10/26/22, 9:14 AM Formative Quiz: Attempt review

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Formative Quiz

Started on Wednesday, 26 October 2022, 5:46 PM

Question 1
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What is the principal accounting for a compound financial instrument?

a. The issuer shall classify a compound instrument as either liability or equity

b. The issuer shall classify a compound instrument as a liability in its entirety, until converted into equity.

c. The issuer shall classify a compound instrument as a liability in its entirety.

d. The issuer shall classify the liability and equity components of a compound instrument separately as financial liability or equity
instrument

Question 2
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On January 1, 2025, ABC Company issued its 12%. 5-year convertible debt instrument with a face amount of P4,000,000 for P3,850,000.
Interest is payable every June 30 and December 31 starting 2025. The debt instrument is convertible into 20,000 ordinary shares with a par
value of P100. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is
14%. ABC uses effective interest method of amortization and 4-decimal PVF. Determine the equity component. (Round off your answer to the
nearest peso.)

Answer: 131,136

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Question 3

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On January 1, 2025, ABC Corporation issued P1,000,000, 12%, nonconvertible bonds with detachable share purchase warrants. Each P1,000
bond carried 20 detachable share purchase warrants, each of which called for one share of ABC ordinary share, par P50, at the specified
option price of P60 per share. The bonds are sold at 106, and the detachable share purchase warrants were immediately quoted at P1 each on
the market. The bond was dated January 1, 2025 and will mature on January 1, 2030. The effective interest rate of the bonds ex – warrant is
11%. Interest payment shall be made every January 1. ABC uses effective interest method of amortization and 4-decimal PVF. To record the
transaction, which of the following can’t be found in the entry? Round off your answer to the nearest peso.

a. Cr. Bond premium 37,008

b. Dr. Cash 1,060,000

c. Cr. Share premium-conversion option 22,992

d. Cr. Bonds payable 1,000,000

Question 4
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On January 1, 2025, ABC Company issued its 12%. 5-year convertible debt instrument with a face amount of P4,000,000 for P3,850,000.
Interest is payable every June 30 and December 31 starting 2025. The debt instrument is convertible into 20,000 ordinary shares with a par
value of P100. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is
14%. ABC uses effective interest method of amortization and 4-decimal PVF. Assume that at the end of 2025, ABC retired the total issue at
103, when the effective interest prevailing in the market ex-conversion privilege is 13% for similar instrument. Which of the following is not
found in ABC’s entry for retirement? (Round off your answer to the nearest peso.)

a. Dr. Bonds payable 3,760,927

b. Cr. Cash 4,120,000

c. Dr. Share Premium – Conversion Privilege 131,136

d. Dr. Share premium – retired conversion privilege 117,185

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Question 5

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Evaluate the following statements:

S1. Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to the nominal rate
multiplied by the beginning-of-period carrying amount of the bonds.

S2. ABC is using effective interest method in amortizing any premium or discount arising from the bond issue. In case the entity incurs
printing costs and legal fees associated with the issuance of bonds, the total costs may be lumped into the discount, or netted against the
premium.

a. True, True

b. True, False

c. False, True

d. False, False

Question 6
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On December 31, 2027, ABC sold a 12% serial bond issue with face amount of P7,000,000 for 106. The bonds mature in the amount of
P1,000,000 on December 31 of each year beginning December 31, 2028 and interest is payable annually. On December 31, 2029, the entity
retired P1,000,000 of bonds due on that date and in addition purchased at 103 and retired bonds with face amount of P1,000,000 which were
due on December 31, 2032. The bond outstanding method of amortization is used. How much is the carrying value of the bonds on
December 31, 2028?

Answer: 7,315,000

Question 7
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On December 31, 2027, ABC issued P4,000,000 8% serial bonds, to be repaid in the amount of P800,000 each year. Interest is payable annually
on December 31. The bonds were issued to yield 10% a year. (Use 4-decimal PVF and round off your answer to the nearest peso.). Determine
the issue price of the bonds.

Answer: 3,806,442

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Question 8

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Evaluate the following statements:

S1. If bonds are issued between interest dates, the entry on the books of the issuing corporation may include a credit to Interest Expense.

S2. If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting gain due to change in fair
value directly to profit or loss.

S3. An extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest
dates. At the time of reacquisition any costs of issuing the bonds must be amortized up to the purchase date.

a. False, True, True

b. Some other option

c. All are False

d. False, True, False

e. All are True

f. True, False, False

Question 9
Complete

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ABC Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2025 on January 1, 2025. The bonds pay interest semiannually on June
30 and December 31. The bonds are issued to yield 5%. ABC uses effective interest method of amortization and 4-decimal PVF. The initial
amount of the bond liability is (Round off your answer to the nearest peso.)

Answer: 5,218,815

Question 10
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On December 31, 2022, NC called for redemption all of its P1,000,000 face amounts bonds payable outstanding at the call price of 105. As of
June 30, 2022, the unamortized discount as P50,000 and the unamortized bond issue costs were P30,000. The market value of the bonds was
P1,060,000 on July 1, 2022, and P1,70,500 on December 31, 2022. The bonds have 2 more years to become due as of June 30, 2022. NC’s
effective income tax rate was 30% for 2022. In its income statement for the year ended December 31, 2022, what amount should NC report as
gain from bond redemption?

Answer: 130,000

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Question 11

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On December 31, 2027, ABC sold a 12% serial bond issue with face amount of P7,000,000 for 106. The bonds mature in the amount of
P1,000,000 on December 31 of each year beginning December 31, 2028 and interest is payable annually. On December 31, 2029, the entity
retired P1,000,000 of bonds due on that date and in addition purchased at 103 and retired bonds with face amount of P1,000,000 which were
due on December 31, 2032. The bond outstanding method of amortization is used. The pre-mature retirement on December 31, 2029 has
resulted to a gain of how much?

Answer: 15,000

Question 12
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ABC Company issues P20,000,000 of 5-year, 12% bonds on March 1, 2027 at 103 plus accrued interest. The bonds are dated January 1, 2027,
and pay interest on December 31. ABC uses the straight line method to amortize any resulting premium/ discount. (Round off your answer to
the nearest peso.) Compute the interest expense for 2027.

Answer: 1,896,552

Question 13
Complete

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On January 1, 2025, ABC Corporation issued P1,000,000, 12%, nonconvertible bonds with detachable share purchase warrants. Each P1,000
bond carried 20 detachable share purchase warrants, each of which called for one share of ABC ordinary share, par P50, at the specified
option price of P60 per share. The bonds are sold at 106, and the detachable share purchase warrants were immediately quoted at P1 each on
the market. The bond was dated January 1, 2025 and will mature on January 1, 2030. The effective interest rate of the bonds ex – warrant is
11%. Interest payment shall be made every January 1. ABC uses effective interest method of amortization and 4-decimal PVF. On December
31, 2025, the carrying value of the liability component is (Round off your answer to the nearest peso.)

Answer: 1,031,079

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Question 14

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On January 1, 2025, ABC Company issued its 12%. 5-year convertible debt instrument with a face amount of P4,000,000 for P3,850,000.
Interest is payable every June 30 and December 31 starting 2025. The debt instrument is convertible into 20,000 ordinary shares with a par
value of P100. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is
14%. ABC uses effective interest method of amortization and 4-decimal PVF. Assume that at the end of 2025, the investor exercises its
privilege to convert a portion of the convertible debt instrument, resulting ABC to issue 10,000 ordinary shares. The fair value of ABC’s
ordinary share on this date is P105. Determine the net increase in equity as a result of exercising the privilege. (Round off your answer to the
nearest peso.)

Answer: 883,528

Question 15
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On July 1, 2022, NC called for redemption all of its P2,000,000 face amounts bonds payable outstanding at the call price of 102. As of June 30,
2022, the unamortized discount as P90,000 and the unamortized bond issue costs were P45,800. The market value of the bonds was
P2,020,300 on July 1, 2022. NC’s effective income tax rate was 30% for 2022. In its income statement for the year ended December 31, 2022,
what amount should NC report as loss from bond redemption?

Answer: 175,800

Question 16
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Accrued interest on bonds that are sold between interest dates

a. is ignored by both the seller and the buyer.

b. is recorded as a loss on the sale of the bonds.

c. decreases the amount a buyer must pay to acquire the bonds.

d. increases the amount a buyer must pay to acquire the bonds.

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Question 17

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Bondholders exchange their convertible bonds for the entity’s ordinary shares. The carrying amount of these bonds was lower than market
value but greater than the par value of the ordinary shares issued. If the book value method is used, which of the following correctly states an
effect of the conversion?

a. Shareholders’ equity is increased

b. Retained earnings increased

c. Share premium is decreased

d. A loss is recognized

Question 18
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On January 1, 2025, ABC Co. issued eight-year bonds with a face value of P1,000,000 and a stated interest rate of 6%, payable semiannually
on June 30 and December 31. The bonds were sold to yield 8%. The issue price of the bonds is (use 3-decimal present value factor and round
off your answer to the nearest peso.)

Answer: 883,560

Question 19
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ABC Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2025 on January 1, 2025. The bonds pay interest semiannually on June
30 and December 31. The bonds are issued to yield 5%. ABC uses effective interest method of amortization and 4-decimal PVF. How much is
the carrying value of the bonds on December 2026? (Round off your answer to the nearest peso.)

Answer: 5,137,718

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Question 20

Complete

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On January 1, 2025, ABC Corporation issued P1,000,000, 12%, nonconvertible bonds with detachable share purchase warrants. Each P1,000
bond carried 20 detachable share purchase warrants, each of which called for one share of ABC ordinary share, par P50, at the specified
option price of P60 per share. The bonds are sold at 106, and the detachable share purchase warrants were immediately quoted at P1 each on
the market. The bond was dated January 1, 2025 and will mature on January 1, 2030. The effective interest rate of the bonds ex – warrant is
11%. Interest payment shall be made every January 1. ABC uses effective interest method of amortization and 4-decimal PVF. If 50% of the
purchase warrants were exercised by the investor middle of 2026, the entry by ABC Corporation to record the said transaction would include
the following, except (Round off your answer to the nearest peso.)

a. Cr. Share premium – issuance, 111,496

b. Dr. Cash, 600,000

c. Cr. Share Capital

d. Dr Share warrants outstanding 22,992

e. 500,000

Question 21
Complete

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Evaluate the following statements:

S1 The proceeds of a bond with a face amount of P100,000,000 which sells at 102 will be P102,000,000.

S2 The proceeds of a bond with a face amount of P100,000,000 which sells at 98 will be P98,000,000.

S3 When bonds are issued at a discount, the bonds payable account may be credited for the proceeds from the issue.

S4 When bonds are issued at a premium, in amortizing the premium using effective interest method, will increase the amortization.

a. Only 3 statements are correct

b. Only 2 statements are correct

c. All statements are incorrect

d. All statements are correct

e. Only 1 statement is correct

Question 22
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ABC Company issues P20,000,000 of 10-year, 9% bonds on March 1, 2025 at 97 plus accrued interest. The bonds are dated January 1, 2025,
and pay interest on December 31. What is the total cash received on the issue date?

Answer: 19,700,000

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Question 23

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A five-year term bond was issued on January 1, 2022 at a premium. The carrying amount of the bond on December 31, 2023 would be

a. Higher than the carrying amount on December 31, 2024

b. Lower than the carrying amount on December 31, 2024

c. The same as the carrying amount on January 1, 2022

d. Higher than the carrying amount on January 1, 2022

Question 24
Complete

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Evaluate the following statements:

S1. The semi-annual interest payment on a 6.5% P10,000,000 bond is P650,000.

S2. The journal entry to record amortization of bond discount includes a debit to the bonds payable account.

S3. Amortization of bond premium reduces the balance in bonds payable.

a. All are False

b. True, False, False

c. False, True, True

d. All are True

e. False, False, True

f. False, True, False

Question 25
Complete

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ABC Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2025 on January 1, 2025. The bonds pay interest semiannually on June
30 and December 31. The bonds are issued to yield 5%. ABC uses effective interest method of amortization and 4-decimal PVF. How much is
the interest expense for 2025 if ABC prepares its financial statements every December 31? (Round off your answer to the nearest peso.)

Answer: 260,452

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Question 26

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On January 1, 2025, ABC Company issued its 12%. 5-year convertible debt instrument with a face amount of P4,000,000 for P3,850,000.
Interest is payable every June 30 and December 31 starting 2025. The debt instrument is convertible into 20,000 ordinary shares with a par
value of P100. When the debt instruments were issued, the prevailing market rate of interest for similar debt without conversion option is
14%. ABC uses effective interest method of amortization and 4-decimal PVF. Assume that at the end of 2025, ABC retired the total issue at
103, when the effective interest prevailing in the market ex-conversion privilege is 13% for similar instrument. Determine the amount that will
be shown in the profit or loss resulting from the retirement. (Round off your answer to the nearest peso.)

Answer: 5,529,600

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