Ch5-9 - master budget PDF

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BONDS PAYABLE and EFFECTIVE INTEREST METHOD1. Diosa Company issued 5,000, 10-year 10% P1000 bonds on January 1, 2016 at 103 to yield 9%. Interest is payable every June 30 and December 31. On June 30, 2016, how much is the amortized premium?a) 150,000 c) 18, b) 36,500 d) 65,Answer is cSolution:Intere...

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BONDS PAYABLE and EFFECTIVE INTEREST METHOD

1. Diosa Company issued 5,000, 10-year 10% P1000 bonds on January 1, 2016 at 103 to yield 9%. Interest is payable every June 30 and December 31. On June 30, 2016, how much is the amortized premium?

a) 150,000

c) 18,250

b) 36,500

d) 65,000

Answer is c Solution: Interest Paid (5,000,000 x 10% x 6/12) Interest Expense (5,150,000 x 9% x 6/12) Amortized Discount

P250,000 (231,750) P 18,250

2. On May 1, 2016, Mabuhay Company issued 1,000, P2000 face value 6% bonds dated January 1, 2016 with interest payments June 30 and December 31. The entity received cash of P2,150,000 plus accrued interest. What is the discount or premium from the issuance of bonds?

a) 110,000 premium b) 150,000 discount c) 110,000 discount d) 150,000 premium

Answer is a Solution: Cash Received Accrued Interest (2,000,000 x 6% x 4/12) Carrying amount of Bonds

P2,150,000 ( 40,000) P2,110,000

Face Value of Bonds Premium on Bonds

(2,000,000) P 110,000

3. On June 1, 2015, Love Ko To Company issued three thousands, P2000 face value 10% five-year bonds for P5,568,000. The bonds were issued to yield 12% interest. Interest is payable semi-annually on December 1 and June 1. Using the effective interest method, what should be the bond interest expense on June 1, 2016?

a) 334,080

c) 336,125

b) 560,208

d) 280,104

Answer is a Solution: First Interest Payment (June 1,2015 to December 1, 2015) Interest expense (5,568,000 x 12% x 6/12) Interest paid (6,000,000 x 10% x 6/12) Discount amortization Carrying amount as June 1, 2015 Carrying amount as of December 1, 2015

Second Interest Payment (December 1, 2015 to June 1, 2016) Interest expense (5,602,080 x12% x6/12) Interest expense related to second interest payment yet already recognized on December 2015 (336,125 x 1/6) Interest expense on June 1, 2016

P334,080 (300,000) P 34,080 5,568,000 P5,602,080

P336,125

( 56,021) P280,104

4. Umasa Company issued on January 1, 2015 a one thousand, P5000 face value 8% five-year bonds at 105 and paid bond issue costs of 60,000 to yield 7%. Interest is payable annually every December 31. What is the carrying amount of the bonds on December 31, 2015?

a) 5,190,000 b) 5,153,300

c) 5,226,700 d) 5,226,700

Answer is b Solution: Bonds payable at issue price (5,000,000 x 105%) Bond issue costs Carrying amount of bonds, January 1, 2015

P5,250,000 (60,000) P 5,190,000

Interest paid (5,000,000 x 8%) Interest expense (5,190,000 x 7%) Premium Amortization

P400,000 (363,300) P 36,700

Carrying amount Premium amortization Carrying amount, December 31, 2015

P5,190,000 (36,700) P5,153,300

5. Face Value of bonds Nominal rate Effective rate Date of issue

4,000,000 12% 14% January 1,2016

The bonds mature on every December 31 of each year at the rate of 1,000,000 for 4 years. The interest is payable annually on December 31. The present value of 1 at 14% is as follows: One period Two periods Three periods Four periods

.8772 .7695 .6750 .5921

What is the present value of the bonds on January 1, 2016? a) 3,844,928 b) 3,299,528 Answer is a

c) 2,652,608 d) 4,000,000

Solution: (a)

(b)

(axb)

Principal

Interest

Total

PV

Present

Date

Payment

Payment

Payment

Factor

12-31-16

1,000,000

480,000

1,480,000

0.8772

12-31-17

1,000,000

360,000

1,360,000

0.7695

Value 1,298,25 6 1,046,52 0

12-31-18

1,000,000

240,000

1,240,000

0.6749

837,000

12-31-19

1,000,000

120,000

1,120,000

0.5921

663,152 3,844,92 8

6. On July 1, 2015, an entity issued bonds with face amount of 7,000,000 and 10% interest rate for 7,703,000. The bonds are sold to yield 8%. Interest is payable annually. The entity paid bond issue costs of 150,000. On December 31, 2015, the fair value of the bonds is determined to be 7,650,000. The entity elects the fair value option of measuring the bonds payable. What is the carrying amount of the bonds payable on December 31,2015 and the gain or loss in the change of fair value, respectively. a) b) c) d)

7,650,000 and 97,000 gain 7,650,000 and 97,000 loss 7,457,240 and 95,760 gain 7,457,240 and 95,760 loss

Answer is b Solution: Carrying amount of bonds—January 1, 2015 (7,703,000-150,000) Carrying amount of bonds—December 31, 2015 Increase in fair value of bonds payable—loss

P7,553,000 (7,650,000) (P 97,000)

7. On December 31, 2015 the Niloko Company retired its P5,000,000 face value, 10% bonds. The entity paid a total cash of P5,500,000 including the accrued

interest of P400,000. The entity incurred a loss of 150,000 in the retirement of the said bonds. What is the unamortized premium or discount of the retired bonds? a) 350,000 premium b) 250,000 premium

c) 100,000 discount d) 50,000 discount

Answer is d Solution: Total cash paid Accrued interest Retirement price Loss on retirement Carrying amount of bonds

P5,500,000 (400,000) P5,100,000 (150,000) P4,950,000

Face value of bonds Carrying amount of bonds Unamortized discount

P5,000,000 ( 4,950,000) (P 50,000)

8. The entity retired its bond with a face value of P5,000,000 and an unamortized premium of 150,000. The bonds is retired at 105 and paid the accrued interest of 200,000. What is the gain or loss in the retirement of bonds? a) 300,000 loss b) 300,000 gain

c) 100,000 loss d) 100,000 gain

Answer is c Solution: Retirement price (5,000,000 x 105%) Carrying amount of bonds (5,000,000+150,000) Loss on retirement of bonds

P5,250,000 (5,150,000) P 100,000

. 9. On December 31, 2015 the Nanloko Company retired its P8,000,000 face value, 10% bonds. The entity paid a total cash of P8,500,000 including the accrued interest of P400,000. The entity incurred a gain of 150,000 in the retirement of

the said bonds. What is the unamortized premium or discount of the retired bonds? a) 250,000 discount b) 250,000 premium

c) 50,000 discount d) 50,000 premium

Answer is b Solution: Total cash paid Accrued interest Retirement price Gain on retirement Carrying amount of bonds

P8,500,000 (400,000) P8,100,000 150,000 P8,250,000

Carrying amount of bonds Face value of bonds Unamortized premium

P 8,250,000 (P 8,000,000) P 250,000

10. The Makakamove-on Company retired its bond with a carrying amount of P4,850,000 at a price that would gain P200,000. The entity also paid the accrued of P200,000. How much is the total cash paid by the entity? a) 4,850,000 b) 5,250,000

c) 5,050,000 d) 4,650,000

Answer is a Solution: Carrying amount of bonds Gain on retirement of bonds Retirement price Accrued interest Total cash paid COMPOUND FINANCIAL INSTRUMENT

P4,850,000 (200,000) P4,650,000 200,000 P4,850,000

1. ABC Company issued 6,000 of 12%, 12-year, P1,000 face value bonds with detachable share warrants at 120. Each bond has a detachable warrant for ten ordinary shares of ABC Company at a specified option price of P20 per share. The par value of the ordinary share is P15. Immediately after the issuance, the market value of bonds ex warrants was P6,500,000 and the market value of thewarrants was P800,000. Q1: What is the carrying amount of bonds payable at year end? a. 6,000,000 b. 6,500,000

c. 6,900,000 d. 7,200,000

Q2: The issuance of the bonds payable with share warrants will show which of the following? a. A credit to Cash 7,200,000 b. A credit to Bonds Payable 6,500,000 c. A debit to Discount on bonds payable 500,000 d. A credit to Share warrants outstanding 700,000 Answer is b,d Solution: a. Issue price of bonds payable – equal to market value ex-warrants 6,500,000 b. Cash

7,200,000 Bonds Payable 6,000,000 Premiums on bonds payable 500,000 Share warrants outstanding 700,000

2. On December 31, 2015, Divergent Company had outstanding 10%, P2,000,000 face amount convertible bonds payable maturing on December 31, 2020. Interst is payable on June 30 an December 31. Each P1,000 bond is convertible into 50 shares of P15 par value. On December 31, 2015, the unamortized premium on bonds payable was P70,000. On December 31, 2015, 400 bonds were converted when Divergent’s share had a market price of P25. The entity incurred P6,000 in connection with the conversion. No equity component was recognized when the bonds were originally issued. Q1: What is the share premium from the issuance of shares as a result of the bond conversion on December 21,2015?

a. 108,000 b. 114,000

c. 120,000 d. 130,000

Q2: The carrying amount of converted bonds payable is equal to ______. a. 300,000 b. 414,000

c. 1,035,000 d. 2,070,000

Answer is a,b Solution: Bonds Payable Premium on bonds payable Carrying amount

2,000,000 70,000 2,070,000

Carrying amount converted (400/2,000 x 2,070,000 Par value of shares issued (400 x 50 x P15) Share premium Conversion Expenses Net share premium

414,000 (300,000) 114,000 (6,000) 108,000

Carrying amount converted (400/2,000 x 2,070,000)

414,000

3. Lychee Corporation issued P7,000,000 face value, 5-year bonds at 110 on December 31, 2015. Each P1,000 bond was issued with 25 detachable share warrants, each of which entitled the bondholder to purchase one ordinary share of P5 par value at P15. Immediately after issuance, the market value of each warrant is P7. The stated interest on the bonds is 9% payable annually every December 31. However, the prevailing market rate of interest for similar bonds without warrant is 11%. Q1: On December 31, 2015, what amount should be recorded as discount or premium on bonds payable? a. 359,000 b. 395,000

c. 539,000 d. 593,000

Q2: The amount allocated to equity is ____________. a. 1,239,000 b. 1,329,000

c. 3,129,000 d. 3,192,000

Answer is c,a Solution: PV of principal (7,000,000 x 0.59) PV of interest payments (630,000 x 3.70) TOTAL PRESENT VALUE OF BONDS PAYABLE

4,130,000 2,331,000 6,461,000

Bonds payable PV of bonds payable Discount on bonds payable

7,000,000 6,461,000 539,000

Issue price of bonds with warrants (7,000,000 x 110%) PV of bonds payable Residual amount allocated to warrants

7,700,000 (6,461,000) 1,239,000

4. Anneth Company issued 8,000 convertible bonds at the beginning of the current year. The bonds had a five-year term with a nominal rate of interest of 5%, and were issued at par with a face value of P1,000 per bond. Interest is payable annually on December 31. Each bond is convertible into 40 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 P325,000 was credited to share premium from conversion privilege. The bonds were not converted and instead, the entity paid off the convertible bondholders as maturity. Q1: What amount should be recorded as gain or loss on the full payment of the convertible bonds at maturity? a. 8,000,000 loss b. 325,000 loss

c. 325,000 gain d. 0

Q2: Which of the following is false in recording the issuance of the convertible bonds? a. A credit to Cash 8,000,000 b. A credit to Bonds Payable 7,675,000 c. A debit to Discount on bonds payable 325,000 d. A credit to Share warrants outstanding 325,000 Answer is d,c Solution: There is no gain or loss since the bonds were not converted and instead, the entity paid off the convertible bondholders as maturity.

Cash Discount on bonds payable Bonds payable Share Premium - conversion privilege

8,000,000 325,000 8,000,000 325,000

9-10) Fajardo Company had outstanding share capital with par value of P100,000,000 and a 9% convertible bond payable in the face amount of P20,000,000. 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 20 shares of P20 par value in exchange for each P1,000 bond. On June 30, 2015, the holders of P5,000,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was P1,100 per bond and the market price of the share was P30. The total unamortized bond discount at the date of conversion was P900,000. The share premium from conversion privilege has a balance of P3,000,000 on June 30, 2015. Q1: What amount of share premium should be recognized by reason of the conversion of bonds payable into share capital? a. 3,525,000 b. 2,775,000

c. 1,750,000 d. 1,525,000

Q2: The total consideration is equal to ____________.

a. 3,525,000 b. 2,775,000

c. 1,750,000 d. 1,525,000

Answer is d,a Solution: Bonds Payable Discount on bonds payable Carrying amount Carrying amount converted (5/20 x 11,100,000) Applicable share premium from conversion privilege (5/20 x 3,000,000) Total consideration Par value of shares issued (5,000 x 20 x 20) Carrying amount converted (5/20 x 11,100,000) Applicable share premium from conversion privilege (5/20 x 3,000,000) Total consideration

20,000,000 (900,000) 11,100,000 2,775,000 750,000 3,525,000 (2,000,000) 2,775,000 750,000 3,525,000

NOTE PAYABLE 1. U-en-I Company had 1,500,000 note payable due on June 30,2016. Under the existing loan facility, the entity had the discretion to refinance or roll over the note payable for at least twelve months after the end of reporting period. On December 31,2015, what amount of the note payable should be reported as noncurrent liability? a. 1,500,000 b. 1,800,000

c. 2,250,000 d. 0

Answer is a Solution: The entire amount is classified as non-current liability. PAS 1, paragraph 73, provides that if an entity has the discretion to refinance or roll over an obligation for at least twelve months after the end of reporting period, it shall classify the obligation as noncurrent, even if it would otherwise be due within a shorter period.

2. Fred Company reported the following liabilities on December 31,2015: Accounts Payable Short-term borrowings Mortgage payable, current portion P100,000 Note payable, due June 30, 2016

600,000 300,000 2,000,000 900,000

The P900,000 note payable was refinanced with a 5-year loan on January 15, 2016 with the first principal payment due January 15, 2017. The financial statements were issued February 28, 2016. What amount should be reported as current liabilities on December 31, 2015? a) 900,000 b) 1,900,000

c. 1,000,000 d. 700,000

Answer is b Solution: Accounts Payable

600,000

Short-term borrowings Mortgage payable- current portion Note payable Total current liabilities

300,000 100,000 900,000 1,900,000

3. On January 1, 2015, Anne Company sold land to Guring Company. There was no establish market price for the land. Guring gave Anne a P3,000,000 noninterest bearing note payable in three equal annual installments of P1,000,000 with the first payment due December 31, 2015. The note has no ready market. The prevailing rate of interest for a note of this type is 12%. The present value of a P3,000,000 note payable in three equal annual installments of P1,000,000 at 12% rate of interest is P2,401,830. What is the carrying amount of the note payable on December 31, 2015? a) 2,401,830 b) 1,401,830

c. 1,690,050 d. 3,000,000

Answer is c Solution: Note Payable Present Value Discount on note payable - January 1, 2015 Amortization or interest expense (12% × 2,401,830) Discount on note payable - December 31, 2015

3,000,000 (2,401,830) 598,170 288,220 309,950

Note payable - January 1, 2015 Annual payment on December 31, 2015 Note payable - December 31, 2015 Discount on note payable - December 31, 2015 Carrying amount - December 31, 2015

3,000,000 1,000,000 2,000,000 309,950 1,690,050

4. On March 1, 2015, Puring Company borrowed P500,000 and signed a 2-year note bearing interest at 8% per annum compounded annually. Interest is payable in full at maturity on February 28, 2017. What amount should be reported as accrued interest payable on December 31, 2016? a) 33,333

c. 76,000

b) 40,000

d. 80,000

Answer is c Solution: Accrued interest from March 1, 2015 to February 28, 2016 (500,000 × 8%) Accrued interest from March 1 to December 31, 2016 (500,000 + 40,000 × 8% × 10/12) Accrued interest payable - December 31, 2016

40,000 36,000 76,000

5. On July 1, 2015, Arman Company obtained a P1,000,000, 180-day bank loan at an annual rate of 10%. The loan agreement requires Arman to maintain a P200,000 compensating balance in its checking account. Arman would otherwise maintain a balance of only P100,000 in this account. The checking account earns interest at an annual rate of 5%. What is the effective interest rate on the borrowing? a) 10% b) 10.67%

c. 11.33% d. 10.56%

Answer is d Solution: Interest expense (1,000,000 × 10% × 180/360) Interest income on compensating balance in excess of the normal checking account balance (100,000 × 5% × 180/360) Net interest expense

50,000

(2,500) 47,500

Net proceeds of loan (1,000,000 - 100,000) Effective amount (900,000 × 180/360) Effective interest rate (47,500/450,000)

900,000 450,000 10.56%

6. On January 1, 2015, Jinky Company signed a P200,000 noninterest bearing note at a discount rate of 11%. The entity elected the fair value option for reporting the note payable. On December 31, 2015, the credit rating and risk factors indicated that the rate of interest applicable to its borrowings was 10%. The present value factors at 11% and 9% are as follows:

PV factor 11%, 3 periods PV factor 11%, 2 periods PV factor 11%, 1 period

.731 .812 .901

PV factor 10%, 3 periods .751 PV factor 10%, 2 periods .826 PV factor 10%, 1 period .909

Q1: What is the initial carrying amount of the note payable on January 1, 2015? a) 146,200 b) 150,200

c. 162,400 d. 165,200

Q2: What is the carrying amount of the note payable on December 31, 2015? a) 165,200 b) 162,400

c. 181,800 d. 150,200

Answer is a,a Solution: a. Fair value of note - January 1, 2015 (200,000 × .731)

146,200

b. Fair value of note - December 31, 2015 (200,000 × .826) 165,200

7. On July 1, 2015, Daniel Company borrowed P2,000,000 on a 11% five-year note payable. On December 31, 2015, the fair value of the note is determined to be P1,950,000 based on market and interest factors. The entity has elected the fair value option for reporting the financial liability. Q1: What amount should be reported as interest expense for 2015? a) 220,000 b) 214,500

c. 110,000 d. 107,250

Q2: What is the carrying amount of the note payable on December 31, 2015? a) 2,000,000 b) 1,950,000

c. 1,000,000 d. 1,780,000

Q3: What is the gain or loss to be recognized in 2015 as a result of the fair value option? a) 150,000 gain b) 150,000 loss...