Midterm - Quiz Solution
Midterm - Quiz Solution
Midterm - Quiz Solution
On January 1, 2022, an entity issued 5,000 10-year bonds payable, a face amount of P1,000 per
bond at 105. Each bond is accompanied by one warrant that permits the bondholder to
purchase 20 equity shares, par 50, at P55 per share. The market value of the bond without a
warrant at the time of issuance is 98. The entity exercise 60% of the warrants on December 31,
2022.
c. Prepare the journal entries at the time of issuance and the exercise of the right to
purchase the warrant.
Cash 5,250,000
Discount on bonds payable 100,000
Bonds payable 5,000,000
Share warrants 350,000
Cash 3,300,000
Share warrants 210,000
Share capital 3,000,000
Share premium 510,000
2. On January 1, 2023, an entity issued a 5,000, the 5-year bond payable, a face amount of 1,000 at
110. The bond contains a conversion privilege that provides for an exchange of 1,000 bonds for
20 equity shares with a par value of 50. It is reliably determined that the bonds would only sell
at 95 without the conversion privilege.
Cash 5,500,000
Discount on bonds payable 250,000
Bonds payable 5,000,000
Share warrants 750,000
a. Prepare the journal entries related to the conversion of bond payable and other
entries related to the conversion.
Bonds payable 5,000,000
Share premium 200,000
Conversion privilege 500,000
Share capital 4,000,000*
P (??) 1,700,000
*Share capital:
5M / 1M = 5,000 x 20 = 100,000 x 40 = 4M
4. On January 1, 2021, DEF Company acquired equipment for 1,000,000 payables in 5 annual
equal installments every December 31. Interest is 10% on the unpaid balance.
a. How much is the interest expense on December 31, 2021, and December 31, 2022?
December 31, 2021 – 100,000
December 31, 2022 – 80,000
b. Prepare the journal entries on January 1, 2021, December 31, 2021, and December
31, 2022.
Jan. 1, 2021 Equipment 1,000,000
Notes payable 1,000,000
5. On January 1, 2021, ABC Company acquired equipment for 1,000,000 payable in 5 equal annual
installments on December 31 of each year.
The prevailing market rate of interest is 10% PV of Ordinary Annuity for 5 years @ 10% is
3.7908. PV of 1 @ 10% is 0.7678.
a. How much is the carrying amount of the notes payable on December 31, 2022?
b. Prepare the journal entries on January 1, 2021, and December 31, 2021.
Equipment 758,160
Discount on notes payable 241,840
Notes payable 1,000,000
6. XYZ Company is involved in litigation regarding a faulty product sold in a prior year. The entity
has consulted with an attorney and determined that it is possible that the entity may lose the
case. The attorney estimated that there is a 40% chance of losing. If this is the case, the attorney
estimated that the amount of any payment would be P5,000,000.
a. What is the required journal entry as a result of this litigation? DISCLOSURE ONLY
7. HIJ Company is being sued for illness caused to local residents as a result of negligence on the
entity’s part in permitting the local residents to be exposed to highly toxic chemicals from its
plants. The entity’s lawyer stated that it is probable that the entity would lose the suit and be
found liable for a judgment costing the entity anywhere from P1,200,000 to P6,000,000.
However, the lawyer estimated that the most probable cost is P3,600,000.
a. What is the required journal entry as a result of this litigation? How much is the
amount to be disclosed, if any?
Loss on litigation 3,600,000
Accrued provision payable 3,600,000
8. On January 1, 2022, an entity issued a 5,000 10-year bond payable, the face amount of P1,000
per bond at 105. The interest rate related to this bond is 10% and the prevailing market rate of
interest is 8%.
a. Prepare the journal entry at the time of issuance and the required entry for the
amortization of the discount or premium of bonds payable on December 31, 2022.
9. On January 1, 2022, an entity issued a 5,000 10-year bond payable, the face amount of P1,000
per bond at 95. The interest rate related to this bond is 8% and the prevailing market rate of
interest is 10%.
a. Prepare the journal entry at the time of issuance and the required entry for the
amortization of the discount or premium of bonds payable on December 31, 2022.
10. On January 1, 2022, an entity issued 5,000 10-year bonds payable, the face amount of P1,000
per bond, and an interest rate of 10%. The entity designated the bond @ fair value through
profit and loss. Transaction cost incurred amounts to 100,000. On December 31, 2022, the fair
value of the bonds is 5,500,000, and 5,300,000 on December 31, 2023.
a. Prepare the journal entries on January 1, 2022, December 31, 2022, and December
31, 2023.
Interest expense
Cash