Effective Interest Method PDF

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CHAPTER 9EFFECTIVE INTEREST METHODMarket price of bondsProblem 9-1 (IAA) On July 1, 2019, Tara Company issued 4,000 bonds of 8%, P1,000 face amount for P3,504,000. The bonds were issued to yield 10%. The bonds are dated July 1, 2019 and mature on July 1, 2029. Interest is payable semiannually on Jan...

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CHAPTER 9 EFFECTIVE INTEREST METHOD Market price of bonds

Problem 9-1 (IAA) On July 1, 2019, Tara Company issued 4,000 bonds of 8%, P1,000 face amount for P3,504,000. The bonds were issued to yield 10%. The bonds are dated July 1, 2019 and mature on July 1, 2029. 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, 2019? a. 30,400 b. 24,800 C. 19,840 d. 15,200

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Problem 9-2 (AICPA Adapted) On January 1, 2019, Carrow Company issued 10% bonds in the face amount of P1,000,000 that mature on December 31, 2028, 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 June 30 and December 3 1.

For the year ended December 31,2019, what amount should be reported as bond interest expense? a. 106,510 b. 100,000 C. 53,160 d. 50,000

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Problem 9-3 (AICPA Adapted) On January 1, 2019, West Company issued 9% bonds in the face amount of P5.000,000 which mature on January 1,2029. The bonds were issued for P4,965,000 to yield 10%. Interest is payable annually on December 31. The entity used the interest method of amortizing bond discount. 1. What amount should be reported as interest expense for 2019? a. 450,000 b. 469,500 C. 422,550 d. 500,000 2. On December 31, 2019, what is the carrying amount of the bonds payable? a. 4,695,000 b. 4,714,500 C. 4,704,750 d. 5,000,000

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Problem 9-4 (AICPA Adapted) On January 1, 2019, Wolf Company issued 10% bonds in the face amount of P5,000,000, which mature on January 1, 2029 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. 1. On December 31,2019, what is the adjusted unamortized bond premium? a. 675,000 b. 629,000 C. 607,500 d. 507,500 2. What is the carrying amount of bonds payable on December 31, 2019? a. 5,000,000 b. 5,629,000 c. 4,371,000 d. 5,675,000

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Problem 9-5(AICPA Adapted) Webb Company had outstanding 7%, 10-year bond payable with face amount of P'5,000,000. The bond was originally sold to yield 6% annual interest. The entity used the effective interest method to amortize bond premium. On January 1, 2019, the carrying amount of the bond payable was P5,250,000. 1. What amount of unamortized premium on bond payable should reported on December 31, 2019? a. 225,000 b. 172,500 C. 215,000 d. 52,500 2. What is the carrying amount of the bond payable on December 31, 2019? a. 5,250,000 b. 4,785,000 c. 5,215,000 d. 5,000,000

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Problem 9-6 (AICPA Adapted) On January 1, 2019, Ward Company issued 9% bonds in face amount of P4,000,000 which mature on January 1, 2029. 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. 1. On December 31, 2019, what is the unamortized bond discount? a. 228,400 b. 208,000 C. 206,440 d. 204,000 2. What is the carrying amount of bonds payable on December 31, 2019? a. 3,756,000 b. 4,000.000 C. 3,771,600 d. 3,740,400

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Problem 9-7(lAA) On January 1,2019, Moon Company reported 9% bonds payable of P4,000,000 less unamortized discount of P320,000. Further examination revealed that these bonds were issued to yield 10%. The amortization of the bond discount was recorded using the effective interest method. Interest was paid on January 1 and July 1 of each year. On July 1,2019, the entity retired the bonds at 103 before maturity. What amount should be recognized as loss on retirement of bonds payable on July 1, 2019? a. 436,000 b. 440,000 C. 432,000 d. 120,000

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Problem 9-8 (LAA) On December 31,2019, Marie Company reported bonds payable of P7,360,000 and accrued interest payable of P200,000. The bonds are retired, on December 31, 2019 for P8,160,000 excluding accrued interest. What amount should be reported as gain or loss on extinguishment of bonds payable? a. 800,000 gain b. 800,000 loss c. 600,000 gain d. 600,000 loss 126

Problem 9-9 (IAA) On December 31, 2019, Boheme Company reported 9% bonds payable due December 31, 2024 with a carrying amount of P15,405,000. The bonds were issued on December 31,2015 and had a face amount of P15,000,000 with interest payable semiannually on June 30 and December 31., On December 31,2019, the entity retired P5,000,000 of these bonds at 98. What amount should be reported as gain or loss on the retirement of the bonds for 2019? a. 235,000 gain b. 235.000 loss c. 100,000 gain d. 100,000 loss 126

Problem 9-10 (IFRS) On January 1, 2019, Luyang Company issued 3-year bonds with amount 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 is 12% after considering the bond issue cost. The interest is payable annually on December 31. The entity used the effective interest method in amortizing bond discount and issue cost. What is the carrying amount of the bonds payable on December 31, 2019? a. 4,840,000 b. 4,831,200 C. 4,848,000 d. 5,000,000

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Problem 9-11 (FRS) On January 1, 2019, Masbate Company issued 5-year bonds with face amount 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, 2019, what is the carrying amount of the bonds payable? a. 5,000,000 b. 5,400,000 c. 5,345,200 d. 5,430,000

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Problem 9-12 (IFRS) On January 1, 2019, Samal 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, 2019 of five annual payments. The entity amortized bond discount by the interest method. On December 31, 2019, what is the carrying amount of the bonds payable? a. 4,832,700 b. 3,832,700 c. 4,805,600 d. 3,805,600

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Problem 9-13 (AICPA Adapted) On January 1, 2019, 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, 2019 of five annual payments. Due date

Principal

Interest

PV on 1/1/2019

12/31/2019

800,000

320,000

1,018,000

12/31/2020

800,000

256,000

872,200

12/31/2021

800,000

192,000

745,000

12/31/2022

800,000

128,000

633,800

12/31/2023

800,000

64,000

536,600

On December 31, 2019, what is the carrying amount of thę bonds payable? a. 3,005,600 b. 3,066,160 c. 2,982,000 d. 2,787,600

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Problem 9-14 (AICPA Adapted) At the beginning of current year, Colt Company issued ten-year bonds with a face amount of P5,000,000 and a stated interest rate of 8% payable annually at every year-end. 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. 5,000,000 b.927.500 c. 5,614,500 d. 4,385,500 131

Problem 9-15 (LAA) White Company issued P2,000,000 face value of 10-year bonds on January 1. The bonds pay interest on January I and July 1 and had a stated rate of 10%. The market rate of interest is 8% What is the issue price of the bonds? a. 2,262,000 b. 2,113,000 C. 2,159,000 d. 2,279,000 131

Problem 9-16 (AICPA Adapted) Margaret Company provided the following information in relation to the issuance of bònds at the beginning of current year Face amount

P5,000,000

Term

Ten years

Stated interest rate

6%

Interest payment date

Annually on December 31

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

7.360

6.418

Present value of an ordinary annuity of 1 for 10 periods What is the issue price of the bonds payable? a. 5,000,000 b. 4,318,000 C. 4,035,400 d. 2,110,000

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