BA

123 (Salazar/Velasco/Dela Cruz)

Notes Payable and Bonds Payable – Financial Accounting & Reporting

Basic Accounting Review
A. Computing the Issue Price. Compute for the issue price of each of the following bond issues? (Round
to the nearest peso.)
1. 10% bonds of P10,000,000 sold on bond issue date; 5-year life; interest payable semi-annually.
Bonds of same risk class sells at yield to maturity of 12%.
2. 9% bonds of P2,000,000 sold on bond issue date; 3-year life; interest payable semi-annually.
Bonds of same risk level sells at a market yield of 8%.
3. 8% bonds of P1,500,000 sold 30 months after bond issue date; 5-year life; interest payable semi-
annually. Bonds of same risk level sells at a market yield of 10%.

B. Computing the yield-to-maturity. On January 1, 2003, Pautang Inc. issued 9% bonds with a face value
of P1,000,000 and a maturity date of December 31, 2007 for P885,300. Interest is payable semi-
annually every January 1 and July 1. It cost Pautang Inc. P30,000 to issue the bonds.
a. Determine the journal entry of Pautang Inc. on January 1, 2003.
b. Determine the revised yield-to-maturity of the bonds. (Round off YTM to 2 decimal places.
XX.XX%)
c. How much is interest expense for the period ending December 31, 2005?
d. Prepare the completed amortization table.

C. Interest expense determination. On April 1, 2003, Pahi Ramnaman Corp. issued P2,000,000 of 8%
debentures to yield 10%, receiving P1,845,560. Interest is payable semi-annually and the bonds
mature in 5 years.
a. Determine the journal entry of Pahi Ramnaman Corp. on April 1, 2003.
b. Compute for interest expense to be reported by Pahi Ramnaman for the year ended December
31, 2006.
c. Prepare the completed amortization table.

D. Deferred Bonds. On January 1, 2005, Cortes issued 10%, P100,000,000, 4-year deferred bond. The
coupon interest is payable at maturity. The effective interest compounded annually on January 1, 2005
is 12%.
a. What is the issue price of the bond?
b. What is interest expense to be recognized for the period ending December 31, 2006?
c. What is the carrying value of the bonds on January 1, 2007?
d. Prepare the completed amortization table.

E. Serial Bonds. A serial bond issue in the amount of P2,000,000, dated January 1, 2001, bearing 8%
interest payable at December 31 each year, is issued by Elenjuin, Inc. to yield 9% per year. The bonds
mature in the amount of P400,000 on January 1 of each year starting in 2002.
a. What is the issue price of the bond?
b. What is interest expense reported by Elenjuin for the period ending December 31, 2004?
c. What is the carrying value of the investment in serial bonds in the books of Elenjuin as of
December 31, 2005?
d. Prepare the completed amortization table.

F. Early extinguishment of debt. The long-term debt section of Stariray Company’s balance sheet as of
December 31, 2003, included 9% bonds payable of P2,000,000 less unamortized discount of P160,000.
These bonds were issued to yield 10%. Interest was paid on January 1 and July 1 of each year. On July
1, 2005, Stariray retired the bonds at 95 (clean price) before maturity.
a. Compute for the gain or loss from the early extinguishment of debt?

 G. Non-interest bearing note. On January 1, 2004, Ann Stine loaned $37,565 to Joe Grant. A zero-
interest-bearing note (face amount, $50,000) was exchanged solely for cash; no other rights or
privileges were exchanged. The note is to be repaid on December 31, 2006.
a. What amount of interest expense should Mr. Grant recognize in 2005?
b. What is the carrying value of the note as of year ending June 30, 2004?

Complex Debt Securities Review

1. Convertible Bonds. On January 1, 2004, ABC issued 10-year, P20 million convertible bonds with
interest payable every January 1. The bonds were selling at 108. A similar option-free bond with
the same risk and maturity is selling at 98. The following information relate to convertible and
option-free bonds after the date of issue:
Date Convertible Bond Option-free bond
12/31/04 104 100
12/31/05 107 101
12/31/06 101 93

a. How much is interest expense for the period ending December 31, 2004?
b. How much is the carrying value of the bond liability as of December 31, 2005?
c. On July 1, 2006, all of the bonds were converted to 1500 P10 par value common stocks. What
is the journal entry of ABC on the date of conversion?
d. If the bonds were acquired from the market on December 31, 2005, determine the gain or loss
from the extinguishment of liabilities to be reported in the income statement.

2. Bonds with detachable stock warrants. Eve Company wants to raise additional capital. After
analysis of the available options, Eve decided to issue P20,000,000 face value, 9% coupon, five-
year bond with detachable warrants. The interest on the bonds are payable annually every July 1.
One stock warrant is attached to every 1,000 face value bond. On July 1, 2004 (issue date),
Investors purchased P5,000,000 face value of the Eve bonds for P5,080,000. On this day, similar
stand-alone bonds sells at 101 and the Eve warrants are valued at P9. On December 31, 2004, Eve
warrant trades at P9.50.

a. Determine the journal on the day of issuance of the bonds.
b. Determine the interest expense to be reported in the income statement of Eve for the period
ending December 31, 2005.
c. If the warrants were sold on January 31, 2005 for P10 each, determine the journal entry of Eve
when the warrants are exercised.

Debt Restructuring Review
2. Modification of Terms. As of December 31, 2003, Antonino has an outstanding debt with
Ajinomoto Bank. The loan has an outstanding principal of P5,000,000 with unamortized discount
of P300,000 and a remaining maturity of five years. The interest on the loan is 10% which is
payable at the end of the year. On December 31, 2004, Antonino entered into a restructuring
agreement with Ajinomoto Bank. The new terms of the loan include:
• Principal will be increased by P1,000,000.
• Interest of 10.25% will be paid at the end of each year.
• Unpaid 2004 coupon interest is waived.

a. How much is gain or loss to be recognized in the books of Antonino on the date of
restructuring?
b. How much is interest expense to be recognized in the books of Antonino on December 31,
2005?

 3. Modification of Terms. On December 31, 2004, Dumalaog entered into a restructuring
agreement with Metrobank. The restructuring provides the following modification:
• Outstanding principal is reduced by P2,000,000. The new principal is P8,000,000.
• The maturity is extended to December 31, 2010.
• The coupon rate is reduced from 10% to 8%.
• Unpaid interest of P2,000,000 is waived.

a. How much is gain or loss to be recognized in the books of Dumalaog on the date of
restructuring?
b. How much is interest expense to be recognized in the books of Dumalaog on December
31, 2005?

4. Asset Swap. Natalo Company has outstanding P3,000,000 note payable to Wagi, Inc. Because of
financial difficulties, Natalo negotiates with Wagi to exchange a prime piece of real estate property
to satisfy its debt. The land is carried in Natalo’s books at P1,800,000. The appraiser hired by
Wagi reported that the current fair market value of the land is P2,800,000. Wagi decided to accept
the land in exchange for extinguishment of Natalo’s debt. Compute for the total gain or loss from
the extinguishment of debt?

5. Equity Swap. Nalugi, Inc. is at the brink of bankruptcy. It’s officers are worried that it would not
be able to raise sufficient funds to retire its maturing debt amounting to P8,000,000. After seeking
the approval of its Board of Directors, Nalugi entered into an agreement for exchange of equity
with its creditors. The terms of its equity for debt exchange agreement are as follows:
• 250,000 shares of P2 par value common stock, current fair market value of P16 per share;
• 20,000 shares of P20 par value preferred stock, current fair market value of P200 per
share.
Determine the total amount of additional paid in capital that will result from this
transaction.