BONDS PAYABLE

Easy:

1. A bond indenture is

a. a contract between the corporation issuing the bonds and the underwriters selling the
bonds
b. a contract between the corporation issuing the bonds and the bond trustee, who is acting
on behalf of the bondholders.
c. the amount due at the maturity date of the bonds
d. the amount for which the corporation can buy back the bonds prior to the maturity date

2. An unsecured bond is the same as a

a. term bond.
b. zero coupon bond.
c. debenture bond.
d. bond indenture.

3. Bonds that are subject to retirement at a stated peso amount prior to maturity at the option
of the issuer are called

a. options.
b. early retirement bonds.
c. Debentures
d. callable bonds.

4. When the effective-interest method is used, the amortization of the bond premium

a. has no effect on the interest expense in any period

b. increases interest expense each period
c. increases interest expense in some periods and decreases interest expense in other
periods
d. decreases interest expense each period

5. The Torrez Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017,
at 97. The journal entry to record the issuance will show a

a. debit to Cash of P1,000,000.

b. credit to Cash for P970,000.
c. credit to Bonds Payable for P1,000,000.
d. credit to Discount on Bonds Payable for P30,000.
6. If the market rate of interest is greater than the contractual rate of interest, bonds will sell

a. at a discount.
b. at face value.
c. at a premium.
d. only after the stated rate of interest is increased.

7. On January 1, 2017, P1,000,000, 5-year, 10% bonds, were issued for P970,000. Interest is paid
semiannually on January 1 and July 1. If the issuing corporation uses the straight-line
method to amortize discount on bonds payable, the semiannual amortization amount is

a. P6,000
b. P3,000
c. P5,000
d. P5,808

8. Sinking Fund Income is reported in the income statement as

a. gain on sinking fund transactions

b. other income
c. income from operations
d. extraordinary

9. On June 1, P400,000 of bonds were purchased as a long-term investment at 101 and P500
was paid as the brokerage commission. If the bonds bear interest at 12%, which is paid
semiannually on January 1 and July 1, what is the total cost to be debited to the investment
account?

a. 401,500
b. 400,000
c. 403,500
d. 404,500

10. When a corporation issues bonds, the price that buyers are willing to pay for the bonds does
not depend on which of the following below

a. market rate of interest

b. face value of the bonds
c. denominations the bonds are sold
d. periodic interest to be paid on the bonds

11. If P1,000,000 of 8% bonds are issued at 102 1/2, the amount of cash received from the sale is
 a. 1,080,000
b. 975,000
c. 1,000,000
d. 1,025,000

12. Debenture bonds are

a. issued on the general credit of the corporation and do not pledge specific assets as
collateral.
b. issued only by the federal government
c. bonds secured by specific assets of the issuing corporation
d. bonds that have a single maturity date

13. When the bonds are sold for more than their face value, the carrying value of the bonds is
equal to

a. face value plus the unamortized discount

b. face value minus the unamortized premium
c. face value plus the unamortized premium
d. face value

14. The balance in Discount on Bonds Payable that is applicable to bonds due in 2020 would be
reported on the balance sheet in the section entitled

a. intangible assets
b. current assets
c. long-term liabilities
d. current liabilities

15. Bonds with a face amount P1,000,000, are sold at 97. The entry to record the issuance is

a. Cash (970,000); Premium on Bonds Payable (30,000); Bonds Payable (1,000,000)

b. Cash (1,000,000); Premium on Bonds Payable (30,000); Bonds Payable (970,000)
c. Cash (970,000); Discount on Bonds Payable (30,000); Bonds Payable (1,000,000)
d. Cash (970,000); Bonds Payable (970,000)

16. If bonds payable are not callable, the issuing corporation

a. must get special permission from the SEC to repurchase them

b. is more likely to repurchase them if the interest rates increase
c. cannot repurchase them before maturity
d. can repurchase them in the open market
17. Bonds payable issued with scheduled maturities at various dates are called

a. Serial bonds
b. Term bonds
c. Callable bonds
d. Convertible bond

18. If P3,000,000 of 10% bonds are issued at 97, the amount of cash received from the sale is

a. 3,300,000
b. 2,910,000
c. 3,090,000
d. 3,000,000

19. The journal entry a company records for the issuance of bonds when the contract rate and
the market rate are the same is

a. debit Cash, credit Premium on Bonds Payable and Bonds Payable

b. debit Cash and Discount on Bonds Payable, credit Bonds Payable
c. debit Bonds Payable, credit Cash
d. debit Cash, credit Bonds Payable

20. The amortization of discount on bonds purchased as a long-term investment

a. decreases the amount of interest expense

b. increases the amount of the investment account
c. increases the amount of interest expense
d. decreases the amount of the investment account

21. The cash and securities comprising a sinking fund established to redeem bonds at maturity
in 2020 should be classified on the balance sheet as

a. current assets
b. intangible assets
c. investments
d. fixed assets

22. The balance in Premium on Bonds Payable

a. should be reported in the paid-in capital section of the balance sheet

 b. should be allocated to the remaining periods for the life of the bonds by the straight-line
method, if the results obtained by that method materially differ from the results that
would be obtained by the interest method
c. would be added to the related bonds payable on the balance sheet
d. should be reported on the balance sheet as a deduction from the related bonds payable

23. Sinking Fund Cash would be classified on the balance sheet as

a. an investment
b. a current asset
c. a fixed asset
d. an intangible asset

24. If bonds are issued at a discount, it means that the

a. market interest rate is lower than the contractual interest rate.

b. financial strength of the issuer is suspect.
c. bondholder will receive effectively less interest than the contractual rate of interest.
d. market interest rate is higher than the contractual interest rate.

25. If the market rate of interest is 10%, a P10,000, 12%, 10-year bond that pays interest
semiannually would sell at an amount

a. less than face value.

b. equal to the face value.
c. that cannot be determined.
d. greater than face value.

26. If the straight-line method of amortization of bond premium or discount is used, which of
the following statements is true?

a. Annual interest expense will decrease over the life of the bonds with the amortization of
bond discount.
b. Annual interest expense will remain the same over the life of the bonds with the
amortization of bond discount.
c. Annual interest expense will increase over the life of the bonds with the amortization of
bond premium.
d. Annual interest expense will increase over the life of the bonds with the amortization of
bond discount.

27. The market interest rate related to a bond is also called the

a. straight-line rate
 b. contract interest rate
c. effective interest rate
d. stated interest rate

28. A legal document that indicates the name of the issuer, the face value of the bond and such
other data is called

a. a bond indenture.
b. convertible bond.
c. trading on the equity.
d. a bond certificate.

29. A corporation would not be successfully trading on equity if it gathered funds by

a. issuing common stock

b. issuing bonds
c. issuing notes
d. issuing preferred stock

30. The account Investment in Bonds is reported

a. at cost as a long-term asset

b. at cost as a long-term asset less Discount on Bond Investments or plus Premium on Bond
Investments
c. at fair market value because that is all that is required
d. at cost as a long-term liability along with the current portion reported as a current
liability

31. The amortization of premium on bonds purchased as a long-term investment

a. decreases the amount of the investment account

b. increases the amount of interest revenue
c. increases the amount of the investment account
d. decreases the amount of interest expense

32. Any unamortized premium should be reported on the balance sheet of the issuing
corporation as

a. a direct deduction from the face amount of the bonds in the liability section
b. a direct deduction from retained earnings
c. an addition to the face amount of the bonds in the liability section
d. as paid-in capital
33. One potential advantage of financing corporations through the use of bonds rather than
common stock is

a. the interest expense is deductible for tax purposes by the corporation

b. the interest on bonds must be paid when due
c. the corporation must pay the bonds at maturity
d. a higher earnings per share is guaranteed for existing common shareholders

34. Sinking Fund Investments would be classified on the balance sheet as

a. a current asset
b. an investment
c. a deferred debit
d. a fixed asset

35. If P1,000,000 of 8% bonds are issued at 103, the amount of cash received from the sale is

a. P1,000,000
b. P 970,000
c. P1,030,000
d. P1,060,000

36. 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 be less than what it would have been had the scientific method of amortization
been used
c. Will be the same as what it would have been had the scientific method of amortization
been used
d. Will exceed what it would have been had the scientific method of amortization been
used

37. Bonds with a face value of P3 million and a stated interest rate of 12% payable semi-
annually on March 1 and September 1 were purchased on August 1. The total payments for
the purchase equal P3,000,000. The best explanation for the excess amount paid over face
value is that

a. The bonds were purchased at face value plus accrued interest

b. The bonds were purchased at a premium
c. No explanation is possible without knowing the maturity date of the bond issue.
d. The bonds were purchased at a discount plus accrued interest
38. The bond indenture may provide that funds for the payment of bonds at maturity be
accumulated over the life of the issue. The amounts set aside are kept separate from other
assets in a special fund called a(n)

a. sinking fund
b. special assessments fund
c. general fund
d. enterprise fund

39. If you elect to not take a discount on trade credit, the effective interest rate on the funds thus
obtained __________ as the time you take to pay increases

a. remains constant
b. falls
c. falls first, then rises
d. rises

40. If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with
a face value of P100,000 will be

a. Less than P100,000

b. Equal to P100,000
c. Greater than P100,000
d. Greater than or less than P100,000, depending on the maturity date of the bonds

41. The Royce Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017,
at 97. The journal entry to record the issuance will show a

a. credit to Bonds Payable for P970,000.

b. credit to Cash for P970,000.
c. debit to Cash of P1,000,000.
d. debit to Discount on Bonds Payable for P30,000.

42. Debtors are interested in the times-interest-earned ratio because they want to

a. know what rate of interest the corporation is paying

b. be sure their debt is backed by collateral
c. have adequate protection against a potential drop in earnings jeopardizing their interest
payments
d. know the tax effect of lending to a corporation

43. The interest rate specified in the bond indenture is called the
 a. effective rate
b. discount rate
c. contract rate
d. market rate

44. The Tomas Corporation issues 1,000, 10-year bonds, 8%, P1,000 bonds dated January 1, 2017,
at 97. The journal entry to record the issuance will show a

a. debit to Cash for P970,000.

b. credit to Discount on Bonds Payable for P30,000.
c. debit to Cash of P1,000,000.
d. credit to Bonds Payable for P970,000.

45. The balance in Discount on Bonds Payable

a. would be subtracted from the related bonds payable on the balance sheet
b. should be allocated to the remaining periods for the life of the bonds by the straight-line
method, if the results obtained by that method materially differ from the results that
would be obtained by the interest method
c. would be added to the related bonds payable to determine the carrying amount of the
bonds
d. should be reported on the balance sheet as an asset because it has a debit balance

46. A corporation issues for cash P14,000,000 of 8%, 20-year bonds, interest payable annually, at
a time when the market rate of interest is 9%. The straight-line method is adopted for the
amortization of bond discount or premium. Which of the following statements is true?

a. The amount of annual interest paid to bondholders remains the same over the life of the
bonds.
b. The carrying amount decreases from its amount at issuance date to P14,000,000 at
maturity.
c. The amount of annual interest expense decreases as the bonds approach maturity.
d. The amount of annual interest paid to bondholders increases over the 20-year life of the
bonds.

47. When the corporation issuing the bonds has the right to repurchase the bonds prior to the
maturity date for a specific price, the bonds are

a. callable bonds
b. convertible bonds
c. unsecured bonds
d. debenture bonds
48. When callable bonds are redeemed below carrying value

a. Retained Earnings is credited

b. Loss on Redemption of Bonds is debited
c. Gain on Redemption of Bonds is credited
d. Retained Earnings is debited

49. Bonds usually sell at a discount when investors are willing to invest in the bonds

a. At the coupon interest rate

b. At rate lower than the stated interest rate
c. When the need arises.
d. At rate higher than the stated interest rate

50. On June 1, P400,000 of bonds were purchased as a long-term investment at 97 and P500 was
paid as the brokerage commission. If the bonds bear interest at 12%, which is paid
semiannually on January 1 and July 1, what is the total cost to be debited to the investment
account?

a. 400,000
b. 388,000
c. 388,500
d. 400,500

51. A corporation issues for cash P1,000,000 of 10%, 20-year bonds, interest payable annually, at
a time when the market rate of interest is 12%. The straight-line method is adopted for the
amortization of bond discount or premium. Which of the following statements is true?

a. The amount of the annual interest expense gradually decreases over the life of the
bonds.
b. The amount of unamortized premium decreases from its balance at issuance date to a
zero balance at maturity.
c. The amount of the annual interest expense is computed at 10% of the bond carrying
amount at the beginning of the year.
d. The amount of unamortized discount decreases from its balance at issuance date to a
zero balance at maturity.

52. When the market rate of interest on bonds is higher than the contract rate, the bonds will
sell at

a. their face value

b. their maturity value
c. a premium
 d. a discount

53. If bonds are issued at a premium, the stated interest rate is

a. lower than the market rate of interest.

b. higher than the market rate of interest.
c. adjusted to a higher rate of interest.
d. too low to attract investors.

54. A long-term investment in debt securities is carried at

a. equity
b. market
c. lower of cost or market
d. cost

55. On July 1, 2013, Rex Company purchased as a long-term investment P5,000,000 face value,
8% bonds for P4,615,000 to yield 10% per year. The bonds pay interest semiannually on
January 1 and July 1. On December 31, 2013, what amount should be reported as accrued
interest receivable?

a. 230,750
b. 0
c. 200,000
d. 400,000

SOLUTION:

5,000,000 x 8% x 6/12= 200,000

56. When the maturities of a bond issue are spread over several dates, the bonds are called

a. debenture bonds
b. bearer bonds
c. serial bonds
d. term bonds

57. Sinking Fund Cash would be classified on the balance sheet as

a. a fixed asset
b. an intangible asset
c. an investment
d. a current asset
Average:

58. Bonds that are secured by investment in equity securities are called

a. Term bonds
b. Collateral trust bonds
c. Debenture bonds
d. Commodity-backed bonds

59. The journal entry a company records for the issuance of bonds when the contract rate is
greater than the market rate would be

a. debit Cash and Discount on Bonds Payable, credit Bonds Payable

b. debit Cash, credit Premium on Bonds Payable and Bonds Payable
c. debit Bonds Payable, credit Cash
d. debit Cash, credit Bonds Payable

60. Long-term debt that matures within one year and is to be converted into stock should be
reported

a. as noncurrent
b. in a special section between liabilities and stockholders’ equity
c. as noncurrent and accompanied with a note explaining the method to be used in its
liquidation
d. as a current liability

61. The present value of P40,000 to be received in one year, at 6% compounded annually, is
(rounded to nearest peso)

a. 40,000
b. 2,400
c. 42,400
d. 37,736

62. Cedric Company issues P10,000,000 face value of bonds at 96 on January 1, 2009. The bonds
are dated January 1, 2009, pay interest semiannually at 8% on June 30 and December 31, and
mature in 10 years. Straight-line amortization is used for discounts and premiums. On
September 1, 2012, P6,000,000 of the bonds are called at 102 plus accrued interest. What gain
or loss would be recognized on the called bonds on September 1, 2012?

a. P453,333 loss
 b. P360,000 loss
c. P272,000 loss
d. P600,000 loss

SOLUTION:

{P9,600,000 + [P400,000 × (3 2/3 ÷ 10)]} × .60 = P5,848,000 P6,120,000 - P5,848,000 = P272,000

63. The Saymore Company issued 10-year bonds on January 1, 2017. The 6% bonds have a face
value of P800,000 and pay interest every January 1 and July 1. The bonds were sold for
P690,960 based on the market interest rate of 8%. Saymore uses the effective-interest method
to amortize bond discounts and premiums. On July 1, 2017, Saymore should record interest
expense (round to the nearest peso) of

a. 55,277
b. 24,000
c. 27,638
d. 48,000

64. On July 1, 2010, Joven Co. issued 1,000 of its 10%, P1,000 bonds at 99 plus accrued interest.
The bonds are dated April 1, 2010 and mature on April 1, 2020. Interest is payable
semiannually on April 1 and October 1. What amount did Joven receive from the bond
issuance?

a. 965,000
b. 1,000,000
c. 1,015,000
d. 990,000

SOLUTION:

(P1,000,000 × .99) + (P1,000,000 × .10 × 3/12) = P1,015,000

65. 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
value, respectively?

a. Understate and overstate

b. Overstate and understate
c. Understate and understate
d. Overstate and overstate
66. The 10% bonds payable of Francis Company had a net carrying amount of P5,700,000 on
December 31, 2012. The bonds, which had a face value of P6,000,000, 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 1,
2013, several years before the maturity, Francis retired the bonds at 102. The interest
payment on Juy 1, 2013 was made as scheduled. What amount should be recorded as loss on
the early retirement of the bonds on July 1, 2013?

a. 336,000
b. 120,000
c. 420,000
d. 378,000

67. Balance sheet and income statement data indicate the following:

Bonds payable, 8% (issued 1990, due 2015) P1,200,000

Preferred 8% stock, P100 par (no change during the year) 200,000
Common stock, P50 par (no change during the year) 1,000,000
Income before income tax for year 320,000
Income tax for year 80,000
Common dividends paid 60,000
Preferred dividends paid 16,000

What is the number of times bond interest charges were earned (round to two decimal
places)?

a. 4.33
b. 5.67
c. 3.24
d. 3.50

68. Tim Corporation retires its P100,000 face value bonds at 102 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is P96,250. The
entry to record the redemption will include a

a. debit of P5,750 to Gain on Bond Redemption

b. credit of P3,750 to Loss on Bond Redemption
c. debit of P2,000 to Premium on Bonds Payable
d. credit of P3,750 to Discount on Bonds Payable

SOLUTION:

P100,000 - P96,250 = P3,750 discount

69. In current accounting practice, the valuation method used for bonds payable is

a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance

70. On January 1, 2011, Garry Co. redeemed its 15-year bonds of P2,500,000 par value for 102.
They were originally issued on January 1, 1999 at 98 with a maturity date of January 1, 2014.
The bond issue costs relating to this transaction were P150,000. Garry amortizes discounts,
premiums, and bond issue costs using the straight-line method. What amount of loss should
Garry recognize on the redemption of these bonds (ignore taxes)?

a. 0
b. 90,000
c. 60,000
d. 50,000

SOLUTION:

(P2,500,000 × 1.02) - (2,300,000 + (200,000)/15 x 12) = 90,000

71. On July 1, 2009, Keann, Inc. issued 9% bonds in the face amount of P5,000,000, which mature
on July 1, 2015. The bonds were issued for P4,695,000 to yield 10%, resulting in a bond
discount of P305,000. Keann uses the effective-interest method of amortizing bond discount.
Interest is payable annually on June 30. At June 30, 2011, Keann's unamortized bond
discount should be

a. 244,000
b. 215,000
c. 264,050
d. 255,000

SOLUTION:

2009 - 2010 P4,695,000 + [(P4,695,000 × .1) - (P5,000,000 × .09)]= P4,714,500

2010 - 2011 P4,714,500 + (P471,450 – P450,000) = P4,735,950
P5,000,000 - P4,735,950 = P264,050

72. Brandon Co. is indebted to Cole under a P400,000, 12%, three-year note dated December 31,
2009. Because of Brandon's financial difficulties developing in 2011, Brandon owed accrued
interest of P48,000 on the note at December 31, 2011. Under a troubled debt restructuring, on
 December 31, 2011, Cole agreed to settle the note and accrued interest for a tract of land
having a fair value of P360,000. Brandon's acquisition cost of the land is P290,000. Ignoring
income taxes, on its 2011 income statement Brandon should report as a result of the troubled
debt restructuring

a. Gain on Disposal (70,000); Restructuring Gain (88,000)

b. Gain on Disposal (110,000); Restructuring Gain (0)
c. Gain on Disposal (70,000; Restructuring Gain (40,000)
d. Gain on Disposal (158,000); Restructuring Gain (0)

SOLUTION:

P360,000 - P290,000 = P70,000

(P400,000 + P48,000) - P360,000 = P88,000

73. A P300,000 bond was redeemed at 98 when the carrying value of the bond was P296,000.
The entry to record the redemption would include a

a. loss on bond redemption of P2,000.

b. gain on bond redemption of P4,000.
c. loss on bond redemption of P4,000.
d. gain on bond redemption of P2,000.

74. On October 1, 2010 Ace Corporation issued 5%, 10-year bonds with a face value of P500,000
at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized
on a straight-line basis.

The entry to record the issuance of the bonds would include a

a. credit of P12,500 to interest Payable

b. credit of P20,000 to Premium on Bonds Payable
c. credit of P480,000 to Bonds Payable
d. debit of P20,000 to Discount on Bonds Payable

SOLUTION:

(P500,000 × 1.04) - P500,000 = P20,000 premium

75. The Raymore Company issued 10-year bonds on January 1, 2017. The 15% bonds have a face
value of P100,000 and pay interest every January 1 and July 1. The bonds were sold for
P117,205 based on the market interest rate of 12%. Raymore uses the effective-interest
method to amortize bond discounts and premiums. On July 1, 2017, Raymore should record
interest expense (round to the nearest peso) of
 a. 7,500
b. 14,065
c. 7,032
d. 8,790

76. The proceeds from bonds issued with nondetachable share warrants shall he accounted for

a. Partly as bonds payable and partly as shareholders’ equity

b. Entirely as bonds payable
c. Partly, us unearned revenue and partly as bonds payable
d. Entirely as shareholders' equity

77. Which of the following is true of accrued interest on bonds that are sold between interest
dates?

a. The accrued interest will be paid to the seller when the bonds mature
b. The accrued interest is computed at the effective rate
c. The accrued interest is extra income to the buyer
d. None of the above

78. Zern Corporation retires its P100,000 face value bonds at 105 on January 1, following the
payment of interest. The carrying value of the bonds at the redemption date is P103,745. The
entry to record the redemption will include a

a. debit of P3,745 to Premium on Bonds Payable

b. credit of P3,745 to Loss on Bond Redemption
c. debit of P5,000 to Premium on Bonds Payable
d. credit of P1,255 to Gain on Bond Redemption

SOLUTION:

P103,745 - P100,000 = P3,745 premium

79. The entry to record the amortization of a premium on bonds payable is

a. debit Bonds Payable, credit Interest Expense

b. debit Interest Expense, credit Premium on Bond Payable
c. debit Interest Expense, debit Premium on Bonds Payable, credit Cash
d. debit Premium on Bonds Payable, credit Interest Expense Commented [u1]: For me, this is the best answer since
the question only asks for the amortization of the premium
not also for the payment of the interest.
80. Bonds Payable has a balance of P1,000,000 and Premium on Bonds Payable has a balance of
P8,000. If the issuing corporation redeems the bonds at 101, what is the amount of gain or
loss on redemption?

a. P8,000 gain
b. P2,000 gain
c. P2,000 loss
d. P8,000 loss

81. On January 1, 2006, Vino Corp. issued 1,000 of its 10%, P1,000 bonds for P1,040,000. These
bonds were to mature on January 1, 2016 but were callable at 101 any time after December
31, 2009. Interest was payable semiannually on July 1 and January 1. On July 1, 2011, Vino
called all of the bonds and retired them. Bond premium was amortized on a straight-line
basis. Before income taxes, Vino's gain or loss in 2011 on this early extinguishment of debt
was

a. P 8,000 gain
b. P30,000 gain
c. P12,000 gain
d. P10,000 loss

SOLUTION:

1,040,000 - (40,000/20) x 11) - (1,000,000 x 1.01) = 8,000

82. To compute the price to pay for a bond, what present value concept is used?

a. Only the present value Of 1 concept

b. Both the present value of 1 concept and present value of an annuity of 1 concept
c. Only the present value of an annuity of 1 concept
d. Neither the present value of 1 concept 'nor the present value of annuity of 1 concept

83. Bonds that are secured by investment in equity securities are called

a. Term bonds
b. Collateral trust bonds
c. Debenture bonds
d. Commodity-backed bonds

84. The 10% bonds payable of Nikki Company had a net carrying amount of P570,000 on
December 31, 2012. The bonds, which had a face value of P600,000, 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, 2013,
 several years before their maturity, Nikki retired the bonds at 102. The interest payment on
July 1, 2013 was made as scheduled. What amount should be recorded as loss on the early
retirement of the bonds on July 2, 2013?

a. 12,000
b. 42,000
c. 37,800
d. 33,600

85. A corporation issues P100,000, 8%, 5-year bonds on January 1, 2017, for P104,200. Interest is
paid semiannually on January 1 and July 1. If the corporation uses the straight-line method
of amortization of bond premium, the amount of bond interest expense to be recognized on
July 1, 2017, is

a. P4,420.
b. P3,580.
c. P4,000.
d. P8,420.

86. On January 1, 2010, Gerald Company sold property to Gabriel Company. There was no
established exchange price for the property, and Gabriel gave Gerald a P2,000,000 zero-
interest-bearing note payable in 5 equal annual installments of P400,000, with the first
payment due December 31, 2010. The prevailing rate of interest for a note of this type is 9%.
The present value of the note at 9% was P1,442,000 at January 1, 2010. What should be the
balance of the Discount on Notes Payable account on the books of Gabriel at December 31,
2010 after adjusting entries are made, assuming that the effective-interest method is used?

a. 428,220
b. 558,000
c. 0
d. 446,400

SOLUTION:

P2,000,000 - P1,442,000 - (P1,442,000 × .09) = P428,220

87. The journal entry a company records for the issuance of bonds when the contract rate is less
than the market rate would be

a. debit Cash and Discount on Bonds Payable, credit Bonds Payable

b. debit Cash, credit Bonds Payable
c. debit Cash, credit Premium on Bonds Payable and Bonds Payable
d. debit Bonds Payable, credit Cash
88. On January 1, 2010, David loaned P45,078 to Jacob. A zero-interest-bearing note (face
amount, P60,000) was exchanged solely for cash; no other rights or privileges were
exchanged. The note is to be repaid on December 31, 2012. The prevailing rate of interest for
a loan of this type is 10%. The present value of P60,000 at 10% for three years is P45,078.
What amount of interest income should David recognize in 2010?

a. 6,000
b. 18,000
c. 13,524
d. 4,508

SOLUTION:

P45,078 × .10 = P4,508

89. On its December 31, 2010 balance sheet, Ren Corp. reported bonds payable of P6,000,000
and related unamortized bond issue costs of P320,000. The bonds had been issued at par. On
January 2, 2011, Ren retired P3,000,000 of the outstanding bonds at par plus a call premium
of P70,000. What amount should Ren report in its 2011 income statement as loss on
extinguishment of debt (ignore taxes)?

a. 160,000
b. 230,000
c. 70,000
d. 0

SOLUTION:

(P3,000,000 + P70,000) - [(P6,000,000 - P320,000) × 1/2] = P230,000

90. Bonds Payable has a balance of P1,000,000 and Discount on Bonds Payable has a balance of
P15,500. If the issuing corporation redeems the bonds at 99, what is the amount of gain or
loss on redemption?

a. P 5,500 loss
b. P15,500 gain
c. P 5,500 gain
d. P15,500 loss

91. Which of the following is true for a bond maturing on a single date when the effective
interest method of amortizing bond discount is used?
 a. Interest expense remains constant each 6 month period
b. Interest expense as a percentage of the bond’s book value varies from period to period
c. Interest expense increases each 6 month period
d. Nominal interest rate exceeds effective interest rate

92. A ten-year bond was issued in 2009 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2011, the carrying
amount of the bond was less than the call price. The amount of bond liability removed from
the accounts in 2011 should have equaled the

a. call price
b. call price less unamortized discount
c. face amount less unamortized discount
d. face amount plus unamortized discount

93. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight
premium shall be

a. Expensed in the year in which incurred

b. Reported in the balance sheet as a deduction from bonds payable and amortized over
the ten-year bond term
c. Capitalized as organization cost
d. Charged to retained earnings when the bonds are issued

94. On January 1, 2013, Romeo 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%. Table values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652

The issue price of the bonds is

a. 889,560
b. 999,600
c. 883,560
d. 884,820
SOLUTION:

534,000 + 349,560 = 883,560

95. The market price of a bond issued at a discount is the present value of its principal amount
at the market rate of interest

a. Plus the present value of all future interest payments at the rate of interest stated on the
bond
b. Less the present value of all future interest payments at the market rate of interest
c. Plus the present value of all future interest payments at the market rate of interest
d. Less the present value of all future interest payments at the rate of interest stated on the
bond

96. When bonds are sold between interest dates, any accrued interest is credited to

a. Interest payable Commented [u2]: Take note that the question says “sold”
b. Bonds payable meaning the issuing company

c. Interest receivable
d. Interest revenue

97. When interest expense is calculated using the effective interest method, interest expense
equal the

a. Maturity value of the bonds multiplied by the effective interest rate

b. Actual amount of interest paid
c. Book value of the bonds multiplied by the stated interest rate
d. Book value of the bonds multiplied by the effective interest rate

98. Bonds Payable has a balance of P1,000,000 and Discount on Bonds Payable has a balance of
P12,500. If the issuing corporation redeems the bonds at 98, what is the amount of gain or
loss on redemption?

a. P 7,500 gain
b. P34,500 loss
c. P 7,500 loss
d. P34,500 gain

99. The present value of P30,000 to be received in two years, at 12% compounded annually, is
(rounded to nearest peso)

a. 37,632
 b. 30,000
c. 23,700
d. 23,916

100. On January 1, 2010, Kei Co. sold P1,000,000 of its 10% bonds for P885,296 to yield 12%.
Interest is payable semiannually on January 1 and July 1. What amount should Kei report as
interest expense for the six months ended June 30, 2010?

a. 50,000
b. 60,000
c. 53,118
d. 44,266

SOLUTION:

P885,296 × .06 = P53,118

101. Balance sheet and income statement data indicate the following:

Bonds payable, 6% (issued 2000, due 2020) P1,200,000

Preferred 8% stock, P100 par (no change during the year) 200,000
Common stock, P50 par (no change during the year) 1,000,000
Income before income tax for year 340,000
Income tax for year 80,000
Common dividends paid 60,000
Preferred dividends paid 16,000

What is the number of times bond interest charges were earned (round to two decimal
places)?

a. 4.72
b. 5.72
c. 6.83
d. 4.83

102. The proceeds from a bond issued with nondetachable share warrants shallbe accounted
for

a. Entirely as shareholders’ equity

b. Partly as unearned revenue and partly as bonds payable
c. Entirely as bonds payable
d. Partly as bonds payable and partly as stockholders’ equity
103. Bonds Payable has a balance of P900,000 and Premium on Bonds Payable has a balance
of P10,000. If the issuing corporation redeems the bonds at 102, what is the amount of gain
or loss on redemption?

a. P1,100 gain
b. P1,100 loss
c. P8,000 gain
d. P8,000 loss

104. On January 1, 2010, Jomar Co. issued its 10% bonds in the face amount of P3,000,000,
which mature on January 1, 2020. The bonds were issued for P3,405,000 to yield 8%,
resulting in bond premium of P405,000. Jomar uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2010, Jomar's adjusted unamortized bond premium should be

a. 364,500
b. 304,500
c. 377,400
d. 405,000

SOLUTION:

P405,000 - [(P3,000,000 × .10) - (P3,405,000 × .08)] = P377,400

105. The journal entry a company records for the payment of interest, interest expense, and
amortization of bond premium is

a. debit Interest Expense, credit Cash

b. debit Interest Expense, credit Interest Payable and Premium on Bonds Payable
c. debit Interest Expense, credit Cash and Premium on Bonds Payable
d. debit Interest Expense and Premium on Bonds Payable, credit Cash

106. The debt to total assets ratio is computed by dividing

a. total liabilities by total assets

b. current liabilities by total assets
c. long-term liabilities by total assets
d. total assets by total liabilities

107. An entity incurred printing and engraving, and registration cost in selling bonds. What
will be the effect of these costs on the interest rate of the bonds?

a. It will decrease the effective interest rate

 b. It will increase the effective interest rate.
c. It will have no effect on either effective or nominal interest rate.
d. It will increase the nominal interest rate.

108. Selling the bonds at a premium has the effect of

a. increasing the amount of cash paid for interest each 6 months.

b. causing the total cost of borrowing to be higher than the bond interest paid.
c. raising the effective interest rate above the stated interest rate.
d. causing the total cost of borrowing to be lower than the bond interest paid.

109. On January 1, 2013, Romeo 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%. Table values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 1.652

The present value of the principal is

a. 534,000
b. 540,000
c. 627,000
d. 623,000

SOLUTION:

1,000,000 × .534 = 534,000

110. If bonds are issued at a premium, this indicates that

a. The nominal rate of interest exceeds the yield rate

b. No necessary relationship exists between the two rates
c. The yield rate of interest exceeds the nominal rate
d. The yield and nominal rates coincide

111. Which of the following is not an advantage of issuing bonds instead of common stock?
 a. Tax savings result
b. Earnings per share on common stock may be lower.
c. Stockholder control is not affected.
d. Income to common shareholders may increase.

112. Cyril Company issues P5,000,000 face value of bonds at 96 on January 1, 2009. The bonds
are dated January 1, 2009, pay interest semiannually at 8% on June 30 and December 31, and
mature in 10 years. Straight-line amortization is used for discounts and premiums. On
September 1, 2012, P3,000,000 of the bonds are called at 102 plus accrued interest. What gain
or loss would be recognized on the called bonds on September 1, 2012?

a. P136,000 loss
b. P226,667 loss
c. P180,000 loss
d. P300,000 loss

SOLUTION:

{P4,800,000 + [P200,000 × (3 2/3 ÷ 10)]} × .60 = P2,924,000 P3,060,000 - P2,924,000 = P136,000

113. An example of an item which is not a liability is

a. dividends payable in stock.

b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year

114. Note disclosures for long-term debt generally include all of the following except

a. call provisions and conversion privileges

b. restrictions imposed by the creditor
c. names of specific creditors
d. assets pledged as security

115. A 20 year bond was issued at a premium with a call provision to retire the bonds. When
the bond issuer exercised the call provision on an interest date, the call rpice exceeded the
carrying value of the bonds. The amount of the bond liability removed from the accounts
should have equaled the

a. Call price plus unamortized premium

b. Current market price
c. Cash paid
 d. Face amount plus unamortized premium

116. On January 1, 2011, Kareen Company issued its 10% bonds in the face amount of
P1,000,000 that mature on January 1, 2021. The bonds were issued for P886,000 to yield 12%
resulting in bond discount of P114,000. Kareen Company uses the interest method of
amortizing bond discount. Interest is payable on January 1 and July 1.For the year ended
December 31, 2011, Kareen should report bond interest expense at

a. 106,510
b. 50,000
c. 53,160
d. 100,000

SOLUTION:

Date Interest paid Interest expense Discount Amortization Book value

Jan 1, 2011 886,000
July 1, 2011 50,000 53,160 3,160 889,160
Jan 1, 2012 50,000 53,350 3,350 892,510
Total 100,000 106,510 6,510

Interest paid (1,000,000 x 10% x 6/12) 50,000

Interest expense
886,000 x 12% x 6/12 53,160
889,160 x 12% x 6/12 53,350
106,510

117. On January 1, 2010, Fracy 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%. Table values are:

Present value of 1 for 8 periods at 6% .627

Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652

The present value of the interest is

 a. 376,830
b. 344,820
c. 372,600
d. 349,560

SOLUTION:

(P1,000,000 × .03) × 11.652 = P349,560

118. The effective interest rate on bonds is higher than the stated rate when bonds sell

a. Above face value

b. At face value
c. Below face value
d. At maturity Value

119. What is the market rate of interest for a bond issue which sells for more than its par
value?

a. Independent of rate stated on the bond

b. Equal to rate stated on the bond
c. Higher than rate stated on the bond
d. Less than rate stated on the bond

120. Willy Co. took advantage of market conditions to refund debt. This was the fourth
refunding operation carried out by Willy within the last three years. The excess of the
carrying amount of the old debt over the amount paid to extinguish it should be reported as
a

a. part of continuing operations

b. gain, net of income taxes
c. loss, net of income taxes
d. deferred credit to be amortized over the life of the new debt

121. A corporation issues for cash P1,000,000 of 8%, 20-year bonds, interest payable annually,
at a time when the market rate of interest is 7%. The straight-line method is adopted for the
amortization of bond discount or premium. Which of the following statements is true?

a. The carrying amount increases from its amount at issuance date to P1,000,000 at
maturity.
b. The amount of annual interest expense decreases as the bonds approach maturity.
c. The amount of annual interest paid to bondholders increases over the 20-year life of the
bonds.
 d. The carrying amount decreases from its amount at issuance date to P1,000,000 at
maturity.

122. Which of the following must be disclosed relative to long-term debt maturities and
sinking fund requirements?

a. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years
b. The amount of scheduled interest payments on long-term debt during each of the next
five years
c. The present value of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years
d. The present value of scheduled interest payments on long-term debt during each of the
next five years

123. When the market rate of interest was 12%, Newman Corporation issued P1,000,000, 11%,
10-year bonds that pay interest annually. The selling price of this bond issue was

a. 321,970
b. 943,494
c. 621,524
d. 1,000,000

124. A corporation issues for cash P8,000,000 of 8%, 30-year bonds, interest payable
semiannually. The amount received for the bonds will be

a. present value of 30 annual interest payments of P640,000

b. present value of 30 annual interest payments of P640,000, plus present value of
P8,000,000 to be repaid in 30 years
c. present value of 60 semiannual interest payments of P320,000, plus present value of
P8,000,000 to be repaid in 30 years
d. present value of P8,000,000 to be repaid in 30 years, less present value of 60 semiannual
interest payments of P320,000

125. The journal entry a company records for the payment of interest, interest expense, and
amortization of bond discount is

a. debit Interest Expense and Discount on Bonds Payable, credit Cash

b. debit Interest Expense, credit Cash and Discount on Bonds Payable
c. debit Interest Expense, credit Cash
d. debit Interest Expense, credit Interest Payable and Discount on Bonds Payable
126. The issuer of a 10 year term bond sold at par three years ago with interest payable May 1
and November 1 each year shall report in its December 31 balance sheet

a. Contingent liability
b. Liability for accrued interest
c. Addition to bonds payable
d. Increase in deferred charges

127. When the market rate of interest was 11%, Welch Corporation issued P100,000, 8%, 10-
year bonds that pay interest semiannually. Using the straight-line method, the amount of
discount or premium to be amortized each interest period would be

a. 17,926
b. 4,000
c. 896
d. 1,793

128. An entity neglected to amortize the discount on outstanding bonds payable. What is the
effect of the failure to record discount amortization on interest expense and bond carrying
value, respectively?

a. Overstate and understate

b. Overstate and overstate
c. Understate and understate
d. Understate and overstate

129. A P300,000 bond was redeemed at 103 when the carrying value of the bond was
P311,000. The entry to record the redemption would include a

a. gain on bond redemption of P9,000.

b. gain on bond redemption of P2,000.
c. loss on bond redemption of P9,000.
d. loss on bond redemption of P2,000.

130. Unamortized debt discount shall be reported in the balance sheet of the issuer as a

a. Direct deduction from the face value of the debt

b. Direct deduction from the present value of the debt
c. Deferred charge
d. Part of the issue costs

131. The entry to record the amortization of a discount on bonds payable is

 a. debit Interest Expense, credit Discount on Bonds Payable
b. debit Interest Expense, credit Cash
c. debit Bonds Payable, credit Interest Expense
d. debit Discount on Bonds Payable, credit Interest Expense

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

a. The premium on bonds payable is an account that appears only on the books of the
investor
b. The premium or bonds payable is a contra stockholders’ equity account
c. The premium on bonds payable decreases when amortization entries are made until its
balance reaches zero at the maturity date.
d. The premium on bonds payable increases when amortization entries are made until it
reaches its maturity value

133. The times interest earned ratio is computed by dividing

a. income before income taxes and interest expense by interest expense

b. income before taxes by interest expense
c. net income and interest expense by interest expense
d. net income by interest expense

134. On June 30, 2011, William Co. had outstanding 8%, P3,000,000 face amount, 15-year
bonds maturing on June 30, 2021. Interest is payable on June 30 and December 31. The
unamortized balances in the bond discount and deferred bond issue costs accounts on June
30, 2011 were P105,000 and P30,000, respectively. On June 30, 2011, William acquired all of
these bonds at 94 and retired them. What net carrying amount should be used in computing
gain or loss on this early extinguishment of debt?

a. 2,820,000
b. 2,895,000
c. 2,865,000
d. 2,970,000

SOLUTION:

P3,000,000 - (P105,000 + P30,000) = P2,865,000

135. How would the amortization of premium on bonds payable affect each of the following?

a. Carrying value of the bond (Decrease); Net income (Decrease)

b. Carrying value of the bond (Increase); Net income (Increase)
c. Carrying value of the bond (Decrease); Net income (Increase)
 d. Carrying value of the bond (Increase); Net income (Decrease)

136. The net amount of a bond liability that appears in the balance sheet is the

a. Face value of the bond plus related discount or minus related premium
b. Call price of the bond plus bond discount or minus bond premium
c. Face value of the bond plus related premium or minus related discount
d. Maturity value of the bond plus related discount or minus related premium

137. A bond issued on June 1 of the current year has interest payment dates of April 1 and
October 1. Bond interest expense for the current year ended December 31 is for a period of

a. 3 months
b. 7 months
c. 6 months
d. 4 months

138. Mark Company's December 31, 2012 statement of financial position contained the
following items in the long-term liabilities section:

9% Registered debentures, callable in 2013, due in 2015 3,500,000

11% Collateral trust bond, convertible into ordinary shares beginning in 3,000,000
2013, due in 2016
10% Subordinate debentures (P500,000 maturing annually beginning 2013) 1,500,000

What is the total amount of terms bonds?

a. 3,500,000
b. 3,000,000
c. 5,000,000
d. 6,500,000

139. When the market rate of interest was 11%, Waverly Corporation issued P1,000,000, 12%,
8-year bonds that pay interest semiannually. The selling price of this bond issue was

a. 1,000,000
b. 720,495
c. 1,052,310
d. 1,154,387

140. On January 1, 2004, Allan Corporation issued P4,500,000 of 10% ten-year bonds at 103.
The bonds are callable at the option of Allan at 105. Allan has recorded amortization of the
 bond premium on the straight-line method (which was not materially different from the
effective-interest method).

On December 31, 2010, when the fair market value of the bonds was 96, Allan repurchased
P1,000,000 of the bonds in the open market at 96. Allan has recorded interest and
amortization for 2010. Ignoring income taxes and assuming that the gain is material, Allan
should report this reacquisition as:

a. a loss of P61,000
b. a gain of P61,000
c. a gain of P49,000
d. a loss of P49,000

141. A corporation called an outstanding bond obligation four years before maturity. At that
time there was an unamortized discount of P300,000. To extinguish this debt, the company
had to pay a call premium of P100,000. Ignoring income tax considerations, how should
these amounts be treated for accounting purposes?

a. Charge P400,000 to a loss in the year of extinguishment

b. Amortize P400,000 over four years
c. Either amortize P400,000 over four years or charge P400,000 to a loss immediately,
whichever management selects
d. Charge P100,000 to a loss in the year of extinguishment and amortize P300,000 over four
years

SOLUTION:

P300,000 + P100,000 = P400,000

142. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the

a. bond coupon
b. registered bond
c. bond indenture
d. bond debenture

143. The main role of the trustee for debenture holders is to protect the interests of:

a. employees.
b. debenture holders.
c. directors.
d. suppliers.
144. The interest expense recorded on an interest payment date is increased

a. by the amortization of discount on bonds payable.

b. only if the market rate of interest is less than the stated rate of interest on that date.
c. by the amortization of premium on bonds payable.
d. only if the bonds were sold at face value.

145. The discount resulting from the determination of the present value of a note payable
shall be reported in the statement of financial position as

a. Deferred charge separate from the note

b. Direct deduction from the face amount of the note
c. Deferred credit separate from the note
d. Addition to the face amount of the note.

146. On January 1, 2010, Edwin Company sold property to Fredie Company which originally
cost Edwin P760,000. There was no established exchange price for this property. Danis gave
Edwin a P1,200,000 zero-interest-bearing note payable in three equal annual installments of
P400,000 with the first payment due December 31, 2010. The note has no ready market. The
prevailing rate of interest for a note of this type is 10%. The present value of a P1,200,000
note payable in three equal annual installments of P400,000 at a 10% rate of interest is
P994,800. What is the amount of interest income that should be recognized by Edwin in
2010, using the effective-interest method?

a. 99,480
b. 120,000
c. 0
d. 40,000

147. In recent year Jed Corporation had net income of P250,000, interest expense of P50,000,
and a times interest earned ratio of 9. What was Jed Corporation's income before taxes for
the year?

a. 500,000
b. 450,000
c. 400,000
d. None of the above

148. How would the amortization of discount on bonds payable affect each of the following?

a. Carrying value of bond (Decrease); Net income (Decrease)

b. Carrying value of bond (Increase); Net income (Increase)
 c. Carrying value of bond (Decrease); Net income (Increase)
d. Carrying value of bond (Increase); Net income (Decrease)

149. When the interest payment dates of a bond are May 1 and November 1, and a bond
issue is sold on June 1, the amount of cash received by the issuer will be

a. Increased by accrued interest from May 1 to June 1

b. Decreased by accrued interest from May 1 to June 1
c. Increased by accrued interest from June 1 to November 1
d. Decreased by accrued interest from June 1 to November 1

Difficult:

150. A 10 year term bond was issued at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date, the carrying amount
of the bond was less than the call price. The amount of bond liability removed from the
accounts should have equaled the

a. Call price less unamortized discount

b. Face amount plus unamortized discount
c. Call price
d. Face amount less unamortized discount

151. For a bond issue which sells for less than its par value the market rate of interest is

a. Dependent on rate stated on the bond

b. Equal to rate stated on the bond
c. Less than rate stated on the bond
d. Higher than rate stated on the bond

152. When bonds are retired prior to maturity with proceeds from a new bond issue,any gain
or loss from the early extinguishment of debt should be

a. Amortized over the remaining original life of the retired bond issue
b. Amortized over the life of the new bond issue
c. Recognized in income from continuing operations in the period of extinguishment
d. Recognized in retained earnings in the period of extinguishment

153. On January 1 of the current year, an entity issued bonds at a discount. The entity
incorrectly used the straight line method instead of the effective interest method to amortize
the discount. How were the following amounts, as of December 31 of the current year
affected by the error?
 a. Bond carrying amount (Understated); Retained earnings (Understated)
b. Bond carrying amount (Understated); Retained earnings (Overstated)
c. Bond carrying amount (Overstated); Retained earnings (Understated)
d. Bond carrying amount (Overstated); Retained earnings (Overstated)

154. What is the effective interest rate of a bond measured at amortized cost?

a. The stated rate of the bond

b. The interest rate currenly charged by the entity or by others for similar bond
c. The interest rate that exactly discounts estimated future cash payments through the
expected life of the bond or when appropriate, a shorter period to the net carrying
amount of the bond
d. The basic risk-free interest rate that is derived from observable government bond prices.

155. When bonds are redeemed by the issuer prior to their maturity date,any gain or loss on
the redemption is

a. Amortized over the period remaining to maturity and reported as part of income from
continuing operations
b. Reported as component of other comprehensive income
c. Reported as part of income from continuing operations in the period of redemption
d. Amortized over the period remaining to maturity and reported as other comprehensive
income

156. On January 1, 2012, an entity issued bonds at a discount. The bonds mature on
December 31, 2017. The entity incorrectly used the straight line method instead of the
effective interest method to amortize the discount. How is the carrying amount of the bonds
affected by the error?

a. December 31, 2012 (Understated); December 31, 2017 (Overstated)

b. December 31, 2012 (Overstated); December 31, 2017 (No effect)
c. December 31, 2012 (Overstated); December 31, 2017 (Understated)
d. December 31, 2012 (Understated); December 31, 2017 (No effect)

157. 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 the same as what it would have been had the scientific method of amortization
been used
b. Will be less than the coupon rate of interest.
c. Will exceed what it would have been had the scientific method of amortization been
used
 d. Will be less than what it would have been had the scientific method of amortization
been used

Undefined:

158. Glen Company had the following long-term debt:

Sinking fund bonds, maturing in installments 2,200,000

Industrial revenue bonds, maturing in installments 1,800,000
Subordinated bonds, maturing on a single date 3,000,000

What is the total amount of serial bonds?

a. 3,000,000
b. 4,000,000
c. 4,800,000
d. 7,000,000

159. Zola Company had the following long-term debt:

Bonds maturing in installments, secured by machinery 1,000,000

Bonds maturing on a single date, secured by realty 1,800,000
Collateral trust bonds 2,000,000

What is the total amount of debenture bonds?

a. 2,000,000
b. 1,000,000
c. 1,800,000
d. 0

160. Blue Company reported the following long-term debt on December 31, 2015:

9% registered debentures, callable in 2016, due in 2017 3,500,000

11% collateral trust bonds, convertible into ordinary shares beginning
in 2016, due in 2017 3,000,000
10% subordinated debentures, P500,000 maturing annually beginning
in 2016 1,500,000

What is the total amount of term bonds?

a. 3,000,000
 b. 3,500,000
c. 5,000,000
d. 6,500,000

161. On March 1, 2015, Cain Company issued at 103 plus accrued interest 4,000 of 9%, P1,000
face value bonds. The bonds are dated January 1, 2015 and mature on January 1, 2025.
Interest is payable semiannually on January 1 and July 1. The entity paid bond issue cost of
P200,000.

What is the net cash received from the bonds issuance?

a. 4,320,000
b. 4,180,000
c. 4,120,000
d. 3,980,000

162. During the current year, Eddy Company incurred the following costs on connection
with the issuance of bonds:

Promotion cost 200,000

Printing and engraving 150,000
Legal fees 800,000
Fees paid to independent accountants for registration 100,000
Commissions paid to underwriter 1,500,000

What amount should be recorded as bond issue costs to be amortized over the term of the
bonds?

a. 2,550,000
b. 2,750,000
c. 1,500,000
d. 1,050,000

163. On July 1, 2015, Carr Company issued at 104, five thousand of 10% P1,000 face value
bonds. The bonds were issued through an underwriter to whom the entity paid bond issue
cost of P125,000.

On July 1, 2015, what amount should be reported as bond liability?

a. 4,875,000
b. 5,075,000
c. 5,200,000
d. 5,325,000
164. Aye Company is authorized to issue P5,000,000 of 6%, 10-year bonds dated July 1, 2015
with interest payments on June 30 and December 31. When the bonds are issued on
November 1, 2015, the entity received cash of P5,150,000 including accrued interest.

What is the discount or premium from the issuance of the bonds payable?

a. 150,000 bond premium

b. 50,000 bond premium
c. 150,000 bond discount
d. No bond premium and discount

165. In January 1, 2015, Carrow Company issued 10% bonds in the face amount of P1,000,000
that mature on January 1, 2025. The bonds were issued for P886,000 to yield 12%, resulting
in bond discount of P114,000.

The entity used the interest method of amortizing bond discount. Interest is payable on
January 1 and July 1.

For the year ended December 31, 2015, what amount should be reported as bond interest
expense?

a. 106,510
b. 100,000
c. 53,160
d. 50,000

166. On January 1, 2015, West Company issued 9% bonds in the face amount of P5,000,000,
which mature on January 1, 2025. 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.

On December 31, 2015, what is the carrying amount of the bonds payable?

a. 4,695,000
b. 4,714,500
c. 4,704,750
d. 5,000,000

167. Webb Company had an outstanding 7%, 10-year P5,000,000 face value bond. The bond
was originally sold to yield 6% annual interest. The entity used the effective interest method
to amortize bond premium. On January 1, 2015, the carrying amount of the bond payable
was P5,250,000.
 What amount of unamortized premium on bond payable should be reported on December
31, 2015?

a. 225,000
b. 172,500
c. 215,000
d. 52,500

168. On December 31, 2015, Marie Company reported bonds payable of P7,360,000 and
accrued interest payable of P200,000. The bonds are retired on December 31, 2015 for
P8,160,000 including accrued interest.

What amount should be reported as gain or loss on extinguishment of bonds payable?

a. 800,000 gain
b. 800,000 loss
c. 600,000 gain
d. 600,000 loss

169. On December 31, 2015, Boheme Company reported a 9% bonds payable due December
31, 2020 with a carrying amount of P15,405,000. The bonds were issued on December 31,
2011 and had a face amount of P15,000,000 with interest payable semiannually on June 30
and December 31 of each year. On December 31, 2015, the entity retired P5,000,000 of these
bonds at 98.

What amount should be reported as gain or loss on the retirement of the bonds for 2015?

a. 235,000 gain
b. 235,000 loss
c. 100,000 gain
d. 100,000 loss

170. On January 1, 2015, Luyang Company issued 3-year bonds with face value of P5,000,000
at 98. Additionally, the entity paid bond issue cost of P140,000. The nominal rate is 10% and
the effective rate is 12%. The interest is payable annually on December 31. The entity used
the effective interest method in amortizing bond discount and issue cost.

What is the carrying amount of the bonds payable on December 31, 2015?

a. 4,840,000
b. 4,831,200
c. 4,848,000
 d. 5,000,000

171. On January 1, 2015, Masbate Company issued 5-year bonds with face value of P5,000,000
at 110. The entity paid bond issue cost of P80,000 on same date. The stated interest rate on
the bonds is 8% payable annually every December 31. The bonds are issued to yield 6% per
annum. The entity used the effective interest method of amortization.

On December 31, 2015, what is the carrying amount of the bonds payable?

a. 5,000,000
b. 5,400,000
c. 5,435,200
d. 5,430,000

172. On January 1, 2015, Samal Company issued P5,000,000, 8% serial bonds, to be repaid in
the amount of P1,000,000 each year. Interest is payable annually on December 31. The bonds
were issued to yield 10% a year. The bond proceeds were P4,757,000 based on the present
value at January 1, 2015 of five annual payments. The entity amortized the bond discount by
the interest method.

On December 31, 2015, what is the carrying amount of the bonds payable?

a. 4,832,700
b. 3,832,700
c. 4,805,600
d. 3,805,600

173. White Company issued P2,000,000 face value of 10-year bonds on January 1. The bonds
pay interest on January 1 and July 1 and had a stated rate of 10%.

If the market rate of interest is 8%, what is the issue price of the bonds?

a. 2,262,000
b. 2,113,000
c. 2,159,000
d. 2,279,000

174. On January 1. 2015, Ezekiel Company received P1,077,200 for P1,000,000 face amount
12% bonds. The bonds were sold to yield 10%. Interest is payable semiannually every
January 1 and July 1. The entity has elected the fair value option for measuring the financial
liability.
 On December 31, 2015, the fair value of the bonds is determined to be P1,064,600 due to
market and interest factors.

What is the carrying amount of the bonds payable on January 1, 2015?

a. 1,000,000
b. 1,077,200
c. 500,000
d. 538,600

What is the interest expense for 2015?

a. 120,000
b. 100,000
c. 107,720
d. 129,264

What is the gain or loss from change in fair value of the bonds for 2015?

a. 64,600 gain
b. 64,600 loss
c. 12,600 gain
d. 12,600 loss

What is the carrying amount of the bonds payable on December 31, 2015?

a. 1,064,600
b. 1,077,200
c. 1,000,000
d. 1,064,920

175. At the beginning of current year, Taguig Company issued a 3-year bonds with face
value of P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on
December 31. Additionally, the entity paid bond issue cost of P150,000.

What is the interest expense for the current year using the effective interest method?

a. 550,000
b. 528,000
c. 576,000
d. 559,680
176. Bonds payable not designated at fair value through profit or loss shall be measured
initially at

a. Fair value
b. Fair value plus bond issue cost
c. Fair value minus bond issue cost
d. Face amount

177. After initial recognition, bonds payable shall be measured at

a. Amortized cost using the effective interest method.

b. Fair value through profit or loss.
c. Amortized cost using the effective interest method and fair value through other
comprehensive income.
d. Amortized cost using the effective interest method and fair value through profit or loss.

178. The “amortized cost” of bonds payable means

a. Face amount plus premium on bonds payable

b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable, minus discount on bonds payable and
minus bond issue cost

179. Which is a true statement for electing the fair value option for measuring bonds
payable?

a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.

180. Under the fair value option, bonds payable shall be measured initially at

a. Fair value
b. Fair value plus bond issue cost
c. Fair value minus bond issue cost
d. Face amount

181. Costs incurred in connection with the issuance of ten-year bonds which sold at a slight
premium shall be

a. Charged to retained earnings

 b. Expensed in the year incurred
c. Capitalized as organization cost
d. Reported as a deduction from bonds payable

182. How would the amortization of premium on bonds payable affect the carrying amount
of bond and net income, respectively?

a. Increase and decrease

b. Increase and increase
c. Decrease and decrease
d. Decrease and increase

183. How would the amortization of discount on bonds payable affect the carrying amount
of bond and net income, respectively?

a. Increase and decrease

b. Increase and increase
c. Decrease and decrease
d. Decrease and increase

184. Which of the following statements is true regarding accrued interest on bonds that are
sold between interest dates?

a. The accrued interest is computed at the effective rate.

b. The accrued interest will be paid to the seller when the bonds mature.
c. The accrued interest is extra income to the buyer.
d. All of the statements are not true.

185. The proceeds from the sale of bonds

a. Will always be equal to the face amount

b. Will always be less than the face amount
c. Will always be more than the face amount
d. May be equal to or more than or less than the face amount depending on market interest
rate

186. An extinguishment of bonds payable originally issued at a premium is made by

purchase of the bonds between interest dates. Which of the following statements is true at
the time of extinguishment?

a. Any costs of issuing the bonds must be amortized up to the purchase date.
b. The premium must be amortized up to the purchase date.
c. Interest must be accrued from the last interest date to the purchase date.
 d. All of these statements are true.

187. Bonds for which the bondholders’ names are not registered with the issuer are called

a. Bearer bonds
b. Term bonds
c. Debenture bonds
d. Serial bonds

188. Bonds that pay no interest unless the issuer is profitable are known as

a. Registered bonds
b. Junk bonds
c. Mortgage bonds
d. Income bonds

189. On theory, the proceeds from the sale of a bond would be equal to

a. The face amount of the bond

b. The present value of the principal amount due at the end of the life of the bond plus the
present value of the interest payments made during the life of the bond
c. The face amount of the bond plus the present value of the interest payments made
during the life of the bond
d. The sum of the face amount of the bond and the periodic interest payments

190. Under international accounting standard, the valuation method used for bonds payable
is

a. Historical cost
b. Discounted cash flow valuation at current yield rate
c. Maturity amount
d. Discounted cash flow valuation at yield rate at issuance

191. An entity issued a bond with a stated rate of interest that is less than the effective
interest rate on the date of issuance. The bond was issued on one of the interest payment
dates. The bond was issued on one of the interest payment dates. What should the entity
report on the first interest payment date?

a. An interest expense that is less than the cash payment made to bondholders.
b. An interest expense that is greater than the cash payment made to bondholders.
c. A debit to the unamortized bond discount.
d. A debit to the unamortized bond premium.
192. A five-year term bond was issued on January 1, 2012 at a premium. The carrying
amount of the bond on December 31, 2013 would be

a. The same as the carrying amount on January 1, 2013

b. Higher than the carrying amount on January 1, 2013
c. Higher than the carrying amount on December 31, 2014
d. Lower than the carrying amount on December 31, 2014

193. A five-year term bond was issued on January 1, 2012 at a discount. The carrying amount
of the bond on December 31, 2013 would be

a. Higher than the carrying amount on January 1, 2013

b. Lower than the carrying amount on January 1, 2013
c. The same as the carrying amount on January 1, 2013
d. Higher than the carrying amount on December 31, 2014

194. On January 1, 2016, Mariel Company issued bonds payable with face amount of
P8,000,000 and 10% stated interest rate at 95. The bonds have a 5-year term and interest is
payable annually every December 31. The entity elected the fair value option. On December
31, 2016 the fair value of the bonds is 105. It is reliably determined that the fair value
increase comprised P150,000 attributable to credit risk and the remainder attributable to
change in the market interest rate.

What amount of gain or loss should be recognized in profit or loss for 2016 to conform with
the fair value option?

a. 650,000 gain
b. 650,000 loss
c. 800,000 gain
d. 800,000 loss

195. When interest expense for the current year is more than interest paid, the bonds
were issued at

a. A discount
b. A premium
c. Face amount
d. Cannot be determined

196. When interest expense for the current year is less than interest paid, the bonds
were issued at

a. A discount
 b. A premium
c. Face amount
d. Cannot be determined

197. When the effective interest method is used, the periodic amortization would

a. Increase if the bonds were issued at a discount

b. Decrease if the bonds were issued at a premium
c. Increase if the bonds were issued at a premium
d. Increase if the bonds were issued at either a discount or a premium

198. A discount on bond payable is charged to interest expense

a. Equally over the life of the bond

b. Only in the year the bond is issued
c. Using the effective interest method
d. Only in the year the bond matures

199. On January 1, 2016, Rizal Company issued 4-year bonds with face amount of P4,000,000
at P4,395,800. The 12% stated rate is payable semiannually every June 30 and December 31.
In addition, the entity paid P137,430 in connection with the issuance of the bonds.

What is the effective rate of interest on the bonds on the date of issue?

a. 12%
b. 11%
c. 10%
d. 9%

200. On January 1, 2016, Taguig Company issued 3-year bonds with face amount of
P5,000,000 at 99. The nominal rate is 10% and the interest is payable annually on December
31. The entity paid bond issue cost of P150,000.

What is the interest expense for 2016 using the effective interest method? (round off present
value factors to four decimal places)

a. 550,000
b. 528,000
c. 576,000
d. 559,680