FINANCIAL ACCOUNTING 2

TOPIC II: NONCURRENT LIABILITIES

NOTES PAYABLE
(Problem #1)On September 1, 2017, an entity borrowed on a P5,400,000 note payable
from a bank. The note bears interest at 12% and is payable in three equal annual
principal payments of P1,800,000. On this date, the bank’s prime rate was 11%.
The first annual payment for interest and principal was made on September 1,
2018.

1. On December 31, 2017 what amount should be reported as accrued interest

payable?
A. 144,000 C. 132,000
B. 216,000 D. 198,000

2. What is the interest expense for 2018?

A. 576,000 C. 648,000
B. 432,000 D. 594,000

(Problem #2) On March 1, 2017, an entity borrowed P5,000,000 and signed a 2-year
note bearing interest at 12% per annum compounded annually. Interest is payable
in full at maturity on February 28, 2019. What amount should be reported as
accrued interest payable on December 31, 2018?
A. 1,200,000 C. 600,000
B. 1,160,000 D. 300,000

DEBT RESTRUCTURE
(Problem #3) An entity transferred land pursuant to a debt restructuring in full
liquidation of liability to the creditor:
Carrying amount of liability liquidated 1,500,000
Carrying amount of land transferred 1,000,000
Fair Value of Land Transferred 900,000

1. Under IFRS, what amount of pre-tax gain on extinguishment of debt should be

reported as component of income from continuing operations?
A. 300,000 C. 200,000
B. 500,000 D. 0

2. Under US GAAP, what is the gain on restructuring?

A. 600,000 C. 100,000
B. 500,000 D. 0

3. Under US GAAP, what amount should be reported as gain or loss on disposal?

A. 100,000 loss C. 400,000 gain
B. 500,000 gain D. 0

(Problem #4) An entity showed the following information at year-end:

Notes Payable 5,000,000
Accrued Interest Payable 500,000

The entity is threatened with a court suit if it could not pay the maturing debt.
Accordingly the entity entered into an agreement with the creditor for the
issuance of share capital in full settlement of the note payable. The agreement
provided for the issue of 50,000 ordinary shares with par value of P50 and quoted
price of P70. The fair value of the note payable is P4,000,000.
FINANCIAL ACCOUNTING 2
TOPIC II: NONCURRENT LIABILITIES

1. What is the gain from extinguishment of debt if the equity swap is measured
at the fair value of the shares?
A. 2,000,000 C. 3,000,000
B. 1,500,000 D. 0

2. What is the gain from extinguishment of debt if the equity swap is measured
at the fair value of the liability?
A. 2,000,000 B. 3,000,000
B. 1,500,000 D. 0

3. What amount should be recognized as share premium if the equity swap is

measured at the carrying amount of liability?
A. 3,000,000 C. 1,000,000
B. 2,500,000 D. 1,500,000

(Problem #5) Due to extreme financial difficulties, an entity negotiated a

restructuring of a 10% P5,000,000 note payable due on December 31, 2017. The
unpaid interest o the note on such date is P500,000. The creditor agreed to
reduce the face value of P4,000,000, forgive for unpaid interest, reduce the
interest rate at 8% and extend the due date three years from December 31, 2017.
The present value of 1 at 10% for three periods is 0.75 and the present value of
an ordinary equity of 1 at 10% for three periods is 2.49.

1. Under IFRS, what is the gain on extinguishment of debt for 2017?

A. 1,703,200 C. 2,000,000
B. 1,203,200 D. 540,000

2. What is the discount or premium on the new note payable on December 31,
2017?
A. 1,000,000 premium C. 203,200 premium
B. 1,000,000 discount D. 203,200 discount

3. What is the interest expense for 2018?

A. 320,000 C. 400,000
B. 379,680 D. 303,680

4. What is the carrying amount of notes payable on December 31, 2018?

A. 4,000,000 C. 3,856,480
B. 5,000,000 D. 3,737,120

BONDS PAYABLE
(Problem #6) On March 1, 2017, an entity issued 5,000 of P1,000 face value bonds
at 110 plus accrued interest. The entity paid bond issue cost of P400,000. The
bonds were dated November 1,2016, mature on November 1, 2026, and bear interest
at 12% payable semi-annually on May 1 and November 1. What net amount was
received from bond issuance?

A. 5,500,000 C. 5,300,000
B. 5,700,000 D. 5,100,000

(Problem #7) During the current year, an entity issued 5,000,000 9% face value
bonds at 110 at interest date. In connection with the issue of the bonds, the
entity paid the following costs:
Promotion Cost 100,000
FINANCIAL ACCOUNTING 2
TOPIC II: NONCURRENT LIABILITIES

Engraving and Printing Cost 200,000

Underwriters’ Commission 400,000
Legal Fees 350,000
Fees paid to accountants for registration 50,000

What amount should be recorded initially as discount or premium on bonds payable?

A. 500,000 premium C. 600,000 premium
B. 500,000 discount D. 600,000 discount

(Problem #8) On January 1, 2017, an entity issued 9% bonds in the face amount of
P5,000,000 which mature on January 1, 2027. 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.

1. What is the interest expense for 2017?

A. 469,500 C. 450,000
B. 500,000 D. 422,500

2. What is the carrying amount of the bonds payable on December 31, 2017?
A. 4,695,000 C. 4,714,500
B. 4,704,750 D. 5,000,000

(Problem #9) On January 1, 2017, an entity issued 10-year bonds with face amount
of P5,000,000 for P5,775,000. The entity paid bond issue cost of P100,000 on the
same date. The stated interest rate on the bonds is 10% payable annually every
December 31. The bonds have an 8% yield per annum after considering the bond
issue cost. The entity used the effective interest method of amortizing bond
premium.

1. What is the interest expense for 2017?

A. 454,000 C. 500,000
B. 400,000 D. 567,500

2. What is the carrying amount of the bonds payable on December 31, 2017?
A. 5,000,000 C. 5,629,000
B. 5,675,000 D. 5,737,000

(PROBLEM #10) On December 31, 2017, an entity issued 5,000 of 8% 10-year, P1,000
face value bonds with detachable warrants at 110. Each bond carried a detachable
warrant for 10 ordinary shares of P100 par value at a specified option price of
P120. Immediately after issuance, the market value of the bonds without warrants
was P4,800,000 and the market value of the warrants was P1,200,000.

1. On December 31, 2017, what is the carrying amount of bonds payable?

A. 5,500,000 C. 4,400,000
B. 4,800,000 D. 5,000,000

2. What is the increase in equity as a result of the bond issuance?

A. 1,200,000 C. 500,000
B. 700,000 D. 0

3. What is the share premium from the subsequent exercise of all share
warrants?
A. 1,700,000 C. 2,100,000
FINANCIAL ACCOUNTING 2
TOPIC II: NONCURRENT LIABILITIES

B. 1,000,000 D. 0

(Problem #11) On December 31, 2017, an entity issued P5,000,000 face value 5-year
bonds at 109. Each P1,000 bond was issued with 20 nondetachable share warrants.
Each warrant entitled the bondholder to purchase one share of P20 par value for
P25. Immediately after issuance, the market value of each warrant was P5. The
interest rate is 11% payable annually every December 31. The prevsiling market
rate of interest for similar bonds without warrants is 12%. The PV 1 at 12% for 5
period is 0.57 and the PV of an ordinary annuity of 1 at 12% for 5 periods is
3.60. what amount should be recorded as increase in equity as a result of the
bond issuance on December 31, 2017?
A. 620,000 C. 500,000
B. 450,000 D. 0

(Problem #12) On January 1, 2017, an entity issued 5,000 convertible bonds with
P1,000,000 face value per bond. The bond mature in three years and are issued at
110. Interest is payable annually every December 31 at a nominal rate of 6%
interest rate. Each bond is convertible at anytime up to maturity into 100 shares
with par value of P5. It is reliably determined that the bonds would sell only at
P4,600,000 without the conversion privilege. What is the equity component of the
original issuance of the convertible bonds?
A. 500,000 C. 900,000
B. 400,000 D. 0

(Problem #13) On December 31, 2017, after recording interest and amortization of
an entity converted P5,000,000 of 12% convertible bonds into 50,000 shares of P50
par value. On the conversion date, the carrying amount of the bonds payable was
P6,000,000, the market value of the bonds was P6,500,000 and the share was
publicly trading at P150. The entity incurred P100,000 in connection with the
conversion. When the bonds were originally issued, the equity component was
recorded at P1,500,000. What amount of share premium should be recorded as a
result of the conversion?
A. 5,000,000 C, 4,900,000
B. 3,500,000 D. 3,400,000