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BONDS PAYABLE
Prof. U. C. Valladolid

1. On March 1, 2014, Pyne Furniture Co. issued P700,000 of 10 percent bonds to yield 8 percent. Interest
is payable semiannually on February 28 and August 31. The bonds mature in ten years. Pyne Furniture
Co. is a calendar-year corporation.

(1) Determine the issue price of the bonds. Show your computations.
(2) Prepare an amortization table through the first two interest periods using
the effective-interest method.
(3) Prepare the journal entries to record bond-related transactions as of the
following dates:
(a) March 1, 2014
(b) August 31, 2014
(c) December 31, 2014
(d) February 28, 2015

2. On January 1, 2014, Jerome Corporation issued 2,000 of its 5-year, P1,000 face value, 11% bonds
dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December
31. Jerome uses the effective interest method of amortization. On December 31, 2015, the 2,000
bonds were extinguished early through acquisition in the open market by Jerome for P1,980,000 plus
accrued interest.

On July 1, 2014, Jerome issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par.
Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest
rate for similar debt without the conversion option is 12%. On July 1, 2015, an investor in Jerome’
convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Jerome’ common stock,
which had a fair value of P105 and a par value of P1 at the date of conversion.

Prepare the entries to record the above transactions.

3. In April 2013, Cathy Corp, issued P3,000,000 of 10% non-convertible bonds at 102 that are due on
March 31, 2019. each P1,000 bond was issued with 40 detachable stock warrants, each of which
entitled the bondholders to purchase one share of Cathy P10 par ordinary share for P25. On April 1,
2013, the market value of Cathy’s ordinary was P20 per share, and the market value of the bonds ex-
warrant was P97.
On January 1, 2015 all warrants were exercise.

Instructions: Prepare the entries to record the above transactions.

4. On December 31, 2013, Orland Company 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. Orland amortizes the bond discount by the interest method.

How much is the proceeds from issuance of bonds?

a. 4,000,000
b. 3,805,600
c. 4,400,000
d. 2,982,000

In its December 31, 2014 statement of financial position, what amount should Orland report as the
carrying value of the bonds payable?
a. 3,005,600
b. 3,066,160
c. 2,982,000
d. 2,787,600

In its December 31, 2015 statement of profit and loss, what amount should Orland report as interest
expense on the bonds ?
a. 64,000
b. 256,000
c. 128,000
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d. answer not given

5. On December 31, 2014, Moses Company issued P5,000,000 face value, 5-year bonds at 109. Each
P1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to
purchase one share of P5 par value common at P25. Immediately after issuance, the market value of
each warrant was P5. The stated interest rate on the bonds is 11% payable annually every December
31. 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 of an ordinary annuity of 1 at 12%
for 5 periods is 3.60. On December 31, 2014, what amount should Moses record as discount or
premium on bonds payable?
a. 170,000 discount
b. 450,000 premium
c. 450,000 discount
d. 800,000 premium

6. On January 1, 2014, Nati Corporation issued 5,000 of its 5-year, P1,000 face value, 11% bonds dated
January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Nati
uses the effective interest method of amortization. On December 31, 2015, the 3,000 bonds were
extinguished early through acquisition in the open market by Nati for P2,970,000 plus accrued interest.

Based on the above information, determine the following: (Round off present value factors to four
decimal places.)

1. The issue price of the bonds on January 1, 2014 is

a. P5,388,835 c. P5,282,135
b. P4,630,655 d. P5,000,000

2. The carrying amount of the bonds on December 31, 2014 is

a. P4,755,930 c. P5,323,830
b. P5,453,840 d. P5,000,000

3. The gain on early retirement of bonds on December 31, 2015 is

a. P116,442 c. P181,785
b. P266,811 d. P 0

7. On January 2, 2013, the Nati, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will
mature on January 1, 2017 and interest is payable annually every January 1. The bond contract entitles
the bondholders to receive 6, P100 par value, ordinary shares in exchange for each P1,000 bond. On
the date of issue, the prevailing market interest rate for similar debt without the conversion option is
10%.

On January 1, 2017, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42.

Based on the above data, answer the following: (Round off present value factors to 4 decimal places)

1. The proceeds from issuance of convertible bonds to be allocated to the liability component is
a. P1,366,000 c. P1,873,184
b. P1,778,336 d. P2,000,000

2. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. P634,000 c. P126,816
b. P221,664 d. P 0

3. The carrying amount of the bonds payable on December 31, 2013 is

a. P2,000,000 c. P1,389,400
b. P1,796,170 d. P1,900,502

4. The interest expense for the year 2014 is

a. P160,000 c. P138,940
b. P179,617 d. P190,050
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5. The gain to be recognized on conversion of the bonds is

a. P126,816 c. P463,408
b. P400,000 d. P 0

8. Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2014. The bonds have a four-year
term with a stated rate of interest of 6 percent, and are issued at par with a face value of 1,000 per bond
(the total proceeds received from issuance of the bonds are 1,000,000). Interest is payable annually at
December 31. Each bond is convertible into 250 ordinary shares with a par value of 1. The market rate
of interest on similar non-convertible debt is 9 percent. Assume that at the issuance date, 97,187 was
credited to Share Premium—Conversion Equity. The bonds were not converted at maturity and Mae
Jong pays off the convertible debt holders. What amount will Mae Jong record as a gain or a loss on this
transaction?
a. -0-
b. 97,187
c. 24,297
d. 250,000

9. On May 1, 2014, Marly Co. issued P500,000 of 7% bonds at 103, which are due on April 30, 2022.
Twenty detachable stock warrants entitling the holder to purchase for P40 one share of Marly’s ordinary
shares P15 par value, were attached to each P1,000 bond. The bonds without the warrants would sell at
96. On May 1, 2014, the fair value of Marly’s shares was P35 per share and of the warrants was P2.

1. On May 1, 2014, the carrying amount of bonds payable is?

a. P515,000.
b. P500,000.
c. P480,000.
d. P494,400.

2. On May 1, 2014, Marly should credit Share Premium–Share Warrants for

a. P20,600
b. P35,000
c. P20,000
d. P15,000

3. Assuming the warrants were exercise on May 1, 2015, how much is the increase in contributed
capital as a result of the exercise of warrants?

10. Lovely Corp. had P600,000 convertible 8% bonds outstanding at June 30, 2014. Each P1,000 bond was
convertible into 10 shares of Lovely's P50 par value ordinary share. On July 1, 2015, the interest was
paid to bondholders, and the bonds were converted into ordinary share, which had a fair market value of
P75 per share. The unamortized premium on these bonds wasP12,000 at the date of conversion. Under
the book value method, this conversion increased the following elements of the stockholders' equity
section by
Ordinary share Share Premuim
a. P300,000 P312,000
b. P306,000 P306,000
c. P450,000 P162,000
d. P600,000 P 12,000

11. Feller Company issues 20,000,000 of 10-year, 9% bonds on March 1, 2014 at 97 plus accrued interest.
The bonds are dated January 1, 2014, and pay interest on June 30 and December 31. What is the total
cash received on the issue date?
a. 19,400,000
b. 20,450,000
c. 19,700,000
d. 19,100,000

12. The 12% bonds payable of Nyman Co. had a carrying amount of 832,000 on
December 31, 2014. The bonds, which had a face value of 800,000, were issued at a premium to yield
10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and
December 31. On June 30, 2015, several years before their maturity, Nyman retired the bonds at 104
plus accrued interest. The loss on retirement, ignoring taxes, is
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a. 0.
b. 6,400.
c. 9,920.
d. 32,000.

13. On November 1, 2014, Jerome Company issued P8,000,000 of its 10-year, 8% term bonds dated
October 1, 2014. The bonds were sold to yield 10% with total proceeds of P7,000,000 plus accrued
interest. Interest is paid every April 1 and October 1. What should Jerome report for interest payable in
its December 31, 2014 balance sheet?
a. 175,000
b. 160,000
c. 116,667
d. 106,667

14. On June 30, 2014, Jerome Company issued at 99, five thousand of its 8%, P1,000 face value bonds.
The bonds were issued through an underwriter to whom Jerome paid bond issue cost of P425,000. On
June 30, 2014, Jerome should report the bond liability at
a. 4,525,000
b. 4,950,000
c. 5,000,000
d. 4,575,000

15. Pat Co. has 3,000,000 of 8% convertible bonds outstanding. Each 1,000 bond is convertible into
30 no-par value common shares. The bonds pay interest on January 31 and July 31. On July 31, 2014,
the holders of 900,000 bonds exercised the conversion privilege. On that date, the market price of the
bonds was 105, the market price of the common shares was 36, the carrying value of the common
shares was 18, and the contributed capital: bond conversion rights was 450,000. The total
unamortized bond premium at the date of conversion was 210,000.
Using the book value method, what amount will Pat record as a result of this conversion?
a. A loss of 9,000
b. An extraordinary loss of 9,000
c. A gain of 18,000
d. No gain or loss

16. A company issued 500,000, 12% (interest payable annually on May 1), 5-year bonds. At year end,
the company had the following account balances:
Bonds payable 500,000 Cr
Discount on bonds 9,500 Dr
Interest payable 10,000 Cr
Conversion rights on convertible bonds 36,000 Cr
Interest expense 10,300 Dr
What amount of proceeds from the bond issue would be shown under the financing activities section
of the year-end cash flow statement?
a. 490,200
b. 526,200
c. 526,500
d. 545,800

17. During year 1, Lake Co. issued 3,000 of its 9%, 1,000 face value bonds at 101 1/2. In connection with
the sale of these bonds, Lake paid the following expenses:
Promotion costs 20,000
Engraving and printing 25,000
Underwriters’ commissions 200,000
What amount should Lake record as bond issue costs to be amortized over the term of the bonds?
a. 0
b. 220,000
c. 225,000
d. 245,000
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18. Grim Corporation reports under IFRS. Grim issued 2,000 1,000 convertible bonds at par, with an annual
interest rate of 6% when the market was 8%. The bonds are due in 5 years and each 1,000 bond is
convertible into 3 shares of common stock. At what amount would Grim record the liability component of
the bond?
a. 479,125
b. 1,840,285
c. 2,000,000
d. 2,006,000

19. On January 1, 2014, Southern Corporation received 107,720 for a 100,000 face amount, 12% bond, a
price that yields 10%. The bonds pay interest semiannually. Southern elects the fair value option for
valuing its financial liabilities. On December 31, 2014, the fair value of the bond is determined to be
106,460. Southern recognized interest expense of 12,000 in its 2014 income statement. What was the
gain or loss recognized on the 2014 income statement to report this bond at fair value?
a. 1,260 gain
b. 6,460 gain
c. 12,000 loss
d. 13,260 loss

20. Bonds with a face value of 1,000,000 were retired prior to maturity, when their book value was 987,000.
The amount (excluding interest) paid to retire the bonds was 950,000. What would the entry to record
the retirement include?
a) Dr. bonds payable 987,000
b) Cr. cash 1,000,000
c) Cr. discount 13,000
d) Dr. loss on bond retirement 37,000

21. On January 2, Vole Co. issued bonds with a face value of 480,000 at a discount to yield 10%. The
bonds pay interest semiannually. On June 30, Vole paid bond interest of 14,400. After Vole recorded
amortization of the bond discount of 3,600, the bonds had a carrying amount of 363,600. What amount
did Vole receive upon issuing the bonds?
a. 360,000
b. 367,200
c. 476,400
d. 480,000

22. On December 31, 2014, MS Company issued 10-year convertible bonds with a face value of
2,000,000 and a stated rate of 10%, paid semi-annually. The bonds are convertible at the investor’s
option. The bonds were issued to provide an effective yield of 9% for proceeds of 2,130,080. If these
bonds did not have a conversion feature, the company would have issued the bonds for 1,880,496 to
yield 11%.

Which of the following is true with respect to the reporting of this financial instrument?
a) The liability portion of this financial instrument would be 2,130,080 at December 31, 2014
b) The liability portion of this financial instrument would be 2,000,000 at December 31, 2014
c) The interest expense for the first half of 2015 would be 95,854 .
d) The interest expense for the first half of 2015 would be 103,427.

23. On October 1, 2014 Macklin Corporation issued 5%, 10-year bonds with a face value of 1,000,000 at
108 (a 4% yield). Interest is paid on October 1 and April 1, with any premiums or discounts amortized on
an effective-interest basis.

1. The entry to record the issuance of the bonds would include a credit of
a. 25,000 to interest Payable.
b. 80,000 to Bonds Payable.
c. 1,000,000 to Bonds Payable.
d. 1,080,000 to Bonds Payable.

2. Bond interest expense reported on the December 31, 2014 income statement of Macklin
Corporation would be
a. 10,800
b. 12,500
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c. 13,500
d. 21,600

24. The 10% bonds payable of Nixon Company had a net carrying amount of 570,000 on December 31,
2013. The bonds, which had a face value of 600,000, were issued at a discount to yield 12%. The
amortization of the bond discount was recorded under the effective-interest method. Interest was paid
on January 1 and July 1 of each year. On July 2, 2014, several years before their maturity, Nixon retired
the bonds at 102. The interest payment on July 1, 2014 was made as scheduled. What is the loss that
Nixon should record on the early retirement of the bonds on July 2, 2014? Ignore taxes.
a. 12,000.
b. 37,800.
c. 33,600.
d. 42,000.

25. The December 31, 2013, statement of financial position of Bordeaux Corporation includes the following
items:

9% bonds payable due December 31, 2020 3,081,000

The bonds were issued on December 31, 2010, and have a face amount of 3,000,000 with interest
payable semi-annually on July 1 and December 31 of each year. On January 1, 2014, Bordeaux retired
1,000,000 of these bonds at 98. What amount should Bordeaux report on the company's 2014 income
statement as gain or loss on the retirement of the bonds?
a. 47,000 loss.
b. 141,000 loss.
c. 7,000 loss.
d. 21,000 loss.