Chapter #16

Financial Liabilities

TRUE OR FALSE

1. Government taxes payable such as Value Added Tax Payable, Withholding Taxes payable and Income
Tax Payable are considered Financial Liabilities. False
2. A preference share that provides for mandatory redemption by the issuer for a fixed or determinable
amount at a fixed or determinable future date or gives the holder the right to require the issuer to
redeem the instrument at or after a particular date for a fixed or determinable amount, is an equity
instrument. False
3. All long-term debt maturing within the next year must be classified as a current liability on the balance
sheet. False
4. Bond issues that mature in installments are called serial bonds. True
5. A bond may only be issued on an interest payment date. False
6. Discount on Notes Payable is a contra account to Notes Payable on the statement of financial position.
True
7. A financial instrument that gives the holder the right to put it back to the issuer for cash or another
financial asset (a 'puttable instrument’) is a financial liability. True
8. The cash paid for interest will always be greater than interest expense when using effective-interest
amortization for a bond. False
9. A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense
being recognized. False
10. If an entity does not have an unconditional right to avoid delivering cash or another financial asset to
settle a contractual obligation, the obligation meets the definition of a financial liability. True
11. Companies should recognize the expense and related liability for compensated absences in the year
earned by employees. True
12. Effective rate, also referred as market yield or market rate, is the interest rate which investors are
willing to accept on a bond at the time of its issue. True
13. Items such as deferred revenue and most warranty obligations are financial liabilities. False
14. The replacement of an existing bond issue with a new one is called refunding. True
15. If a long-term note payable has a stated interest rate, that rate should be considered to be the effective
rate. False
16. A mortgage bond is referred to as a debenture bond. False
17. If the fair value of the equity instruments issued cannot be reliably measured, then the equity
instruments shall be measured to reflect the fair value of the financial liability extinguished. True
18. The implicit interest rate is the rate that equates the cash received with the amounts to be received in
the future. True
19. If the market rate is greater than the coupon rate, bonds will be sold at a premium. False
20. If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as
current. False
21. Financial liabilities are generally classified and measured at amortized cost unless they meet the
criteria for classification at fair value through profit or loss. True
22. The interest rate written in the terms of the bond indenture is called the effective yield or market rate.
23. Dividends in arrears on cumulative preferred stock should be recorded as a current liability. False
24. Amortization of premium increases bond interest expense, while amortization of a discount decreases
bond interest expense. False
25. The stated rate is the same as the coupon rate. True

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MULTIPLE CHOICE QUESTIONS

1. Liabilities are
A. Any accounts having credit balances after closing entries are made.
B. deferred credits that are recognized and measured in conformity with generally accepted
accounting standards.
C. obligations to transfer ownership shares to other entities in the future.
D. obligations arising from past transactions and payable in assets or services in the future.

2. Liabilities are present obligations that represent

A. Both legal and constructive obligations.
B. Neither legal nor constructive obligations.
C. Legal obligations only.
D. Expected value.

3. Which of the following is not a characteristic of a financial liability at fair value through profit or loss?
A. It is held for trading
B. Upon initial recognition, it is designated at fair value through profit or loss.
C. It is a credit derivative that is designated either upon initial recognition or
D. Subsequently as at fair value through profit or loss. d. It is cash or an equity instrument of
another entity.

4. Which of the following does not refer to financial liability held for trading?
A. Acquired or incurred principally for the purpose of selling or repurchasing it in the near term.
B. An uncommitted but anticipated future transaction.
C. On initial recognition is part of a portfolio of identified financial instruments that are managed
together and for which there is evidence of a recent actual pattern of short-term profit-taking.
D. It is a derivative.

5. Initially, financial liabilities may be classified at

Amortized Cost Fair Value through Profit and Loss
A. Yes No
B. Yes No
C. No Yes
D. No Yes

6. A contract that requires the issyer to make specified payments to reimburse the holder for a loss it
incurs because a specified debtor fails to make payment when due in accordance with the original or
modified terms of a debt instrument.
A. Embedded contract
B. Financial guarantee contract
C. Loss reimbursement contract
D. Derivative

7. Which of the following financial liabilities should be classified and subsequently measured at
amortized cost?
I. Commitments to provide a loan at a below-market interest rate.
II. Financial liabilities designated at FVPL
III. Financial guarantee contracts.
IV. Contingent consideration recognized by an acquirer in a business
V. Financial liabilities that arise when a transfer of a financial asset does not qualify for
derecognition.

A. I, II, and III

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 B. I, II, III, and IV
C. I, II, III, IV, and IV
D. None

8. An entity shall
A. Reclassify financial liabilities when there is a change in intention
B. Not reclassify any financial liability.
C. Not reclassify any financial liability, except those at FVPL.
D. Reclassify financial liabilities when the obligation has not been outstanding for more than one
year.

9. Which of the following is a current liability?

A. Preferred dividends in arrears
B. Dividend payable in the form of additional share capital
C. Cash dividend payable to preferred shareholders
D. All of these

10. When the word accrued is used in connection with a current liability, it means
A. an expense has been incurred but is unpaid at the end of the reporting period.
B. an expense has been incurred for which cash has been paid.
C. the liability will not come due in the subsequent accounting period.
D. the liability being contested and may not be paid.

11. A company borrowed cash from a bank and issued to the bank a short-term non-interest-bearing
note payable. The bank discounted the note at 10% and remitted the proceeds to the company. The
effective interest rate paid by the company in this transaction would be
A. equal to the stated discount rate of 10%.
B. more than the stated discount rate of 10%.
C. Less than the stated discount rate of 10%.
D. Independent of the stated discount rate.

12. When all bonds mature on a single date, they

A. term bonds.
B. serial bonds.
C. debenture bonds.
D. callable bonds.

13. Cali Company had a P4.0 million note payable due March 15, 2021. On January 13. 15, 2021 before
the issuance of its 2020 financial statements, Cali Company issued long-term bonds in the amount of
P4.5 million. Proceeds from the bonds were used to repay the note when it came due. How should
Cali classify the p4.0 million note in its December 31, 2020, financial statements?
A. As a current liability with separate disclosure of the note refinancing
B. As a non-current liability with separate disclosure of the note refinancing
C. As a current liability with no separate disclosure required
D. As a non-current liability with no separate disclosure required

14. On August 1, 2020, ABC Company borrowed cash and signed a one-year interest-bearing note on
which both the principal and interest are payable on August 1, 2021. How will the note payable and
the accrued interest be classified on the statement of financial position at December 31, 2020?

Note payable Accrued interest

A. Current liability Non-current liability
B. Non-current liability Current liability
C. Current liability Current liability

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 D. Non-current liability Not reported

15. Which of the following is/are current liabilities?

l. Current portion of long-term debt
ll. Long-term liability due in three months from the end of the reporting period and refinanced on a long-
term basis between the end of the reporting period and the issuance date of the financial statements.
III. Long-term liability due in three months from the end of the reporting period and refinanced on a long-
term basis on or before the end of the reporting period.
IV. Currently maturing obligation where the entity has the discretion to refinance or roll over the
obligation for more than twelve months after the end of the reporting period under an existing loan
facility.
A. I only
B. I and II only
C. I, II, and III only
D. I, III, IV only

16. Which is not an essential characteristic of an accounting liability?

A. The liability is a present obligation of a particular enterprise.
B. The liability arises from past transaction or event,
C. The settlement of the liability requires an outflow of resources embodying economic benefits.
D. The liability is payable to a specifically identifiable payee.

17. Which of the following is incorrect about bonds sold at a discount?

A. The liability is a present obligation of a particular enterprise.
B. The liability arises from past transaction or event,
C. The settlement of the liability requires an outflow of resources embodying economic benefits.
D. The liability is payable to a specifically identifiable payee.

18. Which of the following is not a reason for management and shareholders to favor debt financing over
equity financing?
A. The present owners remain in control of the corporation.
B. The interest incurred in debt financing is a deductible expense in arriving at taxable income
while dividends are not.
C. The charge for interest on the debt may be less than the amount of dividends that might be
expected by shareholders.
D. The interest on debt is not required to be and paid financial periodically position when the
enterprise results in unfavorable operations.

19. Which of the following statements relating to bonds is incorrect?

A. A bond is a debt instrument giving the issuer flexibility as to maturity date.
B. A bond's face value is the amount the issuer must pay to the bondholder at maturity.
C. A bond will typically sell at a discount when its nominal rate is less than the current market rate
of interest.
D. The owner of a registered bond is the person to whom interest payments are mailed.

20. How would the carrying value of a beyond payable be affected by the amortization of each of the
following?
Discount Premium
A. no effect no effect
B. increase no effect
C. increase decrease
D. decrease increase

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21. Which of the following is a bond that is issued and supported only by the general credit standing of
the issuing corporation?
A. Debenture bond
B. Indenture bond
C. Term bond
D. Serial bond

22. Bond premium should be reported in the statement of financial position

A. at the present value of the future reduction in bond interest expense due to the premium.
B. as a deferred credit.
C. along with other premium accounts such as those resulting from share capital transactions'
D. as a direct addition to the face amount of the bonds.

23. A compound financial instrument shall be accounted for as

A. financial liability only.
B. equity only.
C. partly financial liability and partly equity.
D. neither financial liability nor equity.

24. Bond issue costs, such as printing fees legal fees, commissions, etc. are most appropriately accounted
for by
A. charging them to expense account in the year the bonds are actually sold.
B. debiting them to unamortized bond issued costs, setting them as a deferred charge on the
statement of financial position and amortizing them in a manner similar to bond discount over
the life of the bond.
C. charging them to an expense account in the year the bonds are originally dated whether or not
they are sold in that year.
D. adding them to any discount on bonds or subtracting them from any premium on bonds when
the bonds are sold.

25. Under the effective interest method of bond discount or premium amortization, the periodic interest
expense is equal to
A. the stated (nominal) rate of interest multiplied by the face value of bonds.
B. the effective (yield) rate of interest multiplied by the face value of bonds.
C. the stated rate multiplied by the beginning of period carrying amount of bonds.
D. the effective rate multiplied by the beginning-of-period carrying amount of bonds.

26. Bonds with a face value of P5 million carrying a stated interest rate of 12% payable semi-annually on
March 1 and September 1 were issued on July 1. The total proceeds from the issue amounted to
P5,200,000. The best explanation for the excess amount received over face value is
A. the bonds were sold at a premium.
B. the bonds were sold at a higher effective interest rate.
C. the bonds were issued at face value plus accrued interest.
D. no explanation is possible without knowing the maturity date of the bond issue.

27. The proceeds from a bond issued with detachable share purchase warrants should be accounted for
A. entirely as bonds payable.
B. entirely as shareholders' equity.
C. partially as unearned revenue and partially as bonds payable.
D. partially as shareholders' equity and partially as bonds payable.

28. Conceptually, the proceeds from the sale of a bond will equal to
A. the face amount of the bond.
B. the present value of the principal amount due at the end of the life of the bond plus the present
value of the interest payments made during the life of the bond.

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 C. the face amount of the bond plus the present value of the interest payments during the life of the
bond.
D. the sum of the face amount of the bond and the periodic interest payments.

29. If bonds are issued between interest dates, the entry on the books of the corporation could include a
A. debit to Interest payable.
B. credit to Interest Receivable.
C. credit to Interest Expense.
D. credit to Unearned Interest.

30. ABC neglected to amortize premium on outstanding 20-year bonds payable. What is the effect of the
failure to record premium amortization on profit and bond carrying amount, respectively?
A. Understate; understate
B. Understate; overstate
C. Overstate; overstate
D. Overstate; understate

31. If bonds are held to maturity, any premium or discount on bonds payable
A. should be written off directly to a bond retirement account as the bond will be redeemed.
B. are carried forward and written off in the same manner as that used prior to the maturity date.
C. will be fully amortized as their amortization period is designed to coincide with the life of the
bond issue.
D. should be used to calculate the gain or loss resulting from the maturity of the bonds.

32. A call privilege attached to a bond issue means that

A. the investor may convert bonds held to cash at his or her option.
B. the issuer may retire the bonds by paying a specified call price during a specified period.
C. the issuer may retire the bonds by paying a specified market price at the open market at any
point in the life of the bond.
D. the issuer may convert the bonds to some other form of equity security during a specified period

33. What is the market rate of interest for a bond issue that sells for more than its face value?
A. Lower than the rate stated on the bond
B. Equal to the rate stated on the bond
C. Higher than the rate stated on the bond
D. Independent of the rate stated on the bond

34. Among the short-term obligations of Arvin Dave Company as of December 31, the balance sheet date,
are notes payable totaling P250,000 with the PDAC National Bank. These are 90-day notes,
renewable for another 90-day period. These notes should be classified on the balance sheet of Arvin
Dave Company as
A. current liabilities.
B. deferred charges.
C. long-term liabilities.
D. intermediate debt

35. A bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the
entity is a/an
A. compound financial instrument.
B. primary financial instrument.
C. derivative financial instrument.
D. equity.

36. Which of the following items is a current liability?

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 A. Bonds (for which there is an adequate sinking fund properly classified as a long-term
investment) due in three months.
B. Bonds due in three years.
C. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
D. Bonds to be refunded when due in eight months, there being no doubt about the marketability of
the refunding issue.

37. Which of the following is a characteristic of a current liability but not a long-term liability?
A. Unavoidable obligation.
B. Present obligation that entails settlement by probable future transfer or use of cash, goods, or
services.
C. Liquidation is reasonably expected to require use of existing resources classified as current
assets or create other current liabilities.
D. Transaction or other event creating the liability

38. Which of the following does not demonstrate evidence regarding the ability to consummate a
refinancing of short-term debt?
A. Management indicated that they are going to refinance the obligation.
B. Actually refinance the obligation.
C. Have capacity under existing financing agreements that can be used to refinance the obligation.
D. Enter into a financing agreement that clearly permits the entity to refinance the obligation.

39. The generally accepted method of accounting for gains or losses from the early extinguishment of
debt treats any gain or loss as
A. an adjustment to the cost basis of the asset obtained by the debt issue.
B. an amount that should be considered a cash adjustment to the cost of any other debt issued over
the remaining life of the old debt instrument.
C. an amount received or paid to obtain a new debt instrument and, as such, should be amortized
over the life of the new debt.
D. a difference between the reacquisition price and the net carrying amount of the debt which
should be recognized in the period of redemption.

40. Bankers look at the current liability section of the balance sheet primarily
A. to evaluate the entity's credit quality.
B. to assist in understanding the entity's liquidity.
C. to better understand sources of repayment.
D. to evaluate operating efficiency.

PROBLEMS

A. The accountant of Jag Company is in the process of finalizing its financial reports A review of the
company's selected accounts and relevant data reveal the following as of June 30, 2021, the end of its fiscal
year.

Mortgage Note Payable 1,500,000 Sales 9,675,000

Bank Notes Payable 300,000 Withholding Tax Payable 120,000
Accounts Payable 270,000 SSS Premiums Payable 18,250
Share Dividends Payable 200,000 Philhealth Premiums Payable 8,400

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Supplemental information:

a. On August 1, 2021, Jag Company issued a new 3-year mortgage note for with the intention of using
the proceeds in payment of the mortgage note Payable of that is due on August 20, 2021. There was
no unpaid interest as of June 30, 2021.

b. The bank notes are payable in semi-annual installments of P50,000 on February 1 and August 1 of
each year. The interest rate of the note is 12% based on the outstanding balance and payable
together with the principal due. Accrued interest as of June 30, 2021, has not yet been taken up in the
books.

c. Accounts payable included an invoice from a supplier in the amount of P65,000. No receiving report
has been submitted to the accounting office relating to this purchase. A review of the documents
indicated that the goods were shipped by the supplier under the terms FOB destination and the
goods were received on July 3, 2021.

d. The company has some newly hired casual daily wage employees who are paid weekly every Friday.
Average weekly payroll of these employees amounts to P15,000 and the last wage payment was
Friday, June 26, 202 1. No adjustment was made for accrued wages.

e. On April 1, 2021, a suit was filed by a dismissed employee against the company. The company's
lawyer believes it is reasonably possible that the suit will result in a loss to the company ranging
from P500,000 to P1,000,000.

f. The sales account included sales for the month of June 2021 of which is inclusive of the 12% value-
added tax (VAT). The company makes monthly remittance of VAT to the Bureau of Internal Revenue
on the day of the following month.

g. The total income tax due for fiscal year ended June 30, 2021, amounted to P586,500. Quarterly
remittances to the BIR during the fiscal year for income taxes totaled P345,000. The balance due as of
June 30, 2021, has not yet been taken up in the books. (Ignore the tax effect on profit of the
adjustments based on the foregoing data).

1) How much is the total current liabilities at June 30, 2021?

a. P2,804,150
b. P2,604,150
c. P2,589,150
d. P1,104,150

B. FB company is preparing its December 31, 2021 statement of financial position. The following items may
be reported as either current or non-current liability:

a. On December 15, 2021, FB Company declared a cash dividend of P2.50 per share to shareholders of
record on December 31. The dividend is payable on January 15, 2022. FB had issued 800,000
ordinary shares, of which 50,000 shares are held in the treasury. On this same date, FB declared a
10% bonus issue to shareholders of record on December 31, 2021. The dividend will be distributed
on January 31, 2022. FB Company's ordinary share has a par value of PIO and a market value per
share of P28.

b. At December 31, 2021, bonds payable of PIO million are outstanding. The bonds were issued on
September 30, 2021 and mature in annual installments of P2.5 million starting September 30, 2022.
Interest of 12% on the outstanding balance is payable annually every anniversary date of the bond.

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 c. At December 31, 2020, customer advances were P2 million. During 2021, FB Company collected P4
million of customer advances and advances of P2.5 million were earned.

d. At December 31, 2021, retained earnings appropriated for future inventory losses is 1.5 million.

2) How much of the foregoing should be reported as current liabilities at December 31, 2021?
a. P10,275,000
b. P9,675,000
c. P8,175,000
d. P6,300,000

C. The unadjusted trial balance of Hugo Trading at December 31, 2021, the end of its accounting period,
included, among others, the following balances. Hugo Trading’s 2021 financial statements were issued on
April 1, 2022.

Accounts receivable P92,500

Accounts payable 35,000
Bank notes payable 600,000
Mortgage notes payable 1,200,000

Other information:

a. The bank notes, issued on August I, 2021 are due on July 31, 2022 and pay interest at a rate of 10%
payable at maturity.
b. The mortgage note is due on March 1, 2022 Interest at 9% has been up to December 31 (assume 9%
is a realistic one). on March 1, 2022 issued a new 10-year mortgage note and paid P250,000 in cash
on the principal balance and refinanced the remaining P950,000.
c. Included in the accounts receivable balance at December 31, 2021 were two customers' accounts
that had been overpaid and had credit balances totaling P18,000. The accounts were of two major
customers who were expected to order more merchandise from Hugo Trading and apply the
overpayment to those future purchases.
d. On November 1, 2021, Hugo Trading rented a portion of its factory to tenant for P30,000 per year,
payable in advance. The payment for twelve months ended October 31, 2022 as received as required
and was credited to rent revenue.

3) How much is the total current liabilities of Hugo Trading as of December31, 2021?
a. P1,903,000
b. P1,835,000
c. P953,000
d. P935,000

D. The accounts payable balance of Jek Company at December 31, 2021 was P590,000 before the year-end
adjustments relating to the following information:

a. Upon receipt of the invoice on December 28, 2021 for goods costing P30,000, the accounting staff of
Jek Company recorded the purchase in the accounts. It was determined that the goods were shipped
FOB destination on December 27, 2021 and were received by Jek Company on January 2, 2022.

b. Goods with an invoice cost of P25,000 which were shipped FOB shipping point on December 23,
2021 from a vendor to Jek Company were lost in transit. On January 4, 2022, Jek Company filed a
P25,000 claim against the transportation company.

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 c. Goods costing P9,000 were shipped FOB shipping point from a vendor to Jek Company. Because the
vendor's invoice and the goods were received on January 3, 2022, the accounting staff did not include
the goods in its December 31, 2021 inventory nor was the purchase recorded in the accounts in
2021.

4) What amount should Jek Company report as accounts payable in its December 31, 2021 statement of
financial position?
a. P594,000
b. P590,000
c. P585,000
d. P569,000

E. The following information pertains to Camp Inc.'s issuance of bonds on July 1.

Face amount - P800,000

Market yield - 9%
Stated interest rate - 6%
Interest payment date - July 1
Term - 10 years

6% 9%

Present value of 1 for 10 periods 0.558 0.422

Present value of ordinary annuity of 1 or 10 periods 7.360 6.418

5) What should be the issue price of each P1,000 bond?

a. P1,000
b. P 864
c. P 807
d. P 700

F. On July 1, 2020, Silver Company issued P4 million of 16% bonds to yield 14%. Interest is payable semi-
annually on January 1 and July 1. The bonds mature in five years. Silver Company uses the calendar year and
the effective interest method of amortization.

Present value of 1 at 7% for 10 periods is 0.50835

Present value of an ordinary annuity of 1 at 7% for 10 periods is 7.02359
Present value of 1 at 14% for 5 periods is 0.51937
Present value of an ordinary annuity of 1 at 14% for 5 periods is 3.43308

6) How much was the issue price of the bond?

a. P4,280,949
b. P4,274,651
c. P4,000,000
d. P3,719,051

7) What is the bond interest-expense for the year 2021?

a. P299,666
b. P594,963
c. P599,333

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 d. P640,000

8) What is the bond carrying value at December 31, 2021?

a. P4,000,000
b. P4,215,578
c. P4,238,858
d. P4,315,318

G. On July 1, 2021, Eagle Company issued 600 of its 10%, P1,000 bonds at 99 plus accrued interest. The bonds
are dated April 1, 2015 and mature on April 1, 2025. Interest is payable semi-annually on April 1 and October
1.

9) What amount did Eagle Company receive from the bond issuance?
a. P579,000
b. P594,000
c. P600,000
d. P609,000

H. On January 1, 2021, Mall Company issued of 10-year, 8% bonds at par. The bonds, dated January 1, 2021,
pay interest semi-annually on January 1 and July 1. Bond issue costs incurred was P250,000.

10) What is the bond carrying amount at January 2, 2021?

a. P2,250,000
b. P2,000,000
c. P1,910,000
d. P1,750,000

I. On July 1, 2021, Twin Head Corporation issued P5 million of its 10%, 7 -year bonds with one detachable
warrant attached to each P 1,000 bond. Each warrant provides for the right to purchase 20 shares of P15 par
value ordinary for P20 each. The market value of the ordinary share was P25 each at July 1, 2021, At that
time, the bonds without the warrants are selling at 97. The compound financial instrument was sold at 104.

11)What is the bond issue price allocated to the debt?

a. P5,200,000
b. P5,000,000
c. P4,850,000
d. P350,000

12) Assuming that all warrants are exercised and recorded in the accounts, how much is the amount
credited to share premium?
a. P850,000
b. P530,000
c. P500,000
d. P350,000

J. On May 1, 2021, Vision Corporation issued P2,00,000, 20-year, 10% bonds for each P1,000 bond had a
detachable warrant eligible for the purchase of one share of Vision's P50 par ordinary share for P60.
Immediately after the bonds were issued, Vision's securities had the following market values: 10% bonds
without warrants - P 1,040; Warrant - P20; Ordinary share, P50 par - P56

13) What amount should Vision Corporation credit to Premium on Bonds payable?

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 a. P120,000
b. P80,000
c. P40,000
d. P0

K. On September 30, 2021, Belfast Company issued face value, 5-year bonds at 102. Each P1,000 bond was
issued with 20 detachable share warrants, each of which entitled the bondholder to purchase one share of P5
par ordinary share at P25. At time of issuance, there was no available market value for the

The stated interest rate on the bonds is 11% payable annually every September 30. However, the prevailing
market rate of interest for similar bonds without warrants is 12%. The present value of 1 at 12% for 5
periods is 0.57 and the present value pf an ordinary annuity of 1 at 12% for 5 periods is 3.60. Belfast
Company's accounting year ends on December 31.

14) On September 30, 2021, what amount should Belfast record as discount or premium on bonds
payable?
a. P170,000 discount
b. P400,000 discount
c. P170,000 premium
d. P400,000 premium

15) How much is the interest expense for the year ended December 31, 2021?
a. P150,000
b. P144,900
c. P137,500
d. P132,825

L. On December 31, 2019, the Compaq Company issues for P5,851,160 to yield 10%. Interest is payable
December 31 at 12%. On April 1, 2021, Compaq Company retires 2,000 of its own P1,000 bonds at 98 plus
accrued interest. The accounting period for the Compaq Company is the calendar year. The company uses the
effective interest method of amortization.

16) How much is the bond's carrying value at December 31, 2020?
a. P5,851,160
b. P5,836,276
c. P5,000,000
d. P5,866,044

17) How much is the interest expense for the year 2020?
a. P600,000
b. P585,116
c. P558,116
d. P500,000

18) What is the carrying value of the bonds retired on April 1, 2021?
a. P2,000,000
b. P2,134,500
c. P2,334,510
d. P2,332,873

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 19) How much is the gain or loss on the retirement of bonds?
a. P372,873 gain
b. P372,873 loss
c. P40,000gain
d. P40,000 loss

20) What is the carrying amount of the remaining bonds on December 31, 2021?
a. P3,000,000
b. P3,511,589
c. P3,501,766
d. P3,491,943

M. On December 31, 2021, IBM Company had outstanding P20 million face value convertible bonds maturing
on December 31,2019. Each P1,000 bond is convertible into 60 shares of IBM Company's P10 par ordinary
shares. The unamortized premium balance and Bond Conversion Privilege is P350,000 and P640,000,
respectively. On this date, an individual holding 2,000 of the bonds exercised the conversion privilege When
the market value of IBM Company's ordinary share was P18.

21) What is the amount credited to share premium upon conversion of the bonds?
a. P1,790,000
b. P899,000
c. P800,000
d. None

22) Assume that on December 31, 2021, IBM Company retired the at 103. Without the conversion
privilege, these bonds would been 102%. How much is the gain or loss on the retirement taken to profit
or loss?
a. P60,000
b. P54,000
c. P15,000
d. P0

N. On July 1, 2021, after recording interest and amortization, Bert Company converted P2 million bonds of its
12% convertible bonds into 50,000 ordinary shares, P25 par value. On the conversion date, the carrying
amount of the bonds was P2,600,000 and the paid in capital arising from the conversion privilege recognized
in the accounts is P150,000. The market value of the bonds without the conversion privilege was P2,800,000
and Bert Company's ordinary share was publicly trading at P45 each.

23) Under PAS32, what amount of share premium should Bert Company record as a result of the
conversion?
a. P1,500,000
b. P1,350,000
c. P500,000
d. P350,000

O. On December 31, 2021, Um corporation had outstanding 8%, P5 million face value convertible bonds
maturing on December 31, 2024. is annually on December 31. Each P1,000 bond is convertible into 60 shares
of Uni corporation's par value ordinary shares. The unamortized premium balance on December 31, 2021 is
P112,500. The paid in capital arising from bond conversion privilege account has a balance of P80,000. On this
date, an individual holding 500 of the bonds exercised the conversion privilege when the market value of Uni
Corporation's ordinary share was P28.

24) Under PAS 32, Uni Corporation 's entry to record the conversion should include a credit to share
premium of
a. P390,000

Page 13 of 18
 b. P242,500
c. P69,250
d. P61,250

P. On July 1, 2021, an interest date, P 1,000,000 of Hill Company bonds were converted into 20,000 of Hill
Company's ordinary share, each having a par value of and a market value of P55. There is P40,OOO unamortized
discount on the bonds and P 25,000 paid in capital arising from bond conversion privilege.

25) What amount of gain or loss should Hill Company recognize in 2021 as a result of the conversion?
a. P300,000
b. P185,000
c. P160,000
d. P0

Q. Liverpool Company issued 5,000 convertible bonds on January 1, 2021. The bonds have a three-year term
and are issued at 110 with a face value of P1,000 per bond. Interest is payable annually in arrears at a nominal
6% interest rate. Each bond is convertible at any time up to maturity into 100 ordinary shares with par value
of P5.00. When the bonds are issued, the prevailing market rate for similar instrument without conversion
option is 9%. The PV of 1 at 9% for 3 periods is 0.77 and the PV of an ordinary annuity of 1 at 9% for 3 periods
is 2.53.
26) What is the equity component of the bonds issued on January 1, 2021?
a. P391,000
b. P891,000
c. P1,150,000
d. P1,650,000

R. Tom Company issued P6,000,000, 11%, 10-year bonds on May 31, 2021 when the market interest was 10%.
The bonds are priced at 106 1/4. The bonds pay interest on May 31 and November 30.

27) What is the adjusted carrying amount of the bond on December 31, 2021?
a. P6,351,938
b. P6,361,781
c. P6,363,750
d. P6,364,063

28) What is the total interest expense for the year 2021?
a. P660,000
b. P385,000
c. P371,781
d. P330,000

S. On July 1, 2021, Madison Company received P1,032,880 for P1,000,000 face amount, 12% bonds, a price that
yields 10%.

29) How much is the interest expense for the six months ended December31, 2021?
a. P61,973
b. P60,000
c. P51,644
d. P50,000

30) How much is the bond carrying value at December 31, 2021?
a. P1,024,524
b. P1,031,236
c. P1,032,880

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 d. P1,041,236

T. On January 1, 2021, London Company issued its 9% bonds in the face amount of P2 million which mature
resulting on January 1, 2031. The bonds were issued for P1,878,000 to yield 10% resulting in a bond discount
of P122,000. London Company uses the interest method of amortizing bond discount. Interest is payable
annually on December 31.

31) What is London Company's unamortized bond discount at December31, 2021?

a. P114,200
b. P104,000
c. P103,220
d. P102,000

32) What is the carrying value of the bonds at December 31,2021?

a. P1,885,800
b. P1,894,380
c. P1,896,780
d. P1,898,000

U. On January 1, 2021, when the market rate for bond interest was 12%, Victoria Corporation issued P10
million face amount of bonds with interest to be paid semi-annually at a 10% annual rate. The bonds mature
on December 31, 2030 and were issued at a discount of P1,145,000.

33) How much of the discount should be amortized by the effective interest method at Ju1y 1, 2021?
a. P11,450
b. P31,300
c. P50,000
d. P57,250

V. Grand company issued P 1,000,000 par value, 12% bonds on January 2, 2021. The bonds mature in 10 years
and pay interest semi-annually. The bonds were issued for P893,640 which yield an effective interest rate of
14%.

34)What is the carrying amount of the bonds payable at December 31, 2021?
a. P893,640
b. P898,750
c. P898,929
d. P904,276

W. Nevada, Inc. issued a P5,000,000, 10%, 10-year bonds on July 1, 2021 for 113.6 when the effective interest
rate was 8%. Interest is payable on June 30 and December 31. Nevada, Inc. uses the effective interest method
to amortize all premiums and discounts.

35) How much interest expense should Nevada, Inc. report in profit or loss for the year ended December
31,2021?
a. P284,000
b. P250,000
c. P227,200
d. P200,000

X. Frank, Inc. sold 100, P 10,000 par value bonds that bear interest at 12% at a price of P826,280 which yields
an effective interest rate of 16%. Interest is paid annually on the bonds, which mature 8 years from their date
of issuance.

36) How much is the interest expense for the first year of the bond issue?

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 a. P160,000
b. P132,205
c. P120,000
d. P99,154

Y. On November 1, 2021, Mason Corporation issued P800,000 of its 10-year, 8% term bonds dated October 1,
2021. The bonds were sold to yield 10%, with total proceeds of P700,000 plus accrued interest. Interest is paid
every April 1 and October 1.

37) What amount should Mason Corporation report for interest payable in its December 31, 2021
statement of financial position?
a. P17,500
b. P16,000
c. P11,667
d. P10,667

Z. Sim Company is issuing of 8 1/20/0, 5-year bonds. The bonds are dated and sold on March 1, 2021. Interest
payment dates are March 1 and September 1. With a market interest rate of 9%, the bonds were sold for
PI,963,000. The company uses the effective interest method of amortization and the calendar year as its
accounting year.

38) What is the interest expense that Sim will record on September 1,2021?
a. P88,335.00
b. P90,000.00
c. P83,427.00
d. P85,000.00

39) What is the carrying value of the bonds on the December 31,2021 statement of financial position after
all year-end adjustments are made?
a. P1,963,000.00
b. P1,968,658.40
c. P1,969,820.10
d. P2,000,000.00

AA. On December 31, 2020, Bell Company issued P2 million, 12% serial bonds to be repaid in the amount of
P500,000 each year. Interest is payable annually on December 31. The bonds were issued to yield a year. The
bond proceeds were based on the present values at December 31, 2020 company amortizes the bond discount
by the interest method.

40) In its December 31, 2021 statement of financial position, at what amount should Bell Company report
the carrying value of the bonds?
a. P2,083,000
b. P2,051,300
c. P1,531,700
d. P1,551,300

41)How much is the bond interest expense reported by Bell Company for the year ended December
31,2021?
a. P271,300
b. P249,960
c. P240,000
d. P208,300

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BB. For each of the following independent situations, determine the gain on debt restructuring.

Case (i) Angelina Company has outstanding P950,000 note payable to Brad Finance Corporation.
Because of financial difficulties, Angelina Company negotiates with Brad Finance to exchange inventory of
machine parts to satisfy the debt. The cost of the machine parts inventory transferred is carried in
Angelina Company's books at P610,000. The estimated -sales price of these inventory items is P835,000.

42) Gain on debt restructuring is

a. P340,000
b. P225,000
c. P115,000
d. P0

Case (ii) Shiloh Company is unable to meet interest payments and fund requirements to retire its
P1,500,000 bonds payable. Accrued interest on the bonds amounted to p 150,000. The bonds are held by Easy
Investments, Inc. In order to prevent bankruptcy, Shiloh Company entered into an agreement with
Easy Financing, Inc. to exchange equity securities for the debt. Shiloh Company is issuing 20,000 shares of its
P50 par value ordinary shares. The ordinary share is currently selling at P65.

43) Gain on debt restructuring is

a. P650,000
b. P350,000
c. P250,000
d. P0

Case (iii) Lancome Company is experiencing financial difficulties and a downward trend in its operations. The
firm is unable to service its debt and as a result, has missed payment of an annual interest on its loan from Bank
of Manila. The principal amount of the loan is (which is already due) with annual interest of 12% payable
annually. Lancome management has negotiated a modification of its debt's terms with its creditors. The
creditors agree to the following new terms (assume that at this time, the prevailing market rate of interest
remained at 12%):
• forgive all accrued interest
• reduce the principal amount of the loan to PI,800,000
• extend the payment of principal for two years
• reduce the interest rate for the remaining two years to 8%

44) Gain on debt restructuring is

a. P562,040
b. P440,000
c. P322,040
d. P0

Case (iv) Towards the end of 2020, Loogie Company experienced several financial pressures and was
in default of paying interest and principal payments on its outstanding notes payable of P1,500,000. Interest
rate of this note is 10% and at December 31, 2020, accrued interest amounted to P 150,000. Loogie Company
offered a change in the terms of the note that was accepted by the bank. The new terms were:

• accrued interest on the note is immediately payable

• maturity date was extended by five years
• the interest rate is maintained at 10% and is payable annually starting December 31, 2021

45) Gain on debt restructuring is

a. P300,000
b. P165,000

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 c. P150,000
d. P0

CC. On December 31, 2020, Columbia Company shows the following data with respect to its matured obligation

Notes payable P5,000,000

Accrued interest payable P500,000

The company is threatened with a court suit if it could not pay its maturing debt. Accordingly, the company
enters into an agreement with the creditor transfer of a non-cash asset in full settlement of the mortgage. The
agreement provides for the transfer of real estate carried in the books of Columbia Company at P3,000,000.
The real estate has a current fair market value of P4,500,000.

46) What is the total amount reported in Columbia Company's profit or loss result of debt
restructuring?
a. P500,000
b. P1,000,000
c. P1,500,000
d. P2,500,000

DD. Birmingham Company has an overdue 8% note payable to First Bank and accrued interest for one year of
P640,000. As a result of restructuring agreement on January 1, 2021, First Bank agreed to the following
provisions:

• The principal obligation is reduced to

• The accrued interest of P640,000 is forgiven.
• The date of maturity is extended to December
• Annual interest of 10% is to be repaid in 4 years every December 31.

The prevailing market rate of interest for similar obligations remained at 8% at the date of restructuring. The
present value of 1 at 8% for 4 periods is 0.735 and the present value of an ordinary annuity of 1 at 8% for 4
periods is 3.31.

47) What is the gain on the restructuring of the debt recognized in theyear2021?
a. P1,640,000
b. P1,178,000
c. P1,000,000
d. P538,000

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