LOVERSMAEB.BASERGO Date:JAN. 29 , 2021 Professor:MRS.GWENDOLYN HOLLANES Section: 20 A 003 Score:
QUIZ1:
1. Theresultontheyear-endbalancesheetofanissueofa1 0 - yearterm bondsoldatfaceamount fouryearsagowithinterestpayableJune 1 andDecember 1 eachyear,isa(an) a.liabilityforaccruedinterest c.increaseindeferredcharges b.additiontobondspayable d.contingentliability
2. Unamortizedbonddiscountshouldbereportedonthefinancialstatementsoftheissuerasa a. Directdeductionfrom thefaceamountofthebond b. Directdeductionfrom thepresentvalueofthebond c. Deferredcharge d. Partoftheissuecosts
3. Straight-lineamortizationofbondpremium ordiscount: a. canbeusedasanoptionalmethodofamortizationinallsituations. b. providesthesametotalamountofinterestexpenseand interestrevenueastheeffective interestmethodoverthelifeofthebonds. c. providesthesameamountsofinterestexpenseandinterestrevenueeachinterestperiodas theeffectiveinterestmethod. d. isappropriatewhenthebondterm isespeciallylong. e. isappropriatefordeepdiscountbonds.
4. Forabondissuewhichsellsforlessthanitsfaceamount,themarketrateofinterestis a. Dependentontheratestatedonthebond. b. Equaltoratestatedonthebond. c. Lessthanratestatedonthebond. d. Higherthanratestatedonthebond.
5. Themarketpriceofabondissuedatadiscountisthepresentvalueofitsprincipalamountatthe market(effective)rateofinterest a. Lessthepresentvalueofallfutureinterestpaymentsatthemarket(effective)rateofinterest. b. Lessthepresentvalueofallfutureinterestpaymentsattherateofintereststated onthe bond. c. Plusthepresentvalueofallfutureinterestpaymentsatthemarket(effective)rateofinterest. d. Plusthepresentvalueofallfutureinterestpaymentsattherateofintereststated onthe bond.
6. Whichofthefollowingis not arelevantconsiderationwhenevaluatingwhethertoderecognizea financialliability? a. Whethertheobligationhasbeendischarged. b. Whethertheobligationhasbeencanceled. c. Whethertheobligationhasexpired. d. Whethersubstantiallyalltherisksandrewardsoftheobligationhavebeentransferred.
7. Whatistheeffectiveinterestrateofabondorotherdebtinstrumentmeasuredatamortizedcost? a. Thestatedcouponrateofthedebtinstrument. b. Theinterestratecurrentlychargedbytheentityorbyothersforsimilardebtinstruments (i.e.,similarremaining maturity,cash flow pattern,currency,creditrisk,collateral,and interestbasis). c. Theinterestratethatexactlydiscountsestimatedfuturecashpaymentsorreceiptsthrough theexpectedlifeofthedebtinstrumentor,whenappropriate,ashorterperiodtothenet carryingamountoftheinstrument. d. Thebasic,risk-freeinterestratethatisderivedfrom observablegovernmentbondprices.
8. Whichofthefollowingstatementsisfalse? a. Bondscarrynocorporateownershipprivileges. b. Abondisafinancialcontract. c. Bondpricesremainfixedovertime. d. Abondissuermustpayperiodicinterest.
9. Mostbonds: a. aremoneymarketsecurities. b. arefloating-ratesecurities. c. givebondholdersavoiceintheaffairsofthecorporation. d. areinterest-bearingobligationsofgovernmentsorcorporations.
10. Inan“assetswap,”wherealiabilityissettledthroughthetransferofnoncashasset, a. thegainorlossonsettlementiscomputedasthedifferencebetweenthecarryingamountof theliabilityextinguishedandthefairvalueofthenoncashassettransferred. b. thegainorlossonsettlementiscomputedasthedifferencebetweenthecarryingamountof theliabilityextinguishedandthecarryingamountofthenoncashassettransferred. c. thegainorlossonsettlementiscomputedasthedifferencebetweenthecarryingamountof theliabilityextinguishedandthemoreclearlydeterminablebetweenthefairvalueofthe liabilityextinguishedandthecarryingamountofthenoncashassettransferred. d. nogainorlossisrecognized
“There is a time for everything, and a season for every activity under the heavens;” (Ecclesiastes 3:1)
NAME:LOVERSMAEBASERGO Date:JAN. 29 , 2021 Professor:MRS.GWENDOLYN HOLLANES Section: 20 A 003 Score:
QUIZ2:
- OnJanuary2, 20 x 1 ,NastCo.issued8% bondswithafaceamountof₱ 1 , 000 , 000 thatmatureon January2, 20 x 7 .Thebondswereissuedtoyield1 2 %,resultinginadiscountof₱ 150 , 000 .Nast incorrectlyusedthestraight-linemethodinsteadoftheeffectiveinterestmethodtoamortizethe discount.How isthecarryingamountofthebondsaffectedbytheerror?
AtDec. 31 , 20 x 1 AtJan. 2 , 20 x 7 AtDec. 31 , 20 x 1 AtJan. 2 , 20 x 7 a.Overstated Understated c.Understated Overstated
Eachbondhadafairvalueof₱ 1 , 080. Eachshareofstockhadafairvalueof₱ 28.
WhatamountshouldWittrecordasalossonconversionofbonds? a. 150 , 000 b. 110 , 000 c. 30 , 000 d. 0 Explanation:when convertible bonds are converted into equity instrument no gain or loss is recognized
RayCorp.issuedbondswithafaceamountof₱ 200 , 000 .Each₱ 1 , 000 bondcontaineddetachable stockwarrantsfor 100 sharesofRay'scommonstock.Totalproceedsfrom theissueamountedto ₱ 240 , 000 .Thefairvalueofeachwarrantwas₱ 2 ,andthefairvalueofthebondswithoutthe warrantswas₱ 196 , 000 .Thebondswereissuedatadiscountof a. 0 b. 678 c. 4 , 000 d. 33 , 898 Solution: Fair value of bonds without the warrants 196, Face amount of bonds 200, Discount on bonds (4,000)
OnJune3 0 , 20 x 9 ,KingCo.hadoutstanding9%,₱ 5 , 000 , 00 0facevaluebondsmaturingonJune 30 , 2 x 14 .InterestwaspayablesemiannuallyeveryJune30andDecember 31 .OnJune3 0 , 20 x 9 , afteramortizationwasrecordedfortheperiod,theunamortizedbondpremium andbondissue costswere₱ 30 , 00 0and ₱ 50 , 000 ,respectively.Onthatdate,Kingacquired allitsoutstanding bondsontheopenmarketat 9 8andretiredthem.AtJune3 0 , 20 x 9 ,whatamountshouldKing recognizeasgainonredemptionofbonds? a. 20 , 000 b. 80 , 000 c. 120 , 000 d. 180 , 000 Solution: Redemption price (5M x 98%) 4,900, Less: Carrying amount of bonds: Face amount 5,000, Unamortized premium 30, Unamortized issue costs (50,000) 4,980, Gain on retirement 80,
OnJuly3 1 , 20 x 0 ,DomeCo.issued₱ 1 , 000 , 000 of 10 %, 15 - yearbondsatparandusedaportionof theproceedstocallits6 0 0outstanding1 1 %,₱ 1 , 00 0facevaluebonds,dueonJuly3 1 , 2 x 10 ,at 102 .Onthatdate,unamortizedbondpremium relatingtothe 11 % bondswas₱ 65 , 000 .Inits 20 x 0 incomestatement,whatamountshouldDomereportasgainorloss,beforeincometaxes,from retirementofbonds? a. 53 , 000 gain b. 0 c.( 65 , 000 )loss d.( 77 , 000 )loss Solution: Redemption price (600 x 1,000 x 102%) 612, Less: Carrying amount of bonds: Face amount (600 x 1,000) 600, Unamortized premium 65,000 665, Gain on retirement 53,
During2 0 x4PetersonCompanyexperiencedfinancialdifficultiesandislikelytodefaultona ₱ 500 , 000 , 15 %,three-yearnotedated January 1 , 20 X 2 ,payabletoForestNationalBank.On December 31 , 20 X 4 ,thebankagreedtosettlethenoteandunpaidinterestof₱ 75 , 000 for 20 X 4 for ₱ 50 , 000 cash and marketable securitieshaving a carrying amountof₱ 375 , 000 .Peterson's
acquisitioncostofthesecuritiesis₱ 385 , 000 .WhatamountshouldPetersonreportasagainfrom thedebtrestructuringinits 20 x 4 incomestatement? a. 65 , 000 b. 75 , 000 c. 140 , 000 d. 150 , 000 Solution: Payment for the liability: Cash 50, Carrying amount of investment securities 375,000 425, Carrying amount of liability settled: Principal 500, Accrued interest 75,000 575, Gain on settlement 150,
CaseyCorporationenteredintoatroubled-debtrestructuringagreementwithFirstStateBank. FirstStateagreedtoacceptlandwithacarryingamountof₱ 85 , 000 andafairvalueof₱ 120 , 000 inexchangeforanotewithacarryingamountof₱ 185 , 000 .WhatamountshouldCaseyreportas gaininitsincomestatement? a. 0 b. 35 , 000 c. 65 , 000 d. 100 , 000 Solution: =carrying amt. of note - carrying amt. of land =185,000 -85,000 = 100,000 gain
WoodCorp.,adebtorundergoingfinancialdifficultiesgrantedanequityinteresttoacreditorin fullsettlementofa₱ 28 , 000 debtowedtothecreditor.Atthedateofthistransaction,theequity interesthad afairvalueof₱ 25 , 00 0and parvalueof₱ 20 , 000 .Whatamountshould Wood recognizeasgainonrestructuringofdebt? a. 0 b. 3 , 000 c. 5 , 000 d. 8 , 000 Solution: 28,000 – 25,000 = 3,
10 .In2 0 X 2 ,MayCorp.acquiredlandbypaying₱ 75 , 00 0downandsigninganotewithamaturity valueof₱ 1 , 000 , 000 .Onthenote’sduedate,December 31 , 20 X 7 ,Mayowed₱ 40 , 00 0ofaccrued interestand₱ 1 , 000 , 000 principalonthenote.Maywasinfinancialdifficultyandwasunableto makeanypayments.Mayandthebankagreedtoamendthenoteasfollows: The₱ 40 , 000 ofinterestdueonDecember 31 , 20 X 7 ,wasforgiven. Theprincipalofthenotewasreducedfrom ₱ 1 , 000 , 00 0to₱ 950 , 00 0andthematuritydate extended1yeartoDecember 31 , 20 X 8. Maywould berequired tomakeoneinterestpaymenttotaling ₱ 30 , 00 0onDecember3 1 , 20 X 8. Theoriginaleffectiveinterestrateis 10 % whilethecurrentmarketrateonDecember 31 , 20 X 7 is 12 %.
Asaresultofthetroubleddebtrestructuring,Mayshouldreportagain,beforetaxes,inits2 0 X 7 incomestatementof a. 0 b. 165 , 000 c. 60 , 000 d. 149 , 092 Solution: The modification is analyzed as follows: Old terms New terms Principal 1,000,000 950, Accrued interest 40,000 30, Remaining term ('n') 1 year
