438847546-QUIZ- Ch a pter-3- Bonds- P a y a ble- Other- Concepts-docx PDF

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Chapter 3Bonds Payable & Other ConceptsNAME: Date: Professor: Section: Score:QUIZ 1:1. The result on the year-end balance sheet of an issue of a 10-year term bond sold at face amount four years ago with interest payable June 1 and December 1 each year, is a(an) a. liability for accrued inter...

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Chapter 3 Bonds Payable & Other Concepts NAME: Pr of es s or :

Sec t i on:

Dat e: Sc or e:

QUI Z1: 1. Ther e s ul tont heye ar e ndbal anc es he etofani s s ueofa10ye art e r m bonds ol da tf ac eamount f ourye ar sa gowi t hi nt er e s tpa yabl eJ une1andDe c embe r1e ac hyear , i sa( an) a .l i abi l i t yf orac c r uedi nt e r es t c .i nc r e as ei nde f e r r edc har ge s b. addi t i ont obondspa yabl e d. c ont i ngentl i abi l i t y 2. Unamor t i ze dbonddi s c ounts houl dber epor t e dont hefinanc i als t at e ment soft hei s s ue rasa a . Di r ec tde duc t i onf r om t hef ac eamountoft hebond b. Di r ec tde duc t i onf r om t hepr es e ntval ueoft hebond c . De f er r edc har ge d. Par toft hei s s uec os t s 3. St r ai ght l i neamor t i za t i onofbondpr emi um ordi s c ount : a .c anbeus e dasanopt i onalme t hodofamor t i za t i oni nal ls i t ua t i ons . b. pr ovi de st hes amet ot alamountofi nt er e s te xpens eand i nt er e s tr e venueast hee ffe c t i ve i nt er e s tmet hodove rt hel i f eoft hebonds . c . pr ovi de st hes ameamount sofi nt e r e s te xpe ns eandi nt er e s tr e ve nuee ac hi nt e r e s tpe r i odas t hee ffe c t i vei nt er e s tme t hod. d. i sappr opr i a t ewhe nt hebondt er mi ses pec i al l yl ong. e .i sappr opr i a t ef orde epdi s c ountbonds . 4. Forabondi s s uewhi c hs e l l sf orl es st hani t sf ac eamount , t hemar ketr a t eofi nt e r es ti s a . De pe nde ntont her a t es t a t e dont hebond. b. Equalt or a t es t a t edont hebond. c . Le s st hanr a t es t a t edont hebond. d. Hi ghert hanr a t es t a t edont hebond. 5. Themar ke tpr i c eofabondi s s ueda tadi s c ounti st hepr e s e ntval ueofi t spr i nc i palamounta tt he mar ke t( e ffe c t i ve )r a t eofi nt er es t a . Le s st hepr e s entval ueofal lf ut ur ei nt e r es tpa yme nt sa tt hemar ket( e ffe c t i ve)r a t eofi nt er e s t . b. Le s st hepr e s entval ueofal lf ut ur ei nt er e s tpa yme nt sa tt her a t eofi nt er e s ts t a t e d ont he bond. c . Pl ust hepr e s entval ueofal lf ut ur ei nt e r es tpa yme nt sa tt hemar ke t( effe c t i ve )r a t eofi nt e r es t . d. Pl ust hepr e s e ntval ueofal lf ut ur ei nt er e s tpa yme nt sa tt her a t eofi nt er e s ts t a t e d ont he bond. 6. Whi c hoft hef ol l owi ngi snotar e l e vantc ons i der a t i onwhene val ua t i ngwhet hert oder e c ogni zea financ i all i abi l i t y? a . Whe t he rt heobl i ga t i onhasbee ndi s c har ge d. b. Whe t he rt heobl i ga t i onhasbee nc anc e l e d. c . Whe t he rt heobl i ga t i onhase xpi r e d. d. Whe t he rs ubs t ant i al l yal lt her i s ksandr e war dsoft heobl i ga t i onha vebe e nt r ans f er r e d.

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7. Wha ti st hee ffe c t i vei nt e r e s tr a t eofabondorot herde bti ns t r ume ntme as ur e datamor t i ze dc os t ? a . Thes t a t e dc ouponr a t eoft hede bti ns t r ument . b. Thei nt e r e s tr at ec ur r e nt l yc har ge dbyt hee nt i t yorbyot her sf ors i mi l arde bti ns t r ument s ( i . e . ,s i mi l arr e mai ni ng ma t ur i t y ,c as h flow pa t t er n,c ur r enc y ,c r e di tr i s k,c ol l a t e r al ,and i nt er e s tba s i s ) . c . Thei nt e r e s tr a t et ha te xac t l ydi s c ount ses t i ma t e df ut ur ec as hpa yme nt sorr ec ei pt st hr ough t heexpec t edl i f eoft hede bti ns t r ume ntor ,whenappr opr i a t e ,as hor t e rper i odt ot hene t c ar r yi ngamountoft hei ns t r ument . d. Thebas i c , r i s kf r eei nt er es tr a t et hati sde r i vedf r om obs e r vabl egover nmentbondpr i c e s . 8. Whi c hoft hef ol l owi ngs t a t e me nt si sf al s e ? a . Bondsc ar r ynoc or por a t eowner s hi ppr i vi l ege s . b. Abondi safinanc i alc ont r ac t . c . Bondpr i c e sr e mai nfixe dovert i me . d. Abondi s s ue rmus tpa yper i odi ci nt er es t . 9. Mos tbonds : a . ar emone ymar kets e c ur i t i e s . b. ar efloa t i ngr a t es e c ur i t i es . c . gi vebondhol de r savoi c ei nt heaffai r soft hec or por a t i on. d. ar ei nt e r es t bear i ngobl i ga t i onsofgover nment sorc or por a t i ons . 10.I nan“ as s e ts wap, ”wher eal i abi l i t yi ss et t l e dt hr ought het r ans f erofnonc as has s e t , a .t hegai norl os sons e t t l e me nti sc omput e dast hedi ffer e nc ebe t we e nt hec ar r yi ngamountof t hel i abi l i t ye xt i ngui s he dandt hef ai rval ueoft henonc as has s e tt r ans f er r e d. b. t hegai norl os sons e t t l e me nti sc omput e dast hedi ffe r e nc ebe t we e nt hec ar r yi ngamountof t hel i abi l i t ye xt i ngui s he dandt hec ar r yi ngamountoft henonc as has s e tt r ans f e r r e d. c .t hegai norl os sons e t t l e me nti sc omput e dast hedi ffer e nc ebe t we e nt hec ar r yi ngamountof t hel i abi l i t ye xt i ngui s he dandt hemor ec l e ar l ydet e r mi nabl ebe t we e nt hef ai rval ueoft he l i abi l i t ye xt i ngui s he dandt hec ar r yi ngamountoft henonc as has s ett r ans f e r r ed. d. nogai norl os si sr e c ogni ze d

“There is a time for everything, and a season for every activity under the heavens;” (Ecclesiastes 3:1)

- END – NAME: Pr of es s or :

Sec t i on:

Da t e: Sc or e:

QUI Z2: 1. OnJ anuar y2,2 0x1,Nas tCo.i s s ued8% bondswi t haf ac eamountof₱1, 000, 000t ha tma t ur eon J anuar y2,20x7 .Thebondswer ei s s uedt oyi e l d12 %,r es ul t i ngi nadi s c ountof₱150, 000.Nas t i nc or r e c t l yus edt hes t r ai ght l i nemet hodi ns t ea doft heeffe c t i vei nt e r e s tme t hodt oamor t i zet he di s c ount . How i st hec ar r yi ngamountoft hebondsaffec t edbyt heer r or ? AtDe c . 31, 20x1 AtJ an.2, 20x7 AtDe c . 31, 20x1 AtJ an. 2, 20x7 a .Ove r s t a t ed Unde r s t a t e d c .Unde r s t a t ed Ove r s t a t e d

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b. Over s t a t e d

Noe ffe c t

d. Under s t a t e d

Noe ffe c t

2. OnJ ul y1,2003,af t e rr ec or di ngi nt er e s tandamor t i za t i on,Yor kCo.c onver t e d ₱1, 000 , 000ofi t s 12% c onver t i bl ebondsi nt o50, 000s har e sof₱1parval ueor di nar ys har e .Ont hec onver s i onda t e t hec ar r yi ngamountoft hebondswas₱1, 300, 000,t hef ai rval ueoft hebondswas₱1, 400, 000, andYor k’ sor di nar ys har ewaspubl i c l yt r adi nga t₱30pe rs har e . Wha tamountofs har epr e mi um s houl dYor kr e c or dasar es ul toft hec onve r s i on? a .950 , 000 b. 1, 250, 000 c .1, 350 , 000 d. 1, 500, 00 0 3. OnApr i l30,20x5,Wi t tCor p.hadout s t andi ng8%,₱1, 000, 000f ac eamount ,c onver t i bl ebonds ma t ur i ngonApr i l30, 20x9.I nt er e s ti spa yabl eonApr i l30andOc t obe r31.OnApr i l30, 20x5,al l t hes ebondswer ec onver t ed i nt o 40, 000s har e sof₱20paror di nar ys har e .On t heda t eof c onve r s i on:  Unamor t i ze dbonddi s c ountwas₱3 0, 000.  Eac hbondhadaf ai rval ueof₱1, 080.  Eac hs har eofs t oc khadaf ai rval ueof₱28. Wha tamounts houl dWi t tr e c or dasal os sonc onve r s i onofbonds ? a .150 , 000 b. 110, 000 c .30 , 000 d. 0 4. Ra yCor p.i s s uedbondswi t haf ac eamountof₱200, 000. Eac h₱1, 000bondc ont ai neddet ac habl e s t oc kwar r ant sf or10 0s har esofRa y' sc ommons t oc k.Tot alpr oc ee dsf r om t hei s s ueamount edt o ₱240 , 000.Thef ai rval ueofe ac hwar r antwas₱2,andt hef ai rval ueoft hebondswi t houtt he war r ant swas₱196 , 000. Thebondswe r ei s s ueda tadi s c ountof a .0 b. 678 c .4, 000 d. 33, 898 5. OnJ une30,20x9,Ki ngCo.hadout s t andi ng9%,₱5, 000, 000f ac eval uebondsma t ur i ngonJ une 30,2x14.I nt er e s twaspa yabl es e mi annual l ye ve r yJ une30andDec ember31.OnJ une30,20x9, af t eramor t i za t i onwasr e c or dedf ort heper i od,t heunamor t i ze dbondpr emi um andbondi s s ue c os t swer e₱30, 000and ₱50, 000,r e s pe c t i ve l y .Ont ha tda t e ,Ki ngac qui r e d al li t sout s t andi ng bondsont heopenmar ke ta t98andr e t i r edt he m.AtJ une30,20 x9,wha tamounts houl dKi ng r e c ogni zeasgai nonr ede mpt i onofbonds ? a .20, 000 b. 80, 000 c .12 0, 00 0 d. 180, 000 6. OnJ ul y31, 20x0,DomeCo.i s s ue d₱1, 000, 000of10%,15yea rbondsa tparandus edapor t i onof t hepr oc ee dst oc al li t s600out s t andi ng11%,₱1, 000f ac eval uebonds ,dueonJ ul y31,2x10,a t 102 .Ont ha tda t e ,unamor t i ze dbondpr emi um r e l a t i ngt ot he11% bondswas₱65, 000. I ni t s20x0 i nc omes t a t eme nt ,wha tamounts houl dDomer e por tasgai norl os s ,be f or ei nc omet axe s ,f r om r e t i r eme ntofbonds ? a .53, 000gai n b. 0 c . ( 65, 00 0)l os s d. ( 77, 000)l os s 7. Dur i ng20x4Pe t er s onCompanye xpe r i e nc edfinanc i aldi ffic ul t i esandi sl i ke l yt ode f aul tona ₱500 , 000,15%,t hr ee ye arnot edat e dJ anuar y 1,20X2,pa yabl et oFor e s tNa t i onalBank.On De c embe r31, 20X4, t hebanka gr ee dt os e t t l et henot eandunpai di nt e r es tof₱75, 000f or20X4f or ₱50, 000 c as h and mar ket abl es ec ur i t i esha vi ng a c ar r yi ng amountof₱375, 000.Pe t er s on' s ac qui s i t i onc os toft hes ec ur i t i e si s₱38 5, 000. Wha tamounts houl dPet e r s onr epor tasagai nf r om t hede btr e s t r uc t ur i ngi ni t s20x 4i nc omes t a t ement ? a .65, 000 b. 75, 000 c .14 0, 00 0 d. 150, 000 8. Cas e yCor por a t i one nt e r e di nt oat r oubl edde btr es t r uc t ur i ngagr e ementwi t hFi r s tSt a t eBank. Fi r s tSt at ea gr e edt oac c e ptl andwi t hac ar r yi ngamountof₱85, 000a ndaf ai rval ueof₱1 20, 000

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i ne xc hangef oranot ewi t hac ar r yi ngamountof₱185, 000. Wha tamounts houl dCas e yr epor tas gai ni ni t si nc omes t at e ment ? a .0 b. 35, 000 c .65 , 000 d. 100, 000 9. WoodCor p. ,ade bt orunder goi ngfinanc i aldi ffic ul t i e sgr ant e dane qui t yi nt er es tt oac r e di t ori n f ul ls et t l e mentofa₱28, 000de btowedt ot hec r edi t or .Att heda t eoft hi st r ans ac t i on,t hee qui t y i nt er e s thad af ai rval ueof₱25, 000and parval ueof₱20, 000.Wha tamounts houl d Wood r e c ogni zeasgai nonr es t r uc t ur i ngofde bt ? a .0 b. 3, 000 c .5, 000 d. 8, 000 10.I n20X2,Ma yCor p.ac qui r edl andbypa yi ng₱7 5, 000downands i gni nganot ewi t hamat ur i t y val ueof₱1, 000, 000.Ont henot e’ sduedat e ,De c embe r31,20 X7,Ma yowed₱40, 000ofac c r ue d i nt er e s tand₱1, 00 0, 000pr i nc i palont henot e .Ma ywasi nfinanc i aldi ffic ul t yandwasunabl et o makeanypa yment s .Ma yandt hebanka gr ee dt oame ndt henot easf ol l ows :  The₱40, 000ofi nt e r es tdueonDec ember31, 20 X7, wasf or gi ve n.  Thepr i nc i paloft henot ewasr educ e df r om ₱1, 000, 000t o₱950, 000andt hema t ur i t yda t e e xt e nded1ye art oDec embe r31, 20X8.  Ma ywoul d ber e qui r e dt omakeonei nt er es tpa ymentt ot al i ng ₱30, 000onDe c embe r31, 20X8.  Theor i gi naleffe c t i vei nt e r e s tr a t ei s10% whi l et hec ur r e ntmar ketr a t eonDec embe r31, 20X7 i s12%. Asar e s ul toft het r oubl e dde btr e s t r uc t ur i ng,Ma ys houl dr e por tagai n,be f or et axe s ,i ni t s20X7 i nc omes t a t e me ntof a .0 b. 165, 000 c .60 , 000 d. 149, 092 “Blessed are the pure in heart, for they will see God.” (Matthew 5:8) - END – SOLUTIONS TO QUIZ 2: 1. B Solution: EFFECT ON DECEMBER 31, 20X1: Using straight line method: Discount on bonds - 1/2/x1 Divide by: Term Annual amortization of discount

150,000 6 25,000

Discount on bonds - 1/2/x1 Amortization - 20x1 Discount on bonds - 12/31/x1

150,000 (25,000) 125,000

Face amount Discount on bonds - 12/31/x1 Carrying amount - 12/31/x1

1,000,000 (125,000) 875,000

Using effective interest method: Date Interest expense 1/2/x1

Payments

Amortization

Present Value 850,000

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12/31/x1

102,000

80,000

Carrying amounts - 12/31/x1: Straight line (erroneous) Effective interest method Difference - overstatement

22,000

872,000

875,000 872,000 (3,000)

EFFECT ON JANUARY 2, 20X7: On January 2, 20x7, maturity date, there will be NO EFFECT of the error on the carrying amount of the bonds because on this date, the discount would have been fully amortized under both the straight line method and the effective interest method. 2. B Solution: Carrying amount of bonds converted Par value of shares issued (50,000 x 1) Share premium

1,300,000 (50,000) 1,250,000

3. D – No gain or loss is recognized when convertible bonds are converted into equity instrument. 4. C Solution: Fair value of bonds without the warrants Face amount of bonds Discount on bonds 5. B Solution: Redemption price (5M x 98%) Less: Carrying amount of bonds: Face amount Unamortized premium Unamortized issue costs Gain on retirement 6. A Solution: Redemption price (600 x 1,000 x 102%) Less: Carrying amount of bonds: Face amount (600 x 1,000) Unamortized premium Gain on retirement 7. D Solution: Payment for the liability: Cash Carrying amount of investment securities Carrying amount of liability settled:

196,000 200,000 (4,000)

4,900,000 5,000,000 30,000 (50,000)

4,980,000 80,000

612,000 600,000 65,000

50,000 375,000

665,000 53,000

425,000

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Principal Accrued interest Gain on settlement

500,000 75,000

575,000 150,000

8. D (185,000 carrying amt. of note - 85,000 carrying amt. of land) = 100,000 gain 9. B (28,000 – 25,000) = 3,000 10. D Solution: The modification is analyzed as follows: Old terms Principal 1,000,000 Accrued interest 40,000 Remaining term ('n')

New terms 950,000 30,000 1 year

The present value of the modified liability is computed as follows: Future cash flows Principal Interest Present value of the modified liability

PV of 1 @10%, n=1 950,000 30,000

0.90909 0.90909

The difference between the old liability and the new liability is tested for substantiality. Carrying amount of old liability (1M principal + 40,000 accrued interest) Present value of modified liability Difference

Present value 863,636 27,273 890,908

1,040,000 890,908 149,092

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Difference Divide by: Carrying amount of old liability

149,092 1,040,000 14.34%

The modification is considered substantial because the modification resulted to a present value of the new obligation different by at least 10% of the present value (carrying amount) of old obligation. Therefore, the old liability is extinguished and the difference of ₱ 149,092 is recognized as gain on extinguishment....