INTERMEDIATE ACCOUNTING 2 QUIZ 2

Question 1

On January 1, 2022, Dirk Corporation issued 1,000 of its January 1, 2017, 8%, 10 year,
P1,000 face value bonds with detachable stock warrants at P1,250,000. Each bonds,
which pays semi-annual interest every January 1 and July 1, carried 5 detachable
warrants which entitle the holder to acquire one share of Dirk Corporation ordinary
shares for every warrant at a specified option price of P55 per share. Immediately after
the issuance the prevailing market rate of interest is at 10% and the market value of the
warrants was P30. What is the carrying amount of the bonds as of December 31, 2022?
You Answered
935,352

Correct Answers
935,352 (with margin: 50)

FV of compound financial instrument 1,250,000

Present value of principal, 1,000,000 x 0.6139* 613,900  

Present value of nominal interest 1,000,000 x 4% x 7.7217 308,868   922,768

Equity component   327,232

*PV using 5% for 10 periods. Remaining term of the bond is 5

   
years only, because 5 years is already lapsed

     

Initial carrying amount   922,768

Effective interest   1.05

Nominal interest   (40,000)

Effective interest   1.05

Nominal interest    (40,000)

Carrying amount 12/31/22   935,352

Question 2
On January 1, 2021, Medichamp Co. issued 1,000, P4,000, 10%, 3 year bonds for
P3,807,852. Principal is due on December 31, 2023 but interests are due annually
every year-end. In addition, Medichamp incurred bond issue costs of P179,316. The
effective interest rate is 14% after adjustment for bond issue costs. How much is the
carrying amount of the bonds on initial recognition?
You Answered
3,628,536

Correct Answers
3,628,536 (with margin: 0)

Initial carrying amount 1/1/21 (3,807,852 – 179,316) 3,628,536

Question 3
On January 1, 2019, Jenalyn Company issued 9% bonds in the face amount of
P5,000,000 which mature on January 1, 2029. The bonds were issued for P4,695,000
to yield 10%. Interest is payable annually on December 31. The entity used the interest
method of amortizing bond discount. What is the carrying amount of the bonds payable
on December 31, 2019?
You Answered
4,714,500

Correct Answers
4,714,500 (with margin: 0)

Carrying amount 1/1/19 4,695,000

Effective interest           1.10

Nominal interest   (450,000)

Carrying amount 12/31/19  4,714,500

Question 4
On January 1, 2021, Medicham Co. issued 1,000, P4,000, 10%, 3 year bonds for
P3,807,852. Principal is due on December 31, 2023 but interests are due annually
every year-end. In addition, Medicham incurred bond issue costs of P179,316. The
effective interest rate is 14% after adjustment for bond issue costs. How much is the
carrying amount of the bonds on December 31, 2021?
You Answered
3,736,531

Correct Answers
3,736,531 (with margin: 0)

Initial carrying amount 1/1/21 3,807,852 – 179,316 3,628,536

Effective interest           1.14

Nominal interest   (400,000)

Carrying amount 12/31/21  3,736,531

Question 5
On January 1, 2019, Jenalyn Company issued 9% bonds in the face amount of
P5,000,000 which mature on January 1, 2029. The bonds were issued for P4,695,000
to yield 10%. Interest is payable annually on December 31. The entity used the interest
method of amortizing bond discount. What is the interest expense for 2019?
You An$swered
469,500

Correct Answers
469,500 (with margin: 0)

Carrying amount 1/1/19 4,695,000

Effective interest          10%

Interest expense    469,500

Question 6
On May 1, 2022, Barcelona Company issued a five-year P2,000,000 face value bonds
with stated rate of 16%. The bonds were issued to yield 14%. Interests are payable
semi-annually on May 1 and November 1. Barcelona Company uses the calendar year
and the effective interest method of amortization. Present value of 1 at 7% for 10
periods is 0.5084. Present value of an ordinary annuity of 1 at 7% for 10 periods is
7.0236. What is the bond interest expense for the year 2022?
You Answered
199,550

Correct Answers
199,550 (with margin: 100)

CA 5/1/22 2,140,576

Effective interest          14%

Months 5/1/22 – 11/1/22          6/12

Interest expense from 5/1/22 – 11/1/22 149,840

   

CA 5/1/22 2,140,576

Effective interest          1.07

Nominal interest 2,000,000 x 16% x 6/12   (160,000)

CA 11/1/22 2,130,416

Effective interest         14%

Months 11/1/22 – 12/31/22         2/12

Interest expense 11/1/22 – 12/31/22     49,710

Interest expense from 5/1/22 – 11/1/22   149,840

Total for 2022   199,550

Question 7
On January 1, 2020, Jufrant Co. issued its 10% bonds in the face amount of
P3,000,000, which mature on January 1, 2030. The bonds were issued for P3,405,000
to yield 8%, resulting in bond premium of P405,000. Jufrant uses the effective interest
method of amortizing bond premium. Interest is payable annually on December 31. At
December 31, 2020, the carrying amount of the bonds should be
Correct!
3,377,400

Correct Answers
3,377,400 (with margin: 0)

Initial carrying amount 1/1/20 3,405,000

Effective interest           1.08

Nominal interest   (300,000)

Carrying amount 12/31/20  3,377,400

Question 8
On May 1, 2019, Raiders Company issued P2,000,000, 10 years, 9% bonds at 105
including accrued interest. These bonds are dated January 1, 2019. Interest is payable
semi-annually on January 1 and July 1. Transaction costs of P10,000 were paid by
Raiders. What is the net cash receipts from the bond issuance?
You Answered
2,090,000

Correct Answers
2,090,000 (with margin: 0)

Fair value of bonds including the interest (2,000,000 x 1.05) 2,100,000

Transaction cost     (10,000)

Net cash receipt 2,090,000

Question 9
On January 1, 2022, Dirk Corporation issued 1,000 of its January 1, 2017, 8%, 10 year,
P1,000 face value bonds with detachable stock warrants at P1,250,000. Each bonds,
which pays semi-annual interest every January 1 and July 1, carried 5 detachable
warrants which entitle the holder to acquire one share of Dirk Corporation ordinary
shares for every warrant at a specified option price of P55 per share. Immediately after
the issuance the prevailing market rate of interest is at 10% and the market value of the
warrants was P30. How much is the equity component of the compound
instrument? (Round off PV factor to 4 decimal places)
You Answered
327,232

Correct Answers
327,232 (with margin: 50)

FV of compound financial instrument 1,250,000

Present value of principal, 1,000,000 x 0.6139* 613,900  

Present value of nominal interest 1,000,000 x 4% x 7.7217 308,868   922,768

Equity component   327,232

*PV using 5% for 10 periods. Remaining term of the bond is 5

   
years only, because 5 years is already lapsed
Question 10
Motorboat Company had a 12% bonds payable with carrying amount of P8,320,000 on
December 31, 2019. The bonds, which had a face value of P8,000,000, were issued at
a premium to yield 10%. The entity used the effective-interest method of amortization.
Interest was paid on June 30 and December 31. On June 30, 2020, several years
before their maturity, the entity retired the bonds at 105 plus accrued interest. What is
the loss on retirement in 2020?
You Answered
144,000

Correct Answers
-144,000 (with margin: 0)
144,000 (with margin: 0)

Carrying amount of the bonds 12/31/18 8,320,000

Effective interest (10% x 6/12 + 1)        x1.05

Nominal interest (8,000,000 x 12% x 6/12  (480,000)

Carrying amount of the bonds 06/30/19 8,256,000

Retirement price (8,000,000 x 1.05) (8,400,000)

Loss on retirement    (144,000)

Question 11
On January 1, 2021, Medicham Co. issued 1,000, P4,000, 10%, 3 year bonds for
P3,807,852. Principal is due on December 31, 2023 but interests are due annually
every year-end. In addition, Medicham incurred bond issue costs of P179,316. The
effective interest rate is 14% after adjustment for bond issue costs. How much is the
interest expense in 2021?
Correct!
507,995

Correct Answers
507,995 (with margin: 0)

Initial carrying amount 1/1/21 3,807,852 – 179,316 3,628,536

Effective interest           14%

Interest expense    507,995

Question 12
Nami, Inc., issued 2,000 of its 5 year P1,000 face value 11% bonds on January 1, 2018.
These bonds were sold for P2,155,800 a price that yields 9%. The bonds were dated
January 1, 2018 and pay interest annually every December 31. On July 1, 2020, 1,000
of the bonds were retired, the company paying P1,100,000 inclusive of accrued interest.
What amount of gain or (loss) on retirement of bonds payable during 2020?
You Answered
-1,963

Correct Answers
-1,963 (with margin: 10)

Carrying amount of the bonds 1/1/13 2,155,800

Effective interest 1.09

Nominal interest 2,000,000 x 11% (220,000)

Effective interest 1.09

Nominal interest 2,000,000 x 11% (220,000)

Effective interest x 6/12 1.045

Nominal interest 2,000,000 x 11% x 6/12 (110,000)

Carrying amount at 7/1/15 2,086,074

Half of the bonds were retired              ½

Carrying amount of the retired bonds 1,043,036

Accrued interest 1,000,000 x 11% x 6/12      55,000

Total liability 1,098,036

Total retirement price plus accrued interest (1,100,000)

Loss (1,963)

Question 13
On January 1, 2021, Mawi Co. issued 1,000, P4,000, 12%, 3 years bonds for
P4,198,948. Principal is due on December 31, 2023 but interest are due annually every
year-end. The effective interest rate is 10%. How much is the unamortized premium on
bonds as of December 31, 2021?
You Answered
138,843

Correct Answers
138,843 (with margin: 5)

Initial carrying amount 1/1/21 4,198,948

Effective interest 1.10

Nominal interest  (480,000)

Carrying amount12/31/21 4,138,843

Face amount 4,000,000

Premium 138,843
Question 14
RCC Corporation, a calendar-year firm, is authorized to issue P200,000 of 10 percent,
20-year bonds dated January 1, 2024, with interest payable on January 1, and July 1 of
each year. If the bonds were issued on April 1, 2024, the amount of accrued interest on
the date of sale is
Correct!
5,000

Correct Answers
5,000 (with margin: 0)

Face amount 200,000

Nominal interest       10%

Last interest date to date of issuance January 1 to April 1       3/12

Accrued interest      5,000

Question 15
On May 1, 2022, Barcelona Company issued a five-year P2,000,000 face value bonds
with stated rate of 16%. The bonds were issued to yield 14%. Interests are payable
semi-annually on May 1 and November 1. Barcelona Company uses the calendar year
and the effective interest method of amortization.
Present value of 1 at 7% for 10 periods is 0.5084.
Present value of an ordinary annuity of 1 at 7% for 10 periods is 7.0236.
How much is the issue price of the bonds?
Correct!
2,140,576

Correct Answers
2,140,576 (with margin: 200)

PV of principal, 2,000,000 x 0.5084 1,016,800

PV of interest, 2,000,000 x 8% x 7.0236 1,123,776

PV of bonds, initial carrying amount 2,140,576