QUIZ Chapter 25 Bonds Payable Other Concepts Printing PDF

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Chapter 25Bonds Payable & Other ConceptsNAME: LOVERS MAE B. BASERGO Date: JAN. 29, Professor: MRS. GWENDOLYN HOLLANESSection:20A003 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 ...

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Chapter 25 Bonds Payable & Other Concepts NAME:LOVERSMAEB.BASERGO Pr of e s s or :MRS.GWENDOLYN HOLLANES

Sec t i on: 2 0 A00 3

Da t e:J AN.2 9, 2 02 1 Sc or e:

QUI Z1: 1 . Ther e s ul tont heye ar e ndbal anc es he e tofani s s ueofa1 0ye art e r m bonds ol da tf ac eamount f ourye a r sa gowi t hi nt e r e s tpa ya bl eJ une1a ndDe c e mbe r1e a c hye ar ,i sa ( an) a . l i abi l i t yf ora c c r ue di nt e r e s t c .i nc r e as ei nde f e r r e dc ha r ge s b .a ddi t i ont obondspa ya bl e d. c ont i nge ntl i a bi l i t y 2 . Unamor t i z e dbonddi s c ounts houl dber e por t e dont hefinanc i a ls t a t e me nt soft hei s s ue rasa a . Di r e c tde duc t i onf r om t hef ac ea mountoft hebond b . Di r e c tde duc t i onf r om t hepr e s e ntval ueoft hebond c . De f e r r e dc har ge d. Pa r toft hei s s uec os t s 3 . St r ai ght l i neamor t i z a t i onofbondpr e mi um ordi s c ount : a .c a nbeus e da sa nopt i onalme t hodofamor t i z a t i oni na l ls i t ua t i ons . b . pr ovi de st hes a met ot ala mountofi nt e r e s te xpe ns eand i nt e r e s tr e ve nuea st hee ffe c t i ve i nt e r e s tme t hodove rt hel i f eoft hebonds . c . pr ovi de st hes amea mount sofi nt e r e s te xpe ns eandi nt e r 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 e r e s tme t hod. d. i sa ppr opr i a t ewhe nt hebondt e r mi se s pe c i al l yl ong. e .i sa ppr opr i a t ef orde e pdi s c ountbonds . 4 . Forabondi s s uewhi c hs e l l sf orl e s st hani t sf a c ea mount , t hemar ke tr a t eofi nt e r e s 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 e dont hebond. c . Le s st hanr a t es t a t e dont hebond. d. Hi ghe rt ha nr a t es t a t e dont hebond. 5 . Themar ke tpr i c eofabondi s s ue da tadi s c ounti st hepr e s e ntva l ueofi t spr i nc i pa la mounta tt he mar ke t( e ffe c t i ve )r a t eofi nt e r e s t a . Le s st hepr e s e ntva l ueofa l lf ut ur ei nt e r e s tpa yme nt sa tt hemar ke t( e ffe c t i ve )r a t eofi nt e r e s t . b . Le s st hepr e s e ntv al ueofa l lf ut ur ei nt e r e s tpa yme nt sa tt her a t eofi nt e r e s ts t a t e d ont he bond. c . Pl ust hepr e s e ntva l ueofa l lf ut ur ei nt e r e s tpa yme nt sa tt hemar ke t( e ffe c t i ve )r a t eofi nt e r e s t . d. Pl ust hepr e s e ntva l ueofa l lf ut ur ei nt e r e s tpa yme nt sa tt her a t eofi nt e r e s ts t a t e d ont he bond. 6 . Whi c hoft hef ol l o wi ngi snotar e l e va ntc ons i de r a t i onwhe ne va l ua t i ngwhe t he rt ode r e c ogni zea financ i all i a bi l i t y ? a . Whe t he rt heobl i ga t i onha sbe e ndi s c har ge d. b . Whe t he rt heobl i ga t i onha sbe e nc a nc e l e d. c . Whe t he rt heobl i ga t i onha se xpi r e d. d. Whe t he rs ubs t ant i a l l ya l lt her i s ksandr e war dsoft heobl i ga t i onha vebe e nt r a ns f e r 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 he rde bti ns t r ume ntme a s ur e da tamor t i z e dc os t ? a . Thes t a t e dc ouponr a t eoft hede bti ns t r ume nt . b . Thei nt e r e s tr a t ec ur r e nt l yc har ge db yt hee nt i t yorbyot he r sf ors i mi l arde bti ns t r ume nt s ( i . e . ,s i mi l a rr e mai ni ng ma t ur i t y ,c as h flow pa t t e r n,c ur r e nc y ,c r e di tr i s k,c ol l a t e r al ,a nd i nt e r e s tba s i s ) . c . Thei nt e r e s tr a t et ha te xa c t l ydi s c ount se s t i ma t e df ut ur ec as hpa yme nt sorr e c e i pt st hr ough t hee x pe c t e dl i f eoft hede bti ns t r ume ntor ,whe na ppr opr i a t e ,as hor t e rpe r i odt ot hene t c a r r yi nga mountoft hei ns t r ume nt . d. Thebas i c , r i s k f r e ei nt e r e s tr a t et ha ti sde r i ve df r om obs e r vabl egov e r nme ntbondpr 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 eowne r s hi ppr i vi l e ge s . b . Abondi safina nc i alc ont r a c t . c . Bondpr i c e sr e ma i nfix e do ve rt i me . d. Abondi s s ue rmus tpa ype r i odi ci nt e r e s t . 9 . Mos tbonds : a .a r emone ymar k e ts e c ur i t i e s . b .a r efloa t i ng r a t es e c ur i t i e s . c . gi vebondhol de r savoi c ei nt hea ffa i r soft hec or por a t i on. d. a r ei nt e r e s t be a r i ngobl i ga t i onsofgove r nme nt sorc or por a t i ons . 1 0.I na n“ a s s e ts wa p, ”whe r eal i abi l i t yi ss e t t l e dt hr ought het r a ns f e rofnonc as has s e t , a .t hega i norl os sons e t t l e me nti sc omput e da st hedi ffe r e nc ebe t we e nt hec a r r yi ngamountof t hel i abi l i t ye xt i ngui s he dandt hef a i rva l ueoft henonc a s ha s s e tt r a ns f e r r e d. b .t hega i norl os sons e t t l e me nti sc omput e da st hedi ffe r e nc ebe t we e nt hec a r r yi ngamountof t hel i abi l i t ye xt i ngui s he dandt hec a r r yi nga mountoft henonc a s ha s s e tt r a ns f e r r e d. c .t hega i norl os sons e t t l e me nti sc omput e da st hedi ffe r e nc ebe t we e nt hec a r r yi ngamountof t hel i a bi l i t ye xt i ngui s he dandt hemor ec l e a r l yde t e r mi na bl ebe t we e nt hef ai rval ueoft he l i a bi l i t ye xt i ngui s he da ndt hec ar r yi nga mountoft henonc as has s e tt r ans f e r r e d. d. noga i 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: LOVERSMAEBASERGO Pr of e s s or :MRS.GWENDOLYN HOLLANES

Sec t i on: 2 0 A00 3

Da t e: J AN.2 9 , 2 02 1 Sc or e:

QUI Z2: 1 . OnJ a nua r y2 ,2 0 x1 ,Na s tCo.i s s ue d8 % bondswi t haf a c ea mountof₱1 , 00 0 , 0 00t ha tma t ur eon J anua r y2,2 0x 7.Thebondswe r ei s s ue dt oyi e l d12 %,r e s ul t i ngi nadi s c ountof₱1 50 , 00 0 .Na s t i nc or r e c t l yus e dt hes t r ai ght l i neme t hodi ns t e a doft hee ffe c t i vei nt e r e s tme t hodt oamor t i z et he di s c ount .How i st hec ar r yi nga mountoft hebondsa ffe c t e db yt hee r r or ? AtDe c .3 1, 2 0 x1 AtJ an.2 ,2 0 x7 AtDe c .3 1 ,2 0x 1 AtJ an.2 ,2 0 x7 a . Ove r s t a t e d Unde r s t a t e d c .Unde r s t a t e d Ove r s t a t e d

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b .Ove r s t a t e d Noe ffe c t d.Unde r s t a t e d Solution: EFFECT ON DECEMBER 31, 20X1: Using straight line method: Discount on bonds - 1/2/x1 Divide by: Term Annual amortization of discount

Noe ffe c t

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 12/31/x1

102,000

Payments

Amortization

80,000

22,000

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

Present Value 850,000 872,000

875,000 872,000 (3,000)

J an2 , 20 x7 The r ewi l lbenoe ffe c tbe c a us et hedi s c ountwoul dha vebe l lf ul l ya mor t i z e dunde rs t r ai ghtl i nea nd e ffe c t i vei nt e r e s tme t hod. 2 . OnJ ul y1,20 0 3 ,af t e rr e c or di ngi nt e r e s ta nda mor t i z a t i on,Yor kCo .c onve r t e d ₱1, 0 00 , 00 0ofi t s 1 2% c onve r t i bl ebondsi nt o5 0 , 0 00s har e sof₱1pa rval ueor di na r ys har e .Ont hec onve r s i onda t e t hec ar r yi ngamountoft hebondswa s₱1 , 3 0 0, 0 00 ,t hef a i rva l ueoft hebondswa s₱1 , 4 0 0, 00 0 , a ndYor k’ sor di nar ys ha r ewa spubl i c l yt r adi nga t₱3 0pe rs har e .Wha ta mountofs har epr e mi um s houl dYor kr e c or da sar e s ul toft hec onve r s i on? a . 9 50 , 0 0 0 b .1 , 2 5 0, 00 0 c .1 , 3 5 0, 00 0 d. 1 , 5 00 , 0 0 0 Solution: Carrying amount of bonds converted 1,300,000 Par value of shares issued (50,000 x 1) (50,000) Share premium 1,250,000 3 . OnApr i l3 0,2 0 x5 ,Wi t tCor p.ha dout s t a ndi ng8%,₱1, 00 0 , 0 0 0f a c ea mount ,c onve r t i bl ebonds ma t ur i ngonApr i l30 ,2 0x 9.I nt e r e s ti spa yabl eonApr i l30a ndOc t obe r31 .OnApr i l3 0 ,2 0 x5 ,al l t he s ebondswe r ec onve r t e di nt o 40 , 00 0s har e sof₱2 0 pa ror di nar ys har e .On t heda t eof c onve r s i on:  Una mor t i z e dbonddi s c ountwa s₱3 0 , 0 00 .

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 

Ea c hbondha daf a i rva l ueof₱1, 0 80 . Ea c hs ha r eofs t oc khadaf ai rva l ueof₱28 .

Wha tamounts houl dWi t tr e c or da sal os sonc onve r s i onofbonds ? a . 1 50 , 0 0 0 b .1 10 , 00 0 c .3 0 , 0 00 d. 0 Expl a na t i on:when convertible bonds are converted into equity instrument no gain or loss is recognized 4 . Ra yCor p.i s s ue dbondswi t haf ac eamountof₱2 0 0, 00 0 .Eac h₱1 , 0 0 0bondc ont a i ne dde t ac ha bl e s t oc kwa r r ant sf or10 0s ha r e sofRa y' sc ommons t oc k.Tot alpr oc e e dsf r om t hei s s ueamount e dt o ₱2 4 0, 00 0 .Thef ai rva l ueofe ac hwa r r antwa s₱2 ,andt hef ai rva l ueoft hebondswi t houtt he war r ant swa s₱1 9 6, 00 0 .Thebondswe r ei s s ue da tadi s c ountof a . 0 b .6 78 c .4 , 0 0 0 d. 3 3, 89 8 Solution: Fair value of bonds without the warrants 196,000 Face amount of bonds 200,000 Discount on bonds (4,000) 5 . OnJ une3 0,20 x 9,Ki ngCo.ha dout s t andi ng9%,₱5, 0 00 , 0 0 0f ac eval uebondsma t ur i ngonJ une 3 0,2 x1 4 .I nt e r e s twa spa ya bl es e mi a nnua l l ye ve r yJ une3 0andDe c e mbe r3 1.OnJ une3 0 ,2 0x 9 , a f t e ra mor t i z a t i onwa sr e c or de df ort hepe r i od,t heuna mor t i z e dbondpr e mi um a ndbondi s s ue c os t swe r e₱3 0 , 0 0 0a nd ₱5 0, 0 00 ,r e s pe c t i ve l y .Ont ha tda t e ,Ki nga c qui r e d al li t sout s t a ndi ng bondsont heope nmar ke ta t98a ndr e t i r e dt he m.AtJ une3 0,2 0 x9 ,wha tamounts houl dKi ng r e c ogni zea sga i nonr e de mpt i onofbonds ? a . 2 0, 00 0 b .8 0, 0 00 c .1 2 0, 00 0 d. 1 80 , 0 0 0 Solution: Redemption price (5M x 98%) 4,900,000 Less: Carrying amount of bonds: Face amount 5,000,000 Unamortized premium 30,000 Unamortized issue costs (50,000) 4,980,000 Gain on retirement 80,000 6 . OnJ ul y3 1, 20 x0 ,DomeCo.i s s ue d₱1, 00 0 , 0 0 0of1 0 %,1 5 ye arbondsa tpa ra ndus e dapor t i onof t hepr oc e e dst oc a l li t s6 00out s t andi ng1 1%,₱1 , 0 00f a c eva l uebonds ,dueonJ ul y3 1,2 x1 0 ,a t 1 02 . Ont ha tda t e ,unamor t i z e dbondpr e mi um r e l a t i ngt ot he11 % bondswas₱6 5, 00 0 .I ni t s2 0x 0 i nc omes t a t e me nt ,wha tamounts houl dDomer e por ta sgai norl os s ,be f or ei nc omet ax e s ,f r om r e t i r e me ntofbonds ? a . 5 3, 00 0gai n b .0 c . ( 6 5 , 0 0 0)l os s d.( 7 7, 0 00 )l os s Solution: Redemption price (600 x 1,000 x 102%) 612,000 Less: Carrying amount of bonds: Face amount (600 x 1,000) 600,000 Unamortized premium 65,000 665,000 Gain on retirement 53,000 7 . Dur i ng20 x 4Pe t e r s onCompa nye xpe r i e nc e dfina nc i a ldi ffic ul t i e sa ndi sl i ke l yt ode f a ul tona ₱5 0 0, 00 0 ,15 %,t hr e e ye a rnot eda t e dJ a nuar y1 ,2 0 X2,pa ya bl et oFor e s tNa t i onalBa nk.On De c e mbe r3 1 ,2 0X4, t hebanka gr e e dt os e t t l et henot ea ndunpai di nt e r e s tof₱75 , 00 0f or2 0X4f or ₱5 0, 0 00 c as ha nd mar ke t abl es e c ur i t i e sha vi ng a c a r r yi ng a mountof₱37 5 , 0 0 0.Pe t e r s on' s

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a c qui s i t i onc os toft hes e c ur i t i e si s₱38 5 , 0 0 0.Wha tamounts houl dPe t e r s onr e por tasagai nf r om t hede btr e s t r uc t ur i ngi ni t s2 0 x4i nc omes t a t e me nt ? a . 6 5, 00 0 b .7 5, 0 00 c .1 4 0, 00 0 d. 1 50 , 0 0 0 Solution: Payment for the liability: Cash 50,000 Carrying amount of investment securities 375,000 425,000 Carrying amount of liability settled: Principal 500,000 Accrued interest 75,000 575,000 Gain on settlement 150,000 8 . Cas e yCor por a t i one nt e r e di nt oat r oubl e dde btr e s t r uc t ur i nga gr e e me ntwi t hFi r s tS t a t eBa nk. Fi r s tSt a t ea gr e e dt oa c c e ptl a ndwi t hac a r r yi nga mountof₱8 5, 0 00a ndaf ai rval ueof₱1 20 , 00 0 i ne x c hangef oranot ewi t hac a r r yi nga mountof₱1 8 5, 00 0 .Wha tamounts houl dCa s e yr e por ta s ga i ni ni t si nc omes t a t e me nt ? a . 0 b .3 5, 0 00 c .6 5 , 0 00 d. 1 00 , 0 0 0 Solution: =carrying amt. of note - carrying amt. of land =185,000 -85,000 = 100,000 gain 9 . WoodCor p. ,ade bt orunde r goi ngfina nc i aldi ffic ul t i e sgr ant e da ne qui t yi nt e r e s tt oac r e di t ori n f ul ls e t t l e me ntofa₱2 8, 0 00de btowe dt ot hec r e di t or .Att heda t eoft hi st r a ns a c t i on,t hee qui t y i nt e r e s tha d af a i rva l ueof₱2 5 , 0 00and pa rva l ueof₱2 0, 00 0 .Wha ta mounts houl d Wood r e c ogni zea sga i nonr e s t r uc t ur i ngofde bt ? a . 0 b .3 , 0 0 0 c .5 , 0 0 0 d. 8 , 0 00 Sol ut i on: 28,000 – 25,000 = 3,000 1 0.I n20 X2,Ma yCor p.ac qui r e dl andb ypa yi ng₱75 , 0 0 0do wna nds i gni nganot ewi t hama t ur i t y va l ueof₱1, 0 00 , 0 0 0.Ont henot e ’ sdueda t e ,De c e mbe r31 ,2 0X7,Ma yowe d₱4 0 , 0 00ofac c r ue d i nt e r e s ta nd₱1 , 0 0 0, 0 00pr i nc i palont henot e .Ma ywasi nfinanc i a ldi ffic ul t ya ndwasunabl et o makea nypa yme nt s .Ma ya ndt heba nka gr e e dt oa me ndt henot ea sf ol l ows :  The₱4 0 , 0 00ofi nt e r e s tdueonDe c e mbe r31 , 20 X7, wa sf or gi ve n.  Thepr i nc i pa loft henot ewa sr e duc e df r om ₱1 , 0 0 0, 00 0t o₱95 0 , 0 00a ndt hema t ur i t yda t e e xt e nde d1ye a rt oDe c e mbe r3 1, 2 0X8.  Ma ywoul d ber e qui r e dt oma keonei nt e r e s tpa yme ntt ot al i ng ₱30 , 00 0onDe c e mbe r3 1 , 2 0X8.  Theor i gi na le ffe c t i vei nt e r e s tr a t ei s1 0 % whi l et hec ur r e ntma r ke tr a t eonDe c e mbe r3 1,2 0 X7 i s1 2%. 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 ax e s ,i ni t s20 X7 i nc omes t a t e me ntof a . 0 b .1 65 , 00 0 c .6 0 , 0 00 d. 1 49 , 0 9 2 Solution: The modification is analyzed as follows: Old terms New terms Principal 1,000,000 950,000 Accrued interest 40,000 30,000 Remaining term ('n') 1 year

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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

“Blessed are the pure in heart, for they will see God.” (Matthew 5:8) - END –

Present value 863,636 27,273 890,908

1,040,000 890,908 149,092...