STRAIGHT PROBLEMS

TYPES OF BONDS

1. SAN MIGUEL INC. reported the following financial liabilities on December 31, 2021:

9% debentures, callable in 2023, due in 2024 4,000,000

12% collateral trust bonds, convertible into share
4,000,000
capital beginning in 2022, due in 2025
Industrial revenue bonds, maturing in 1,600,000
installments
10% Bonds maturing on a single date, secured by 1,500,000
realty
Unsecured 10% registered bonds
3,000,000
(P250,000 maturing annually beginning in 2022)
Subordinated bonds, maturing on a single date 1,000,000
Bonds maturing in installments, secured by
1,400,000
machinery
8% debentures (P1,000,000 maturing annually) 5,000,000
12% guaranty security bonds, due 2023 2,500,000
REQUIREMENTS: (1) How much is the total amount of term bonds? (2) What is the total amount of
debenture bonds?

NET ISSUE PRICE & CARRYING AMOUNT OF BONDS

2. GINEBRA INC. issued P3,000,000, 5 years, 10% bonds at 110 including accrued interest on June 1,
2021 but dated March 1, 2021. Interest is payable semi-annually on March 1 and September 1.
Transaction costs of P35,000 were incurred by GINEBRA in relation to the bond issuance.

REQUIREMENTS: (a) The net amount that GINEBRA receive from the bond issuance is (b) What is the
initial measurement of the bonds? (c) Assuming the bonds were issued at 98 plus accrued interest,
What is the net cash receipt from the bond issuance? What is its initial measurement?

3. On January 1, 2021, PHOENIX PETROLEUM CORP. is contemplating on issuing a 8% 3 year,

P10,000,000 bonds. Principal is due at maturity but interest is payable semi-annually every July 1
and December 31. The company determines that the market rate of interest on that date is 10%.
REQUIREMENTS:

(a) What is the initial measurement of the bonds issued by the company?

(b) If the transaction took effect, what is the carrying amount of the bonds on December 31, 2021?

(c) What is the balance of unamortized discount or premium on December 31, 2021?

4. On January 1, 2021, GLOBALPORT CORP. issued a 5% P6,000,000. Principal on the bonds matures in
three equal annual installments. Interest is also due annually at each year-end. The market rate of
interest on the bonds on January 1 is 6%.

REQUIREMENTS:
(a) What is the initial measurement of the bonds issued by the company?
(b) If the transaction took effect, what is the carrying amount of the bonds on December 31, 2021?
(c) What is the balance of unamortized discount or premium on December 31, 2021?
(d) Redo requirements (a) to (c), but assuming the bonds matures in 6 equal semi-annual
installments and the interest is paid semi-annually.

5. On January 1, 2021, MAGNOLIA CORP. received P2,154,400 for P2,000,000 face amount 12% bonds.
The bonds were sold to yield 10%. Interest is payable semiannually every January 1 and July 1. On
December 31, 2021, the fair value of the bonds is P2,129,200. The change in fair value of the bonds is
attributable to market factors. REQUIREMENTS: Assuming the entity has elected the fair value option for
valuing financial liabilities and assuming the entity measures bond at amortized cost.

(a) What is the carrying amount of the bonds on December 31, 2021?
(b) What is the amount of interest expense to be reported on the income statement of 2021?
(c) What is the balance of unamortized discount or premium on December 31, 2021?

RETIREMENT OF BONDS

6. At the beginning of 2021, BLACKWATER CORP issued a 10% 4-year, P2,000,000 bonds. Principal is
due at maturity but interest is payable semi-annually every July 1 and December 31. The company
determines that the market rate of interest on the date of issue is 12%. The bonds are quoted at 95
and 101 on December 31, 2022 and 2023, respectively.

The bonds are measured at amortized cost.

REQUIREMENTS: (Answer the following questions independently)

(a) Determine the amount of gain or loss on early retirement to be presented in the 2022
statement of profit or loss assuming the whole amount of bonds were retired on December 31,
2022 at a retirement price of P1,900,000.

(b) Assume that the whole amount of bonds were retired on March 31, 2023 at a retirement price
of P1,887,500, determine the gain or loss on early retirement?

(c) Assume that only half of the bonds were retired on December 31, 2022 at a retirement price of
P1,010,000, determine the balance of unamortized discount or premium on December 31,
2023?

(d) Assume that only half of the bonds were retired on March 31, 2023 at a retirement price of
P937,500, what is the net amount presented in profit or loss on the income statement of 2023?

(e) Assume that the entity elected the fair value option in accounting for its bonds and half of the
bonds were retired on July 1, 2023 for a retirement price of P875,000, what is the net amount
presented in profit or loss on the income statement of 2023?

MULTIPLE CHOICE (THEORIES)

1. S1: Bond certificate is known as the contract between the issuer of bonds and the bondholders?

S2: A bond are similar to term loans and notes except that the former is usually offered to the public
and sold to investors.

A. True, false C. False, false

B. False, true D. True, true

2. Which of the following types of bonds is properly defined or characterized?

(1) Debenture bonds are bonds with collateral security in the form of real properties.
(2) Convertible bonds are bands that can be exchanged by the issuer for equity shares of
the issuing entity.
(3) Junk bonds are high risk and high yield bonds issued by entities that are heavily
indebted or otherwise in weak financial position.
(4) Serial bonds are bonds with a single date of maturity.

A. 1 and 4 C. 1 and 2
B. 2 and 3 D. 2 and 4

3. In relation to the proper measurement of bonds payable, which of the following statement is
correct?
A. Bonds payable at fair value through profit or loss is initially measured at fair value minus
transaction costs.
B. Fair value of bonds payable shall include accrued interest if bonds are issued between interest
payment dates.
C. For bonds measured at amortized cost, if the initial measurement of bonds is higher than its
face value, the difference is treated as a premium and amortized using the effective interest
method. As a result of amortization, the interest expense recorded is LOWER than the interest
accrued or paid.
D. For bonds measured at amortized cost, if the initial measurement of bonds is lower than its face
value, the difference is treated as a discount and amortized using the effective interest method.
As a result of amortization, the interest expense recorded is LOWER than the interest accrued or
paid.

4. Which of the following is true of a premium on bonds payable?

A. The premium or bonds payable is a contra shareholders' equity account.
B. The premium on bonds payable is an account that appears only on the books of the investor
C. The premium on bonds payable increases when amortization entries are made until maturity
date.
D. The premium on bonds payable decreases when amortization entries are made until the balance
reaches zero at maturity date.

5. If bonds are initially sold at a discount and the straight-line method of amortization is used, interest
expense in the earlier years
A. Will be less than the coupon rate of interest.
B. Will exceed what it would have been had the effective interest method of amortization been
used.
C. Will be less than what it would have been had the effective interest method of amortization
been used.
D. Will be the same as what it would have been had the effective interest method of amortization
been used.
6. How would the amortization of discount on bonds payable affect each of the following?
Carrying amount of bonds Net income
A. Increase Decrease
B. Decrease Increase
C. Decrease Decrease
A. Increase Increase

7. An entity neglected to amortize the premium on outstanding bonds payable. What is the effect
of the failure to record premium amortization on interest expense and bond carrying amount,
respectively?
A. B. C. D.
Interest expense Overstated Overstated Understated Understated
Bond carrying amount Overstated Understated Overstated Understated

8. Which of the following is true of accrued interest on bonds that are sold between interest
dates?
A. The accrued interest is extra income to the buyer.
B. The accrued interest is computed at the effective rate.
C. The accrued interest will be paid to the seller when the bonds mature.
D. None of the above

9. S1: If the bonds are retired AT MATURITY, there is no accounting problem since there is no
gain or loss on retirement.
S2: In relation to bond refunding, the difference between the carrying amount of the
financial liability extinguished and the consideration paid shall be included in
profit or loss.
A. True, false C. False, false
B. False true D. True, true