NOTES PAYABLE AND BONDS PAYABLE QUIZ

NAME: Date:
Professor: Section: Score:

A. MULTIPLE CHOICE. Choose the best answer. If the answer is not given, write R.

1. On August 1, 20x1, an entity acquired a new equipment that it does not have to pay for until
September 1, 20x5. The total payment on September 1, 20x5, will include both principal and interest.
The initial measurement of the note and the equipment is
a. payment for the principal multiplied by Present value of ₱1
b. payment for interest multiplied by Present value of ordinary annuity of ₱1
c. a plus b
d. total payment on the note multiplied by Present value of ₱1 (ANS)

2. On March 1, 20X4, Fine Co. borrowed ₱10,000 and signed a two-year note bearing interest at 12% per
annum compounded annually. Interest is payable in full at maturity on February 28, 20X6. What
amount should Fine report as a liability for accrued interest at December 31, 20X5?
a. 0 b. 1,000 c. 1,200 d. 2,320

Solution:
Interest expense in 20x4 (10,000 x 12% x 10/12) 1,000
Interest expense in 20x5 [(10,000 + 1,000) x 12%] 1,320
Interest payable (compounded) - 12/31/x5 2,320

3. On December 30, 20X6, Bart, Inc., purchased a machine from Fell Corp. in exchange for a noninterest
bearing note requiring eight payments of ₱20,000. The first payment was made on December 30,
20X6, and the others are due annually on December 30. At the date of issuance, the prevailing rate of
interest for this type of note was 11%. On Bart's December 31, 20X6, balance sheet, the note payable
to Fell was
a. 94,240 b. 102,920 c. 104,620 d. 114,240

Solution:
Cash flow 20,000
PV of annuity due of 1 @11%, n=8 5.712
PV of note on Dec. 30, 20x6 114,240
Less: First installment on Dec. 31, 20x6 (20,000)
PV of note on Dec. 31, 20x6 94,240

The next two items are based on the following information:

House Publishers offered a contest in which the winner would receive ₱1,000,000, payable over 20 years.
On December 31, 2000, House announced the winner of the contest and signed a note payable to the
winner for ₱1,000,000, payable in ₱50,000 installments every January 2. Also on December 31, 2000,
House purchased an annuity for ₱418,250 to provide the ₱950,000 prize monies remaining after the first
₱50,000 installment, which was paid on January 2, 2001.

4. In its December 31, 20x0, balance sheet, what amount should House report as note payable-contest
winner, net of current portion?
a. 368,250 b. 418,250 c. 900,000d. 950,000

418,250 – the cash price equivalent of the annuity purchased.

5. In its 20x0 income statement, what should House report as contest prize expense?
a. 0 b. 418,250 c. 468,250 d. 1,000,000

(418,250 + 50,000 first payment made immediately) = 468,250 total contest prize expense

6. On December 1, 20x5, Money Co. gave Home Co. a ₱200,000, 11% loan. Money paid proceeds of
₱194,000 after the deduction of a ₱6,000 nonrefundable loan origination fee. Principal and interest
are due in 60 monthly installments of ₱4,310, beginning January 1, 20x6. The repayments yield an
effective interest rate of 11% at a present value of ₱200,000 and 12.4% at a present value of
₱194,000. What amount of income from this loan should Money report in its 20x5 income
statement?
a. 0 b. 1,833 c. 2,005 d. 7,833

1. (194,000 x 12.4% x 1/12) = 2,005

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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 interest c. increase in deferred charges
b. addition to bonds payable d. contingent liability

2. Straight-line amortization of bond premium or discount:

a. can be used as an optional method of amortization in all situations.
b. provides the same total amount of interest expense and interest revenue as the effective interest
method over the life of the bonds.
c. provides the same amounts of interest expense and interest revenue each interest period as the
effective interest method.
d. is appropriate when the bond term is especially long.
e. is appropriate for deep discount bonds.

3. The market price of a bond issued at a discount is the present value of its principal amount at the
market (effective) rate of interest
a. Less the present value of all future interest payments at the market (effective) rate of interest.
b. Less the present value of all future interest payments at the rate of interest stated on the bond.
c. Plus the present value of all future interest payments at the market (effective) rate of interest.
d. Plus the present value of all future interest payments at the rate of interest stated on the bond.

4. What is the effective interest rate of a bond or other debt instrument measured at amortized cost?
a. The stated coupon rate of the debt instrument.
b. The interest rate currently charged by the entity or by others for similar debt instruments (i.e.,
similar remaining maturity, cash flow pattern, currency, credit risk, collateral, and interest basis).
c. The interest rate that exactly discounts estimated future cash payments or receipts through the
expected life of the debt instrument or, when appropriate, a shorter period to the net carrying
amount of the instrument.
d. The basic, risk-free interest rate that is derived from observable government bond prices.

1. On January 2, 20x1, Nast Co. issued 8% bonds with a face amount of ₱1,000,000 that mature on
January 2, 20x7. The bonds were issued to yield 12%, resulting in a discount of ₱150,000. Nast
incorrectly used the straight-line method instead of the effective interest method to amortize the
discount. How is the carrying amount of the bonds affected by the error?

At Dec. 31, 20x1 At Jan. 2, 20x7 At Dec. 31, 20x1 At Jan. 2, 20x7
a. Overstated Understated c. Understated Overstated
b. Overstated No effect d. Understated No effect

B
Solution:
EFFECT ON DECEMBER 31, 20X1:
Using straight line method:
Discount on bonds - 1/2/x1 150,000
Divide by: Term 6
Annual amortization of discount 25,000

Discount on bonds - 1/2/x1 150,000

Amortization - 20x1 (25,000)
Discount on bonds - 12/31/x1 125,000

Face amount 1,000,000

Discount on bonds - 12/31/x1 (125,000)
Carrying amount - 12/31/x1 875,000

Using effective interest method:

Date Interest expense Payments Amortization Present Value
1/2/x1 850,000
12/31/x1 102,000 80,000 22,000 872,000

Carrying amounts - 12/31/x1:

Straight line (erroneous) 875,000
Effective interest method 872,000
Difference - overstatement (3,000)

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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. On July 1, 2003, after recording interest and amortization, York Co. converted ₱1,000,000 of its 12%
convertible bonds into 50,000 shares of ₱1 par value ordinary share. On the conversion date the
carrying amount of the bonds was ₱1,300,000, the fair value of the bonds was ₱1,400,000, and York’s
ordinary share was publicly trading at ₱30 per share. What amount of share premium should York
record as a result of the conversion?
a. 950,000 b. 1,250,000 c. 1,350,000 d. 1,500,000

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. On April 30, 20x5, Witt Corp. had outstanding 8%, ₱1,000,000 face amount, convertible bonds
maturing on April 30, 20x9. Interest is payable on April 30 and October 31. On April 30, 20x5, all these
bonds were converted into 40,000 shares of ₱20 par ordinary share. On the date of conversion:
 Unamortized bond discount was ₱30,000.
 Each bond had a fair value of ₱1,080.
 Each share of stock had a fair value of ₱28.

What amount should Witt record as a loss on conversion of bonds?

a. 150,000 b. 110,000 c. 30,000 d. 0

No gain or loss is recognized when convertible bonds are converted into equity instrument.

4. Ray Corp. issued bonds with a face amount of ₱200,000. Each ₱1,000 bond contained detachable
stock warrants for 100 shares of Ray's common stock. Total proceeds from the issue amounted to
₱240,000. The fair value of each warrant was ₱2, and the fair value of the bonds without the warrants
was ₱196,000. The bonds were issued at a discount of
a. 0 b. 678 c. 4,000 d. 33,898

Solution:
Fair value of bonds without the warrants 196,000
Face amount of bonds 200,000
Discount on bonds (4,000)

5. On June 30, 20x9, King Co. had outstanding 9%, ₱5,000,000 face value bonds maturing on June 30,
2x14. Interest was payable semiannually every June 30 and December 31. On June 30, 20x9, after
amortization was recorded for the period, the unamortized bond premium and bond issue costs were
₱30,000 and ₱50,000, respectively. On that date, King acquired all its outstanding bonds on the open
market at 98 and retired them. At June 30, 20x9, what amount should King recognize as gain on
redemption of bonds?
a. 20,000 b. 80,000 c. 120,000 d. 180,000

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. On July 31, 20x0, Dome Co. issued ₱1,000,000 of 10%, 15-year bonds at par and used a portion of the
proceeds to call its 600 outstanding 11%, ₱1,000 face value bonds, due on July 31, 2x10, at 102. On
that date, unamortized bond premium relating to the 11% bonds was ₱65,000. In its 20x0 income
statement, what amount should Dome report as gain or loss, before income taxes, from retirement of
bonds?
a. 53,000 gain b. 0 c. (65,000) loss d. (77,000) loss

Solution:
Redemption price (600 x 1,000 x 102%) 612,000
Less: Carrying amount of bonds:

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Face amount (600 x 1,000) 600,000
Unamortized premium 65,000 665,000
Gain on retirement 53,000

7. During 20x4 Peterson Company experienced financial difficulties and is likely to default on a
₱500,000, 15%, three-year note dated January 1, 20X2, payable to Forest National Bank. On
December 31, 20X4, the bank agreed to settle the note and unpaid interest of ₱75,000 for 20X4 for
₱50,000 cash and marketable securities having a carrying amount of ₱375,000. Peterson's acquisition
cost of the securities is ₱385,000. What amount should Peterson report as a gain from the debt
restructuring in its 20x4 income statement?
a. 65,000 b. 75,000 c. 140,000 d. 150,000

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. Casey Corporation entered into a troubled-debt restructuring agreement with First State Bank. First
State agreed to accept land with a carrying amount of ₱85,000 and a fair value of ₱120,000 in
exchange for a note with a carrying amount of ₱185,000. What amount should Casey report as gain in
its income statement?
a. 0 b. 35,000 c. 65,000 d. 100,000

(185,000 carrying amt. of note - 85,000 carrying amt. of land) = 100,000 gain

9. Wood Corp., a debtor undergoing financial difficulties granted an equity interest to a creditor in full
settlement of a ₱28,000 debt owed to the creditor. At the date of this transaction, the equity interest
had a fair value of ₱25,000 and par value of ₱20,000. What amount should Wood recognize as gain
on restructuring of debt?
a. 0 b. 3,000 c. 5,000 d. 8,000

(28,000 – 25,000) = 3,000

10. On January 1, 20x1, an entity issues a 4-year, non-interest bearing note payable amounting to Php
4,800,000 in exchange for equipment. The principal on the note is due in three equal annual
installments payable every December 31. The effective interest rate on January 1, 20x1 is 14%.

a. Compute for current and noncurrent portions of the note payable on December 31,
20x2.
b. Provide all the entries during the term of the note payable.

Requirement (a):

Cash flows 1,200,000

PV ord. annuity @14%, n=4 2.91371
Present value - 1/1/x1 3,496,452

Date Payments Interest expense Amortization Present value

1/1/x1 3,496,452
12/31/x1 1,200,000 489,503 710,497 2,785,955
12/31/x2 1,200,000 390,034 809,966 1,975,989
12/31/x3 1,200,000 276,638 923,362 1,052,627
12/31/x4 1,200,000 147,368 1,052,632 (5)

Current portion, 12/31/x2: 923,362

Noncurrent portion, 12/31/x2: 1,052,627

Requirement (b):

1/1/x1

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Equipment 3,496,452
Discount on note payable 1,303,548
Note payable 4,800,000

12/31/x1
Note payable 1,200,000
Interest expense 489,503
Discount on note payable 489,503
Cash 1,200,000

12/31/x2
Note payable 1,200,000
Interest expense 390,034
Discount on note payable 390,034
Cash 1,200,000

12/31/x3
Note payable 1,200,000
Interest expense 276,638
Discount on note payable 276,638
Cash 1,200,000

12/31/x4
Note payable 1,200,000
Interest expense 147,368
Discount on note payable 147,368
Cash 1,200,000

On January 1, 20x1, an entity obtains an 11%, Php 5,000,000 bank loan. The bank charges then entity an
8.74% nonrefundable loan origination fee. The principal on the loan matures on December 31, 20x4 but
interest is due annually every Dec 31.
Compute for the initial carrying amount of the loan.
Compute for the effective interest rate on the loan
Compute for the carrying amount of the loan on December 31, 20x1.

Requirement (a):
Loan payable 5,000,000
Transaction costs (5M x 8.75%) (437,000)
Carrying amount - 1/1/x1 4,563,000

Requirement (b):
Trial and error:

Working formula:
 (Principal: 5,000,000 x PV of 1 @ x%, n=4) + (Interest: 550,000 x PV ordinary annuity @ x%, n=4) =
4,563,000

First trial: @14%

 (Principal: 5,000,000 x PV of 1 @ 16%, n=4) + (Interest: 550,000 x PV ordinary annuity @ 16%, n=4) =
4,563,000
 (5,000,000 x 0.59208) + (550,000 x 2.91371) = 4,563,000
 (2,960,400 + 1,602,541) = 4,563,000
 4,562,941 = 4,563,000

If the difference of ₱60 is deemed immaterial then 14% is regarded as the effective interest rate.

Requirement (c):
Date Payments Interest expense Amortization Present value
1/1/x1 4,563,000
12/31/x1 550,000 638,820 88,820 4,651,820
12/31/x2 550,000 651,255 101,255 4,753,075
12/31/x3 550,000 665,430 115,430 4,868,505
12/31/x4 550,000 681,591 131,591 5,000,096

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At year-end, Roth Company issued a Php 1,000,000 face value note payable to Wake Company in
exchange for services rendered to Roth.

The note, made at usual trade terms, is due in nine months and bears interest, payable at maturity, at the
annual rate of 3%. The market interest rate is 8%. The compound interest factor of 1 due in nine months
at 8% is 0.944.

At what amount should the note payable be reported at year-end?

a. 1,030,000
b. 1,000,000 (ANS)
c. 965,200
d. 944,000

Loob Company had the following loans at 12% interest payable at maturity. Loob repaid each loan on
scheduled maturity date.

Date Amount Maturity date Term

11/1/2016 500,000 10/31/2017 1 year
2/1/2017 1,500,000 7/31/2017 6 months
5/1/2017 800,000 1/31/2018 9 months

The entity recorded interest expense when the loans are repaid. As a result, interest expense of Php
150,000 was recorded in 2017.

What amount should be reported as interest expense for 2017?

a. 150,000
b. 204,000 (ANS)
c. 246,000
d. 236,000

Able Company had the following amounts of long-term debt outstanding on December 31, 2017:

14% term note, due 2018 500,000

11% term note, due 2020 1,500,000
8% note, due in 11 equal annual principal 1,100,000
payments, plus interest beginning December 31,
2018
7% guaranteed debentures, due 2019 1,000,000
Total 4, 100,000

The annual sinking-fund requirement on the guaranteed debentures is Php 200,000 per year.

What amount should be reported as current maturities of long-term debt on December 31, 2017?

a. 500,000
b. 500,000
c. 100,000
d. 600,000 (ANS)

At year-end, Sunshine Company showed the following data with respect to a matured obligation:

Note payable 5,000,000

Accrued interest payable 500,000

The entity is threatened with a court suit if it could not pay a maturing debt. Accordingly, the entity
entered into an agreement with the creditor for the issuance of share capital in full settlement of the note
payable.

The agreement provided for the issue of 35,000 shares with par value of Php 100. The share is currently
quoted at Php 130.

The fair value of the note payable on the date of restructuring is Php 4,700,000.

1. What amount should be recognized as gain from extinguishment of debt?

a. 1,000,000
b. 2,000,000
c. 950,000 (ANS)
d. 800,000

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 2. If the shares do not have fair value, what amount should be recognized as gain from
extinguishment of debt?
a. 200,000
b. 800,000 (ANS)
c. 300,000
d. 0

3. If both the shares and the note payable do not have fair value, what amount should be
recognized as gain from extinguishment of debt?
a. 2,000,000
b. 1,500,000
c. 1,000,000
d. 0 (ANS)

On April 1, 2017, Greg Company issued at Php 99 plus accrued interest, 2,000 of 8% Php 1,000 face value
bonds. The bonds are dated January 1, 2017, mature on January 1, 2027, and pay interest on January 1
and July 1. The entity paid bond issue cost of Php 70,000.

From the bond issuance, what is the net cash received?

a. 2,020,000
b. 1,980,000
c. 1,950,000 (ANS)
d. 1,910,000

On July 1, 2017, Carr Company issued at 104, five thousand bonds of 10% Php 1,000 face amount. The
bonds were issued through an underwriter to whom the entity paid bond issue cost of Php 125,000.

On July 1, 2017, what amount should be reported as bond liability?

a. 4875000
b. 5075000 (ANS)
c. 5200000
d. 5325000

On January 1, 2017, Carrow Company issued 100025 bonds in the face amount of Php 1,000,000 that
mature on December 31, 2026.

The bonds were issued for Php 886,000 to yield 12%, resulting in bond discount of Php 114,000.

The entity used the interest method of amortizing bond discount. Interest is payable on June 30 and
December 31.

For the year ended December 31, 2017, what amount should be reported as bond interest expense?

a. 106,510 (ANS)
b. 100,000
c. 53,160
d. 50,000

At the beginning of current year, Colt Company issued ten-year bonds with a face amount of Php
5,000,000 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. 1,927,500
c. 5,614,500
d. 4,385,500 (ANS)

At the beginning of current year, Case Company issued Php 5,000,000 of 12% nonconvertible 5-year
bonds at 103.

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In addition, each Php 1,000 bond was issued with 30 detachable share warrants, each of which entitled
the bondholder to purchase, for Php 50, one ordinary share of Case Company, par value Php 25.

The quoted market value of each warrant was Php 4. The market value of the bonds ex-warrants at the
time of issuance is 95.

What is the carrying amount of the bonds payable?

a. 5,000,000
b. 4,750,000 (ANS)
c. 5,150,000
d. 4,550,000

What amount of the proceeds from the bond issue cost should be recognized as an increase in
shareholders’ equity?
a. 600,000
b. 300,000
c. 200,000
d. 400,000 (ANS)

Clay Company had Php 600,000 convertible 8% bonds payable outstanding on June 30, 2017. Each Php
1,000 bond was convertible into 10 ordinary shares of Php 50 par value.

On July 1, 2017, the interest was paid to bondholders, and the bonds were converted into ordinary shares,
which had a fair value of Php 75 per share.

The unamortized premium on these bonds was Php 12,000 at the date of conversion. No equity
component was recognized when the bonds were originally issued.

What is the increase in share capital as a result of the bond conversion?

a. 300,000 (ANS)
b. 306,000
c. 450,000
d. 600,000

What is the increase in share premium as a result of the bond conversion?

a. 312,000 (ANS)
b. 306,000
c. 162,000
d. 12,000

Young Company issued 5,000 convertible bonds at the beginning of the current year. The bonds had a
four-year term with a stated rate of interest of 6%, and were issued at par with a face amount of Php
1,000 per bond. Interest is payable annually on December 31.

Each bond is convertible into 50 ordinary shares with a par value of Php 10. The market rate of interest on
similar nonconvertible bond is 9%.

At the issuance date, the amount of Php 485,000 was credited to share premium from conversion
privilege.

The bond were not converted and instead, the entity paid off the convertible bondholders as maturity.

What amount should be recorded as gain or loss on the full payment of the convertible bonds at
maturity?
a. 2,500,000 gain
b. 485,000 loss
c. 485,000 gain
d. 0 (ANS)
MIAW