FINANCIAL ACCOUNTING AND REPORTING

FAR14 Financial Liabilities

14.1. Definition of a Liability ............................................................................................ 1

14.2. Recognition ................................................................................................................... 1

14.3. Financial and Non-financial Liabilities.............................................................. 1

14.4. Recognition and Classification of Financial Liabilities ............................... 2

14.5. Trade and Other Payables ...................................................................................... 2

14.6. Notes Payable............................................................................................................... 3

14.7. Loans Payable .............................................................................................................. 3

14.8. Bonds Payable.............................................................................................................. 3

14.9. Compound Financial Instruments....................................................................... 4

14.10. Derecognition of Financial Liabilities .............................................................. 4

14.11. Debt Restructuring ................................................................................................... 4

FAR14 Financial Liabilities
14.1. Definition of a Liability
 A liability is ‘a present obligation of the entity to transfer an economic resource as a result of past events.’
A duty or responsibility that an entity has no practical ability to avoid. Can either be:
 Legal obligation – contract, legislation or operation of law
Obligation  Constructive obligation – entity’s actions (past practice or published
policies) that create a valid expectation on others that the entity will accept
and discharge certain responsibilities.
 Pay cash, deliver goods or render services
Transfer of  Exchange assets with another party on unfavorable terms
economic  Transfer assets if a specified uncertain future event occurs
resource  Issue a financial instrument that obliges the entity to transfer an economic
resource
Present  The entity has already obtained economic benefits or taken an action
obligation as  As a consequence, the entity will or may have to transfer an economic resource
result of past that it would not otherwise have had to transfer
events
 A contract that is equally unperformed – neither party has fulfilled any of its
obligations, or both parties have partially fulfilled their obligations to an equal
extent.
Executory
 If the entity performs first, the entity’s combined right and obligation changes
contracts
to an asset.
 If the other party performs first, the entity’s combined right and obligation
changes to a liability.

14.2. Recognition
 An item is recognized if:
– It meets the definition of a liability; and
– Recognizing it would provide useful information, i.e. relevant and faithfully represented information
Recognition may not provide relevant information is, for example:
Relevance – It is uncertain whether a liability exists
– A liability exists but the probability of an outflow of economic benefits is low
Faithful Exceptionally high measurement uncertainty can affect the faithful representation
representation of a liability.

14.3. Financial and Non-financial Liabilities

Financial Liabilities Non-financial Liabilities
a. A contractual obligation to deliver cash
or another financial asset to another
entity
b. A contractual obligation to exchange
financial assets or financial liabilities
with another entity under conditions
Definition that are potentially unfavorable to the A liability other than a financial liability.
entity
c. A contract that will or may be settled in
the entity’s own equity instruments
and is not classified as the entity’s own
equity instruments

 Accounts payable
 Notes payable  Unearned revenues and warranty
obligations that are to be settled
 Loans payable
through future delivery of goods or
 Bonds payable
provision of services
 Accrued payables
 Taxes, SSS, Philhealth and PAG-IBIG
 Lease liabilities
Examples payables
 Held for trading liabilities
 Constructive obligations
 Derivative liabilities
 Commodity contracts that cannot be
 Redeemable preference shares settled net in cash or other financial
 Security deposits and other returnable instrument but only through
deposits commodity exchange

FAR14 FINANCIAL LIABILITIES 1

 Fair value minus transaction costs Best estimate of the amounts needed to
Initial (transaction costs are expensed settle those obligations or measurement
measurement immediately for FLFVPL). basis required by other standards.

 Amortized cost
 Held for trading – fair value (changes to
profit or loss)
Subsequent Best estimate adjusted for any changes on
 Designated as FVPL – fair value
measurement the expected settlement amounts.
(changes in OCI for changes in credit
risk, remainder to PL)

Case Study 1
The following are taken from the records of ABC Company as of year-end:
Accounts payable P4,000
Utilities payable 14,000
Accrued interest expense 12,000
Advances from customers 2,000
Unearned rent 18,000
Warranty obligations 10,000
Income taxes payable 4,000
Preference shares issued 20,000
Constructive obligation 22,000
Obligation to deliver a variable number of own shares worth a fixed amount of cash 20,000
SSS contributions payable 12,000
Cash dividends payable 8,000
Property dividends payable 14,000
Share dividends payable 6,000
Lease liability 70,000
Bonds payable 240,000
Discount on bonds payable 30,000
Security deposit 4,000
Redeemable preference shares issued 28,000
Unearned interest on receivables 6,000

Required
How much is the financial liabilities that are to be disclosed in the notes?

14.4. Recognition and Classification of Financial Liabilities

 A financial liability is recognized only when the entity becomes a party to the contractual provisions of
the instrument.
 All financial liabilities are classifies as subsequently measured at amortized cost, except for the following:
– Financial liabilities at fair value through profit or loss (FVPL)
– Derivative liabilities
– Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition
– Financial guarantee contracts
– Commitments to provide a loan at a below-market interest rate
– Contingent consideration recognized by an acquirer in a business combination

14.5. Trade and Other Payables

 Trade payables are obligations arising from purchases of inventory that are to be sold in the ordinary
course of business. Other payables are classified as non-trade.
 For a trading or manufacturing entity, trade and non-trade payables that are currently due are normally
aggregated and presented as one line item under the heading “Trade and other payables”.
 The following table summarizes the different items under this heading:
Accounts payable from purchases of inventory are recognized when ownership over
Accounts payable
the goods is transferred to the buyer.
Unearned income Represents advanced collection of income that is not yet earned.
Represents cash receipts that are held in trust for other parties.
– Deposit liabilities of banks
Liability for
– Deposits received for returnable containers
deposits received
– Security deposits received from lessees
– Deposits received from escrow agreements
Liabilities for expenses already incurred but not yet paid (e.g. salaries payable, utilities
Accrued expenses
payable, etc.)
Dividends Recognized when the dividend is appropriately authorized and is no longer at the
payable discretion of the entity, declared either by the Board of Directors or shareholders.
FAR14 FINANCIAL LIABILITIES 2
14.6. Notes Payable
 These are obligations supported by debtor promissory note. The accounting for notes payable is similar to
the accounting for notes receivable (as discussed in FAR04).
Initial measurement Fair value minus transaction costs
Short-term payable Fair value is equal to face amount
 With reasonable interest rate – fair value is equal to face amount
 Noninterest-bearing – fair value is equal to present value of the future
Long-term payables cash flows
 Unreasonable interest rate – fair value is equal to present value of the
future cash flows
 Initially measured at face amount – face amount or expected settlement
Subsequent
amount
measurement
 Initially measured at present value – amortized cost

Case Study 2
The following transactions are entered into by ABC Company in 2019:
 On January 1, 2019, ABC Company acquired equipment in exchange for P100,000 cash and a 3-year,
noninterest-bearing, P1,000,000 note payable due on January 1, 2022. The prevailing interest rate is 12%.
 On January 1, 2019, ABC Company acquired equipment in exchange for P100,000 cash and a 4-year,
noninterest-bearing, P1,000,000 note payable due in 4 equal annual installments starting December 31, 2019.
The prevailing interest rate is 12%.
 On January 1, 2019, ABC Company issued a 3-year, 3%, P1,000,000 note payable in exchange for a machine.
Principal is due on January 1, 2022 but interest is due annually every January 1. The prevailing interest rate
for this type of note is 12%.
 On July 1, 2019, ABC Company borrowed P1,000,000 and issued a one-year note payable. The lender
discounted the note at 12%.
 On October 1, 2019, ABC Company issued a two-year, 12%, P1,000,000 note payable in exchange for a piece
of land. Principal is due on October 1, 2021 but interest is due annually.

Required
Compute for the initial valuation and year-end carrying amounts of each payable assuming all payments are made.
Prepare journal entries for the above transactions.

14.7. Loans Payable

 This is similar to notes payable. It is also supported by a formal promise to pay a certain sum of money at
a specific future date. It can also connote bank loans and similar types of financing.
 Loans payable are accounted for similar to notes payable. However, loan transactions normally involve
transaction costs (incremental costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability).
 Origination fees are upfront fees charged by a lender to cover the costs of processing the loan and is
directly deducted from loan proceeds released to the borrower. These are included in the calculation of the
effective interest rate.
 Secured loans are ones that have a collateral security which the lender can take if the borrower defaults.
– Mortgage loan – secured by real property
– Chattel mortgage – secured by movable personal property
 Fixed interest loan is one where the interest charges are based on a fixed rate. Variable interest loan is
one where the interest charges vary as market interest rate changes.
 Credit lines is an arrangement between a financial institution and a borrower that establishes the
maximum amount of loan (credit limit) that the borrower can obtain. This provides convenience and saves
the borrower cost and time in processing numerous individual loans.
 Credit card uses a credit line granted to the cardholder by a bank or a credit card company.
 Revolving credit agreement (or committed line of credit) imposes a legal obligation on the bank, but
the borrower pays a commitment fee.
 Commercial paper consists of short-term (usually 270 days or less) unsecured, notes payable issued by
large companies with high credit ratings to investors. These are traded in money markets and are highly
liquid.

14.8. Bonds Payable

 Long-term debt instruments similar to notes and loans except that bonds are usually offered to the public
and sold to many investors. A bond is intended to be broken up into various subunits which can be issued
to a variety of investors.
 Bond indenture is the contractual arrangement between the issuer and the bondholders. It contains
restrictive covenants intended to prevent the issuer from taking actions contrary to the interests of the
bondholders.
 Bond certificate is issued to the bondholder representing the amount of bonds he has purchased.
 Bonds can be issued through underwriting, auction or direct placement with investors.
 Bonds are accounted for in much the same way as notes and loans payable.

FAR14 FINANCIAL LIABILITIES 3

 Cash proceeds/Carrying Effective rate vs Amortization of interest
amount Nominal rate expense
Discount Less than face amount EIR > NIR Interest expense > Interest paid
Premium Greater than face amount EIR < NIR Interest expense < Interest paid
No premium
Equal to face amount EIR = NIR Interest expense = Interest paid
or discount

Case Study 3
The following transactions are entered into by ABC Company in 2019:
 On January 1, 2019, ABC Company issued 1,000, P1,000, 10%, 3-year bonds for P951,963. Principal is due at
maturity, but interest is due annually every year-end.
 On January 1, 2019, ABC Company issued 1,000, P1,000, 14%, 3-year bonds for P1,048,037. Principal is due at
maturity, but interest is due annually every year-end.
 On April 1, 2019, ABC Company issued 11%, 3-year, P1,000,000 bonds, dated January 1, 2019. Principal is due
at maturity, but interest is due annually.
 On January 1, 2019, ABC Company issued new bonds with face amount of P10,000,000 for P10,800,000. ABC
used the proceeds to retire an existing 10-year, 12%, P8,000,000 bonds issued five years earlier. The
unamortized discount on the existing bonds is P340,000. ABC retired the bonds at a call premium of P400,000
and incurred P50,000 direct costs of retirement.
 On January 1, 2019, ABC Company issued 5-year, 14%, P1,000,000 bonds for P1,072,096. Principal is due at
maturity, but interest is due annually every year-end. On July 1, 2021, ABC retired the bonds at 102. The
retirement price includes payment for accrued interest.

Required
Compute for the initial valuation and year-end carrying amounts of each bond payable assuming all payments are
made, and the effective interest rate is 12%. Prepare journal entries for the above transactions.

14.9. Compound Financial Instruments

 This is a financial instrument that, from the issuer’s perspective, contains both a liability and an equity
component. These components are classified and accounted for separately.
 Examples include convertible bonds and bonds with share warrants.

Case Study 4
The following transactions are entered into by ABC Company in 2019:
 On January 1, 2019, ABC Company issued 10%, 3-year, P1,000,000 convertible bonds at 105. Each P1,000
bond is convertible into 8 shares with par value of P100 per share. Principal is due at maturity, but interest is
due annually at each year-end. On issuance date, the bonds were selling at a yield to maturity market rate of
12% without the conversion option.
 On January 1, 2019, ABC Company issued 3-year, 10%, 1,000, P1,000 bonds at 97. Each bond has one
detachable share warrant entitling the holder to buy 10 shares of ABC Company with par value of P100 at
P120 per share. Shortly after issuance, the bonds are selling at 95 ex-warrants.
 On December 31, 2020, all of the bonds were converted into equity. ABC incurred stock issuance costs of
P20,000.

Required
Prepare journal entries for the above transactions.

14.10. Derecognition of Financial Liabilities

 A financial liability is derecognized when it is extinguished, i.e. when the obligation is discharged or
cancelled or expires. A liability is extinguished in many ways, for example through:
– Repayment in cash
– Transfer of non-cash assets or rendering of services
– Issuance of equity securities
– Replacement of the existing obligation with a new obligation
– Waiver or cancellation by the creditor
– Expiration (e.g. warranty obligation expires after the warranty period)

14.11. Debt Restructuring

 In cases where the debtor cannot pay his/her obligation due to financial difficulty, the parties may enter
into a debt restructuring agreement. Debt restricting is fundamentally the liquidation or settlement of debt
in exchange for a nonmonetary asset (asset swap), share issuance (equity swap) or through modification
of terms. Any gain or loss arising from the restructuring is included as a separate line item in the statement
of comprehensive income.

FAR14 FINANCIAL LIABILITIES 4

Asset Swap
This is a form of debt restructuring where a liability is extinguished in exchange for a nonmonetary asset. The difference
of the carrying amount of the liability (including any accrued interest) and the carrying amount of the nonmonetary
asset given is a gain or loss on extinguishment of debt as the case may be.
Carrying amount of nonmonetary asset given xxx
Carrying amount of liability (principal + interest accrued) (xxx)
Loss (gain) on extinguishment of debt xxx

Equity Swap
This pertains to the settlement of a monetary liability through issuance of shares by the debtor company. The gain or
loss on extinguishment is computed as follows:
Value of shares issued* xxx
Carrying amount of liability (principal + interest accrued) (xxx)
Loss (gain) on extinguishment of debt xxx

*the shares are valued in the following hierarchy: (1) fair value of shares, (2) fair value of liability extinguished, (3) par value of shares. This is in
conjunction with what is stated in IFRIC 19.

Modification of terms
Modifying the terms of an existing liability in such a way that it would be less burdensome for the debtor is a form of
debt restructuring. This may be done by reducing the interest rate, waiving the payment of any accrued interest,
extending the term, reducing any principal payments or a combination of any of these.

According to PFRS 9, substantial modification of terms of an existing liability shall be accounted for as an
extinguishment of the old debt and the recognition of a new one. There is substantial modification if the gain or loss on
extinguishment is at least 10% of the carrying amount of the old debt in absolute amount. The gain or loss on
extinguishment is computed as follows:

Present value of the new liability based on new terms xxx

Carrying amount of the old liability (principal + interest accrued) (xxx)
Loss (gain) on extinguishment of debt* xxx

*should be at least 10% of the carrying amount of the old liability to be recognized as gain or loss

Note that the discounting of the new liability shall still use the original effective interest rate. Any transaction costs shall
be recognized as part of the gain or loss on extinguishment. In the instance that the loss is less than 10%, the gain or
loss is not recognized. The old liability is simply continued based on the new terms. Consequently, a new effective
interest rate is interpolated to amortize the carrying amount of the liability based on the modified cash flows.

Case Study 5
The following debt restructuring arrangements was entered into by ABC Inc. with its creditors on December 31, 2019:
 The entity is indebted to a bank under a P6,000,000, 10% three-year note that is due on December 31, 2019.
Because of financial difficulties, The entity owed accrued interest of P600,000 on the note on the same date. A debt
restructuring arrangement was made, and the bank agreed to settle the note and accrued interest in exchange for
a tract of land having a fair value of P5,000,000. The carrying amount of the land is P3,000,000.
 On December 31, 2019, ABC Inc. has an outstanding note payable with a carrying amount of P5,500,000. The
amount includes accrued interest of P500,000. 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 provides for the issuance of
50,000 ordinary shares with par value of P50. The ordinary share is currently quoted at P70. The fair value of the
note payable is P4,000,000. The issuance is made on December 31, 2019.
 The entity has negotiated a restructuring of its 10%, P5,000,000 note payable due on December 31, 2019. The
unpaid interest on the note on such date is P500,000. The creditor has agreed to reduce the face value to
P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three years from
December 31, 2019.
 The entity has negotiated a restructuring of its 8%, P1,000,000 note payable due on December 31, 2019. The
unpaid interest on the note on such date is P100,000. The creditor has agreed to reduce the face value to P900,000,
forgive the unpaid interest, reduce the interest rate to 7% and extend the due date two years from December 31,
2019.

Required
Compute for the gain/loss on extinguishment or refinancing for the above arrangements.

FAR14 FINANCIAL LIABILITIES 5

Quizzer – Problem 1
1. On March 1, 2012, Eavesdropper Company issued 5,000 of its P1,000 face value bonds at 110 plus accrued interest.
The entity paid bond issue cost of P300,000. The bonds were dated November 1, 2011, mature on November 1,
2021, and bear interest at 12% payable semiannually on May 1 and November 1. What net amount was received
from the bond issuance on March 1, 2012?
A. P5,700,000
B. P5,200,000
C. P5,400,000
D. P5,500,000

2. During 2012, Edible Company issued 3,000 of its 9% P1,000 face value bonds at 102. In connection with the sale of
the bonds, the entity paid the following costs:
Promotion cost P20,000
Engraving and printing cost 25,000
Underwriters' commission 200,000
Legal fees 100,000
Fees paid to accountants for registration 55,000

What total amount should be recorded as bond issue costs to be amortized over the term of the bonds?
A. P400,000
B. P380,000
C. P300,000
D. None

3. On January 1, 2012, Fabulous Company issued 9% bonds in the amount of P5,000,000 which mature on January 1,
2022. The bonds were issued for P4,695,000 to yield 10%. Interest is payable annually on December 31. The entity
uses the interest method of amortizing bond discount. What should be reported as carrying amount of the bonds
payable on December 31, 2012?
A. P4,695,000
B. P4,704,750
C. P4,714,500
D. P5,000,000

4. On January 1, 2012, Fallacy 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 uses the effective interest method of
amortization. On December 31, 2012, what should be reported as carrying amount of the bonds payable?
A. P5,000,000
B. P5,400,000
C. P5,345,200
D. P5,430,000

5. On December 31, 2012, Gaiety Company issued 5,000 of its 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. On December 31, 2012, what amount should be reported as
bonds payable?
A. P5,500,000
B. P4,800,000
C. P4,400,000
D. P5,000,000

6. On December 31, 2012, Gallant Company issued P8,000.000 of 12% bonds payable maturing in 5 years. The bonds
pay interest semiannually. The bonds include nondetachable warrants giving the bondholders the right to purchase
16,000 P100 par value ordinary shares for P150 per share within the next three years. The bonds and warrants
were issued at 120. The value of the warrants at the time of issuance was P1,500,000. The market rate of interest
for similar bonds without the warrants is 10%. The PV of 1 at 5% for ten periods is .61, and the PV of an ordinary
annuity of 1 at 5% for ten periods is 7.72. On December 31, 2012, what amount should be reported as increase in
shareholders' equity?
A. P1,500,000
B. P1,014,400
C. P1,600,000
D. None

FAR14 FINANCIAL LIABILITIES 6

7. Habitable Company issued 5,000 convertible bonds on January 1, 2012. The bonds have a three-year term and are
issued at 110 with a face value of P1,000 per bond. Interest is payable annually in arrears at a nominal 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 issuance of the convertible bonds on January 1, 2012?
A. P500,000
B. P400,000
C. P900,000
D. None

8. On July 1, 2012, after recording interest and amortization. Hackneyed Company converted P5,000,000 of its 12%
convertible bonds into 50,000 shares of P50 par value. On the conversion date, the carrying amount of the bonds
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. P5,000,000
B. P3,500,000
C. P4,900,000
D. P3,400,000

9. Due to extreme financial difficulties, Takeable Company has negotiated a restructuring of its 10%, P5,000,000 note
payable due on December 31, 2012. The unpaid interest on the note on such date is P500,000. The creditor has
agreed to reduce the face value to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and extend
the due date three years from December 31, 2012. The present value of 1 at 10% for three periods is 0.75 and the
present value of an ordinary annuity of 1 at 10% for three periods is 2.49.

Question 1: What is the gain on extinguishment of debt to be recognized on December 31, 2012?
A. P1,703,200
B. P1,203,200
C. P2,000,000
D. P540,000

Question 2: What is the interest expense to be recognized for 2013?

A. P320,000
B. P379,680
C. P400,000
D. P303,680

Quizzer – Theory 1
1. A legal obligation is an obligation that is derived from all of the following, except?
A. Legislation C. Other operation of law
B. A contract D. An established pattern of past practice

2. A constructive obligation is an obligation that is derived from an entity’s actions where

I. By an established pattern of practice, published policy or sufficiently specific current statement, the entity has
indicated to other parties that it will accept certain responsibilities.
II. The entity has created a valid expectation on the part of those other parties that it will discharge those
responsibilities.
A. I only C. Either I or II
B. II only D. Both I and II

3. An outflow of resources embodying future economic benefits is regarded as “probable” when

A. The event is more likely than not to occur, meaning, the probability that the event will occur is greater than the
probability that the event will not occur.
B. The probability that the event will not occur is greater than the probability that the event will occur.
C. The probability that the event will occur is the same as the probability that the event will not occur,
D. The probability that the event will occur is 90% likely.

4. It is an event that creates a legal or constructive obligation because the entity has no other realistic alternative but
to settle the obligation.
A. Event after reporting period C. Nonadjusting event
B. Adjusting event D. Obligating event

5. It is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic
benefits to be received under the contract.
A. Onerous contract C. Executed contract
B. Executory contract D. Sale contract

FAR14 FINANCIAL LIABILITIES 2

6. The unavoidable costs under an onerous contract represent the “least net cost of exiting from the contract” which
is equal to the
A. Cost of fulfilling the contract
B. Penalty arising from failure to fulfill the contract
C. Lower of the cost of fulfilling the contract or the penalty arising from failure to fulfill the contract
D. Higher of the cost of fulfilling the contract or the penalty arising from failure to fulfill the contract.

7. This is defined as “a structured program that is planned and controlled by the management that materially changes
either the scope of a business of an entity or the manner in which that business is conducted".
A. Restructuring C. Recapitalization
B. Liquidation D. Corporate revamp

8. Examples of events that qualify as restructuring include all of the following, except
A. Sale or termination of business
B. Closure of business location in a region or relocation of business from one location to another
C. Change in management structure such as elimination of a layer of management
D. Fundamental reorganization of an entity that has an immaterial and insignificant impact on its operations.

9. Which is a cost of restructuring?

A. Cost of retraining or relocating continuing staff
B. Marketing or advertising cost
C. Investment in new system and distribution network
D. Cost of relocating business activities from one location to another

10. A bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is
A. A compound financial instrument C. A derivative financial instrument
B. A primary financial instrument D. An equity

11. Which of the following statements about accounting for compound instrument is true?
I. The issuer shall classify a compound instrument as either financial liability or equity based on the predominant
characteristics of the contractual arrangement.
II. The issuer shall classify the liability and equity components of a compound instrument separately as financial
liability and equity instrument.
A. I only C. Both I and II
B. II only D. Neither I nor II

12. How are the proceeds from issuing a compound instrument allocated between the liability and equity components?
I. First, the liability component is measured at fair value, and then the remainder of the proceeds is allocated to
the equity component.
II. The proceeds are allocated to the liability and equity components based on the relative fair value of both the
liability and equity components.
A. I only C. Either I or II
B. II only D. Neither I nor II

13. These instruments provide the holder with the contractual right to receive payments on account of interest at fixed
dates extending into the indefinite future, either with a right or no right to a return of principal.
A. Perpetual debt instruments C. Derivative financial instruments
B. Compound financial instruments D. Financial instruments

14. In theory disregarding any other marketplace variables, the proceeds from the sale of a bond will be equal to
A. The face amount of the bond.
B. The present value of the face amount of the bond plus the present value of the interest payments to be 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.

15. Which one of the following is true when the effective interest method of amortizing bond discount is used?
A. Interest expense as a percentage of the bonds' carrying amount varies from period to period.
B. Interest expense remains constant for each period.
C. Interest expense increases each period.
D. The interest rate decreases each period.

FAR14 FINANCIAL LIABILITIES 2