Chapter 5 - Financial Liabilities

5-1. (Jefferson Corporation)

(a)(1) Gross method

Dec. 16 Purchases 66,000

Freight in 1,400
Accounts Payable – Intel 67,400

19 Purchases 72,000
Accounts Payable – Celeron 72,000

26 Accounts Payable – Intel 67,400

Purchase Discounts 1,320
Cash 66,080

31 Accounts Payable – Celeron 72,000

Purchase Discounts 1,440
Cash 70,560

(a)(2) Net method

Dec. 16 Purchases 64,680

Freight in 1,400
Accounts Payable – Intel 66,080

19 Purchases 69,840
Accounts Payable – Celeron 69,840

26 Accounts Payable – Intel 66,080

Cash 66,080

31 Accounts Payable – Celeron 69,840

Purchase Discounts Lost 720
Cash 70,560

(b) Adjusting entry at December 31 under the net method

Dec. 31 Purchase Discounts Lost 720

Accounts Payable – Celeron 720

5-2 (Washington Company)

Reported amount of accounts payable at December 31, 2018 P1,000,000

Adjustments:
Unrecorded check written and issued on December 27 (350,000)
Unrecorded purchases received on December 28, net 147,000
Goods purchased FOB shipping point still in transit and not
yet recorded at year end 120,000
Debit balance in a supplier’s account netted in the balance 80,000
Correct amount of accounts payable at December 31, 2018 P 997,000
Chapter 5 – Financial Liabilities

5-3. (Adams Company)

Reported amount of accounts payable at December 31, 2018 P1,500,000

Adjustments:
Goods purchased FOB shipping point lost in transit 240,000
Credit memo for goods returned to supplier not recorded at yearend (80,000)
Correct amount of accounts payable at December 31, 2018 P1,660,000

5-4. (Madison Company)

(a)
2019
May 1 Automobile 3,600,000
Discount on Notes Payable 324,000
Notes Payable 3,924,000
3,924,000/1.09 = 3,600,000

Dec. 31 Interest Expense 216,000

Discount on Notes Payable 216,000
324,000 x 8/12 = 216,000
2020
Apr. 1 Interest Expense 108,000
Notes Payable 3,924,000
Discount on Notes Payable 108,000
Cash 3,924,000
324,000 – 216,000 = 108,000

(b) Notes Payable P3,924,000

Less Discount on Notes Payable 108,000
Amortized cost, December 31, 2019 P3,816,000

5-5. (Monroe Corporation)

(a)
2019
June 1 Cash 2,700,000
Discount on Notes Payable 300,000
Notes Payable 3,000,000
3M x 10% = 300,000
3M – 300,000 = 2,700,000

Dec. 31 Interest Expense 175,000

Discount on Notes Payable 175,000
300,000 x 7/12

2020
May 31 Interest Expense 125,000
Notes Payable 3,000,000
Discount on Notes Payable 125,000
Cash 3,000,000
300,000 – 175,000 = 125,000

(b) Notes Payable P3,000,000

Less Discount on Notes Payable 125,000
Amortized cost, December 31, 2019 P2,875,000

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Chapter 5 – Financial Liabilities

5-6. (Unison Company)

(a) Market rate of interest is 5%

Principal P8,000,000
Stated interest (8M x 9%) 720,000
Maturity value P8,720,000
PV factor at 5% for 1 period 0.9524
Present value of note at May 1, 2019 P8,304,928
Face value of note 8,000,000
Premium on notes payable P 304,928

2019
May 1 Equipment 8,304,928
Premium on Notes Payable 304,928
Notes Payable 8,000,000

Dec. 31 Interest Expense 276,715

Premium on Notes Payable 203,285
Interest Payable 480,000
304,928 x 8/12 = 203,285
8M x 9% x 8/12 = 480,000

2020
Apr. 30 Interest Expense 138,357*
Premium on Notes Payable 101,643
Interest Payable 480,000
Notes Payable 8,000,000
Cash 8,720,000
304,928 – 203,285 = 101,643
*difference is due to rounding off.

Notes Payable P8,000,000

Premium on Notes Payable 101,643
Interest Payable 480,000
Carrying amount at December 31, 2019 P8,581,643

(b) Market rate of interest is 12%

Principal P8,000,000
Stated interest (8M x 9%) 720,000
Maturity value P8,720,000
PV factor at 12% for 1 period 0.8929
Present value of note at May 1, 2019 P7,786,088
Face value of note 8,000,000
Discount on notes payable P 213,912

2019
May 1 Equipment 7,786,088
Discount on Notes Payable 213,912
Notes Payable 8,000,000

Dec. 31 Interest Expense 622,608

Discount on Notes Payable 142,608
Interest Payable 480,000
213,912 x 8/12 = 142,608
8M x 9% x 8/12 = 480,000

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Chapter 5 – Financial Liabilities

2020
Apr. 30 Interest Expense 311,304
Interest Payable 480,000
Notes Payable 8,000,000
Discount on Notes Payable 71,304
Cash 8,720,000
213,912 – 142,608 = 71,304
*difference is due to rounding off.

Notes payable P8,000,000

Discount on notes payable (71,304)
Interest payable 480,000
Carrying amount at December 31, 2019 P8,408,696

5-7. (KFC Delivery Service)

(a) Effective interest method

6,949,800/9,000,000 = 0.7722
Using Table II – PV of P1, under 3 periods, 0.7722 is under 9% interest rate

(b)
Table of Amortization
Date Amortization of Discount Carrying Value
4/1/18 6,949,800
3/31/19 625,482 7,575,282
3/31/20 681,775 8,257,057
3/31/21 742,943* 9,000,000
*Rounded; difference is due to rounding off.

(c) Interest expense for year ended December 31, 2019:

January 1 – April 1 625,482 x 3/12 P156,371
April 1 – December 31 681,775 x 9/12 511,331
Total interest expense P667,702

Carrying amount, April 1, 2018 P6,949,800

Add amortization of discount
625,482 x 9/12 469,112
Carrying amount, December 31, 2018 P7,418,912

As of Dec 31, 2019

NP 9.000,000
DISCOUNT ON NP (2.050,200-462,112) 1,581,088
AC, 12/31/18 7,418,912

or

AC, 12/31/18 = 6,949,800 + 469,112 7,418,912

(d)

2018
April 1 Land 6,949,800
Discount on Notes Payable 2,050,200
Notes Payable 9,000,000

Dec 31 Interest Expense 469,112

Discount on Notes Payable 469,112

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Chapter 5 – Financial Liabilities

2019
Jan 1. Discount on Notes Payable 469,112
Interest Expense 469,112

April 1 Interest Expense 625,482

Discount on Notes Payable 625,482

Dec. 31 Interest Expense 511,331

Discount on Notes Payable 511,331

2020
Jan 1. Discount on Notes Payable 511,331
Interest Expense 511,331

Mar.31 Interest Expense 681,775

Discount on Notes Payable 681,775

Dec. 31 Interest Expense 511,331

Discount on Notes Payable 511,331

2021
Jan 1. Discount on Notes Payable 511,331
Interest Expense 511,331

Mar.31 Interest Expense 742,943

Discount on Notes Payable 625,482

31 Cash 9,000,000
Notes Payable 9,000,000

5-8. (JFC Company)

(a) Interest Expense

2018 = 6,949,800 x 9% x 8/12 P416,988
2019 = 6,949,800 x 9% x 4/12 = 208,494
6,949,800 x 1.09 = 7,575,282
7,575,282 x 9% x 8/12 = 454,517 P663,011
2020 = 7,575,282 x 9% x 4/12 = 227,258
7,575,282 x 1.09 = 8,257,057
8,257,057 x 9% x 8/12 495,423 P722,681

(b) Notes Payable P6,949,800

Interest Payable (416,988 + 663,011) 1,079,999
Total Notes Payable, including accrued interest P8,029,799

(c) On December 31, 2019, the notes payable including accrued interest shall be reported
among the non-current liabilities, since this amount will be due after more than 12
months.

On December 31, 2020, the notes payable including accrued interest shall be reported
among the current liabilities, since this amount will be due on April 1, 2021, a period of
less than 12 months.

(d)
2018
May 1 Land 6,949,800
Notes Payable 6,949,800

Dec.31 Interest Expense 416,988

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Chapter 5 – Financial Liabilities

Interest Payable 416,988

2019
Dec. 31 Interest Expense 663,011
Interest Payable 663,011

2020
Dec. 31 Interest Expense 722,681
Interest Payable 722,681

2021
Apr 30 Interest Expense 247,520
Interest Payable 247,520
6,949,800 + 416,988 + 663,011
+ 722,681 = 8,752,480
9,000,000 – 8,752,480 = 247,520

30 Notes Payable 6,949,800

Interest Payable 2,050,200
Cash 9,000,000

5-9. (Wendy’s Catering Service) NON-INTEREST BEARING

(a) Present value of the note

800,000 x 3.2397 P2,591,760

9% yield, 4 years, PV of single annuity

(b) Table of Amortization

Periodic Amortization
Date Payment of Discount Amount applied to P Carrying Value
4/1/18 2,591,760
3/31/19 800,000 233,258 566,742 2,025,018
3/31/20 800,000 182,252 617,748 1,407,270
3/31/21 800,000 126,654 673,346 733,924
3/31/22 800,000 66,076* 733,924 -0-
*Rounded off.

Amortization of Discount = CV x 9% yield

(c)
2018
Apr.1 Equipment 2,591,760
Discount on Notes Payable 608,240
Notes Payable 3,200,000
3,200,000 – 2,591,760 = 608,240

Dec.31 Interest Expense 174,944

Discount on Notes Payable 174,944
233,258 x 9/12

2019
Mar31 Interest Expense 58,314
Discount on Notes Payable 58,314
233,258 x 3/12 = 58,314

Notes Payable 800,000

Cash 800,000

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Chapter 5 – Financial Liabilities

Dec.31 Interest Expense 136,689

Discount on Notes Payable 136,689
182,252 x 9/12 = 136,689

2020
Mar31 Interest Expense 45,563
Discount on Notes Payable 45,563
182,252 x 3/12 = 45,583

Notes Payable 800,000

Cash 800,000

Dec.31 Interest Expense 94,990

Discount on Notes Payable 94,990
126,654 x 9/12 = 94,440

2021
Mar31 Interest Expense 31,664
Discount on Notes Payable 31,664
126,654 – 94,990 = 31,664

Notes Payable 800,000

Cash 800,000

Dec.31 Interest Expense 49,557

Discount on Notes Payable 49,557
66,076 x 9/12 = 49,557

2022
Mar31 Interest Expense 16,519
Discount on Notes Payable 16,519
66,076- 49,557 = 16,519

Notes Payable 800,000

Cash 800,000

(1) What is the amortized cost of notes payable as of December 31,2019? Of this amount, how
much shall be classified as current liabilities (2) and as non-current liabilities (3)?

Total Current Portion Non- Current Portion

Notes payable 2,400,000 800,000 1,600,000
Discount on Notes 238,293 (yellow) 45,563 192,730
Payable
Amortized cost 2.161,707 (1) 745,437 (2) 1,407,270 (3)

Current portion of Notes Payable at December 31, 2019

Principal due in 2020 617,748

Interest Accrued at December 31, 2019 136,689
Total Current Portion of Notes Payable 754,437

Table of Amortization
Periodic Amortization
Date Payment of Discount Amount applied to P Carrying Value
4/1/18 2,591,760
3/31/19 800,000 233,258 566,742 2,025,018

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Chapter 5 – Financial Liabilities

3/31/20 800,000 182,252 617,748 1,407,270

3/31/21 800,000 126,654 673,346 733,924
3/31/22 800,000 66,076* 733,924 -0-
*Rounded off.

5-10 (Burgee’s Food Corporation) INTEREST BEARING

(a) Table of Amortization

Periodic Interest Reduction
Date Payment Expense of Principal Carrying Value
10/1/18 2,591,760
9/30/19 800,000 233,258 566,742 2,025,018
9/30/20 800,000 182,252 617,748 1,407,270
9/30/21 800,000 126,654 673.345 733,924
9/30/22 800,000 66,076* 733,924 -0-
*Rounded off.

(b) (Note that the author opted not to prepare reversing entries. Reversing entries may
also be made and resulting account balances will be the same.

2018
Oct. 1 Equipment 2,591,760
Notes Payable 2,591,760

Dec. 31 Interest Expense 58,315

Interest Payable 58,315
233,258 x 3/12

2019
Oct. 1 Notes Payable 566,742
Interest Payable 58,315
Interest Expense 174,943
Cash 800,000
233,258 x 9/12 =174,943

Dec.31 Interest Expense 45,563

Interest Payable 45,563
182,252 x 3/12

2020
Oct. 1 Notes Payable 617,748
Interest Payable 45,563
Interest Expense 136,689
Cash 800,000
182,252 x 9/12 = 136,689

Dec.31 Interest Expense 31,664

Interest Payable 31,664
126,654 x 3/12
2021
Oct. 1 Notes Payable 673,345
Interest Payable 31,664
Interest Expense 94,991
Cash 800,000
126,654 x 9/12 = 94,991

Dec.31 Interest Expense 16,519

Interest Payable 16,519
66,076 x 3/12
2022

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Chapter 5 – Financial Liabilities

Oct. 1 Notes Payable 733,924

Interest Payable 16,519
Interest Expense 49,557*
Cash 800,000
66,076 x 9/12 =49,557*
*Rounded
(c)
Current Non-current Total
Notes Payable P617,748 P1,407,270 P2,025,018
Interest Payable 45,563 -0- 45,563
Amortized Cost, 12/31/19 P663,311 P1,407,270 P2,070,581

5-11. (Ruby Corporation)

At 8% At 12%
Bond issue price 5,405,725 4,632,025
Nominal interest for 2018 250,000 250,000
Interest expense (Effective interest) for 2018 216,229 277,922
Premium/discount amortization in 2018 33,771 27,922
Bond carrying value at December 31, 2019 5,371,954 4,659,947
Nominal interest for 2019 500,000 500,000
Interest expense for 2019 428,351 560,970
Premium/discount amortization in 2019 71,649 60,970
Bond carrying value at December 31, 2019 5,300,305 4,720,917

Computations:
At 8%: Issue price = (5,000,000 x 0.6756) + (250,000 x 8.1109)
= 3,378,000 + 2,027,725 = 5,405,725

Interest Interest Premium Bond

Date Paid Expense Amortization Carrying Value
06/30/18 5,405,725
12/31/18 250,000 216,229 33,771 5,371,954
06/30/19 250,000 214,878 35,122 5,336,832
12/31/19 250,000 213,473 36,527 5,300,305

At 12%: Issue price = (5,000,000 x 0.5584) + (250,000 x 7.3601)

= 2,792,000 + 1,840,025 = 4,632,025

Interest Interest Discount Bond

Date Paid Expense Amortization Carrying Value
06/30/18 4,632,025
12/31/18 250,000 277,922 27,922 4,659,947
06/30/19 250,000 279,597 29,597 4,689,544
12/31/19 250,000 281,373 31,373 4,720,917

5-12. (Fire Company)

(a) Issue price
Present value of face value (4,000,000 x 0.6756) P2,702,400
Present value of interest payments (200,000 x 8.1109) 1,622,180
Issue price P4,324,580

(b) Amortization Table

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Chapter 5 – Financial Liabilities

Interest Interest Premium Bond Carrying

Date Paid Expense Amortization Value
3/01/18 - - - 4,324,580
8/31/18 200,000 172,983 27,017 4,297,563
2/28/19 200,000 171,903 28,097 4,269,466
8/31/19 200,000 170,779 29,221 4,240,245

(c)
2018
Mar. 1 Cash 4,324,580
Bonds Payable 4,000,000
Premium on Bonds Payable 324,580

Aug. 31 Interest Expense 172,983

Premium on Bonds Payable 27,017
Cash 200,000

Dec. 31 Interest Expense (171,903 x 4/6) 114,602

Premium on Bonds Payable 18,731
Interest Payable (200,000 x 4/6) 133,333

2019
Feb. 28 Interest Expense (171,903 x 2/6) 57,301
Premium on Bonds Payable (28,097 x 2/6) 9,366
Interest payable 133,333
Cash 200,000

5-13. (Mercury Corporation)

(a)
2018
Aug. 1 Cash 4,458,429
Discount on Bonds Payable 708,238
Interest Payable 166,667
Bonds Payable 5,000,000
5M x 8% x 5/12 = 166,667
4,458,429 – 166,667 = 4,291,762
5,000,000 – 4,291,762 = 708,238

Dec. 31 Interest Expense 178,823

Interest Payable 166,666
Discount on Bonds Payable 12,157
5M x 8% x 5/12 = 166,666
4,291,762 x 10% x 5/12 = 178,823
178,823 – 166,666 = 12,157
2019
Mar. 1 Interest Expense 71,529
Interest Payable 333,333
Discount on Bonds Payable 4,862
Cash 400,000
4,291,762 x 10% x 2/12 = 71,529
5M x 8% x 2/12 = 66,667
71,529 – 66,667 = 4,862
5M x 8% = 400,000

Dec. 31 Interest Expense 359,065

Discount on Bonds Payable 25,732

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Chapter 5 – Financial Liabilities

Interest Payable 333,333

4,291,762 + 12,157 + 4,862 = 4,308,781
4,308,781 x 10% x 10/12 = 359,065
5M x 8% x 10/12 = 333,333
359,065 – 333,333 = 25,732
(Amounts can be conveniently computed by using a partial amortization table as follows)

Effective Nominal Amortization Carrying value

August 1, 2018 4,291,762
February 28, 2019 250,353 233,333 17,020 4,308,782
February 28, 2020 430,878 400,000 30,878 4,339,659

Interest expense for 2018: 250,353 x 5/7 = 178,824

Interest expense for 2019: (250,353 x 2/7) + (430,878 x 10/12) = 430,594

Carrying amount, December 31, 2018: 4,291,762 + (17,020 x 5/7) = 4,303,919

Carrying amount, December 31, 2019: 4,308,782 + (30,878 x 10/12) = 4,334,514

(b)
2018 2019
August 1 – December 31, 2018
4,291,761 x 10% x 5/12 178,823
January 1 – March 1, 2019
4,291,761 x 10% x 2/12 71,529
March 1 – December 31, 2019
4,308,780 x 10% x 10/12 359,065
Interest Expense for the year 178,823 430,594

(c) December 31, 2018 December 31, 2019

Bonds Payable P5,000,000 P5,000,000
Less Discount on Bonds Payable 696,081 665,487
Carrying amount P4,303,919 P4,334,513

5-14. (Metal Corporation)

Issue price of bonds and warrants (5,000,000 x 1.08) P5,400,000

MV of bonds without warrants (5,000,000 x 1.02) 5,100,000
Value assigned to warrants P 300,000

(a) Cash 5,400,000

Premium on Bonds Payable 100,000
Bonds Payable 5,000,000
Share Warrants Outstanding 300,000

(b) Cash (5,000 x 2 x 140) 1,400,000

Share Warrants Outstanding 300,000
Ordinary Share Capital (5,000 x 2 x 100) 1,000,000
Share Premium - Ordinary 700,000

5-15. (Onyx)
(a) Issue price of bonds with warrants (1,000,000 x 1.04) P1,040,000
Bond price without warrants
1,000,000 x 0.4523 452,300
100,000 x 4.5638 456,380 908,680
Value of share warrants P131,320

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Chapter 5 – Financial Liabilities

(b) Interest Expense for 2018 (908,680 x 12% x 10/12) P90,868

(c) Bond carrying value, March 1, 2018 P908,680

Amortization through December 31, 2018
908,680 x 12% x 10/12 90,868
1,000,000 x 10% x 10/12 83,333 7,535
Bond carrying value, December 31, 2018 901,145

(d) Cash (1,000 x 30 x 40) 1,200,000

Share Warrants Outstanding 131,320
Ordinary Share Capital (30,000 x 25) 750,000
Share Premium - Ordinary 581,320

5-16. (Celeron Company)

(a) Issue price of convertible bonds (2M x 1.01) P2,020,000

Issue price of bonds without conversion privilege
2,000,000 x 0.5674 1,134,800
200,000 x 3.6048 720,960 1,855,760
Allocation to equity 164,240

(b) Amortization Table

Interest Interest Premium Bond Carrying
Date Paid Expense Amortization Value
07/01/18 - - - 1,855,760
06/30/19 200,000 222,691 22,691 1,878,451
06/30/20 200,000 225,414 25,414 1,903,865
06/30/20 (1,142,319)
06/30/20 761,546
06/30/21 80,000 91,386 11,386 772,932
06/30/22 80,000 92,752 12,752 785,684
06/30/23 80,000 94,316 14,316* 800,000
*Adjusted; difference is due to rounding off.

(c)
2018
July 1 Cash 2,020,000
Discount on Bonds Payable 144,240
Bonds Payable 2,000,000
PIC Arising from Bond Conversion Privilege 164,240
2019
June 30 Interest Expense 222,691
Discount on Bonds Payable 22,691
Cash 200,000

2020
June 30 Interest Expense 225,414
Discount on Bonds Payable 25,414
Cash 200,000

30 Bonds Payable 1,200,000

PIC Arising from Bond Conversion Privilege 86,544
Discount on Bonds Payable 57,681
Ordinary Share Capital 960,000
Share Premium - Ordinary 268,863

Carrying value of bonds converted (1,903,865 x120/200) 1,142,319

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Chapter 5 – Financial Liabilities

Face value of bonds converted 1,200,000

Discount on bonds payable cancelled 57,681
Value of equity converted (144,240 x 120/200) 86,544
Par value of ordinary shares issued (120 x 80 x 100) 960,000

2021
June 30 Interest Expense 91,386
Discount on Bonds Payable 11,386
Cash 80,000

5-17. (Lim Corporation)

(a) Cash 5,200,000

Discount on Bonds Payable 379,180
Bonds Payable 5,000,000
PIC Arising from Bond Conversion Privilege 579,180
Issue price (5M x 1.04) 5,200,000
Present value of the bonds
5M x .6209 3,104,500
400,000 x 3.7908 1,516,320 4,620,820
Amount allocated to the
conversion privilege 579,180
Discount on bonds payable
5,000,000 – 4,620,820 379,180

Refer to the following table for the amounts included in the journal entries.
Interest Interest Discount Bond
Date Paid Expense Amortization Carrying Value
01/02/18 4,620,820
12/31/18 400,000 462,082 62,082 4,682,902
12/31/19 400,000 468,290 68,290 4,751,192
12/31/20 400,000 475,119 75,119 4,826,311
12/31/20 (965,262)
12/31/20 3,861,049
12/31/21 320,000 386,105 66,105 3,927,154
12/31/22 (1,963,577)
12/31/22 1,963,578
12/31/22 160,000 196,422* 36,422* 2,000,000
*Adjusted due to rounding off

(b) Interest Expense 468,290

Cash 400,000
Discount on Bonds Payable 68,290

(c) Interest Expense 475,119

Cash 400,000
Discount on Bonds Payable 75,119

Bonds Payable 1,000,000

PIC Arising from Bond Conversion Privilege 115,836
Discount on Bonds Payable 34,738
Ordinary Share Capital (200 x 40 x 100) 800,000
Share Premium – Ordinary 281,098

Carrying amount of bonds converted

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Chapter 5 – Financial Liabilities

4,826,311 x 1/5 965,262

Carrying amount of conversion
privilege cancelled (579,180x 1/5) 115,836
Total 1,081,098
Par value of shares issued
200 x 40 x 100 800,000
Share Premium 281,098

(d) Interest Expense 386,105

Cash 320,000
Discount on Bonds Payable 66,105

Bonds Payable 2,000,000

PIC Arising from Bond Conversion Privilege 231,672
Discount on Bonds Payable 36,423
Cash (2,000,000 x 1.01) 2,020,000
Gain on Retirement of Bonds 17,633
PIC from Unexercised Bond Conversion Privilege 157,616

Retirement price 2,020,000

Retirement price on account of liability
(2,000,000 + 160,000) x .9009 1,945,944
Retirement price on account of equity 74,056

Carrying value of bonds retired

3,927,154 x 1/2 1,963,577
Retirement price of bonds 1,945,944
Gain on retirement of bonds 17,633

Carrying value of equity cancelled 231,672

Retirement price on account of equity 74,056
Gain on cancellation taken to equity 157,616

(e) Interest Expense 196,422

Cash 160,000
Discount on Bonds Payable 36,422

Bonds Payable 2,000,000

Cash 2,000,000

5-18. (Emerald Corporation)

(a) Carrying value, December 1, 2019 (see, table) 5,323,145

Amortization for one month (33,843 x 1/6) 5,640
Carrying value, December 31, 2019 5,317,505

The following tables may facilitate the computations required in this problem.
Interest Interest Premium Bond
Date Paid Expense Amortization Carrying Value
12/01/18 - - - 5,386,072
06/01/19 300,000 269,304 30,696 5,355,376
12/01/19 300,000 267,769 32,231 5,323,145
06/01/20 300,000 266,157 33,843 5,289,302
12/01/20 300,000 264,465 35,535 5,253,767
06/01/21 300,000 262,688 37,312 5,216,455

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Chapter 5 – Financial Liabilities

12/01/21 300,000 260,823 39,177 5,177,278

Carrying amount of remaining bonds on June 1, 2021

5,216,455 x 2/5 = 2,086,582

06/01/21 2,086,582
12/01/21 120,000 104,329 15,671 2,070,911
06/01/22 120,000 103,546 16,454 2,054,456
12/01/22 120,000 102,723 17,277 2,037,179
06/01/23 120,000 101,859 18,141 2,019,038
12/01/23 120,000 100,962* 19,038 2,000,000
*Adjusted; difference is due to rounding off.

(b) Interest Expense for year 2019

January 1-June 1, 2019 (269,304 x 5/6) 224,420
June 1-December 1, 2019 267,769
December 1-31, 2016 (266,157 x 1/6) 44,360
Total 536,549

(c) Carrying value of bonds retired on June 1, 2021

5,216,455 x 3/5 3,129,873
Amortization June 1-August 1, 2018 (39,177 x 2/6 x 3/5) 7,835
Carrying value of bonds retired on August 1, 2021 3,122,038

(d) Carrying value of bonds retired 3,122,038

Redemption price (3,000,000 x 1.05) 3,150,000
Loss on redemption of bonds 27,962

(e) Carrying value of remaining bonds, June 1, 2021 2,086,582

Amortization, June 1 – December 1 15,671
Dec. 1-31, 2021 (16,454 x 1/6) 2,742 (18,413)
Carrying value of remaining bonds, December 31, 2021 2,068,169

(f) On bonds redeemed: 2021 2022

January 1-June 1, 2021 (262,688 x 3/5 x 5/6) 131,344
June 1-August 1, 2021
(260,823 x 3/5 x 2/6) 52,164
On remaining bonds
January 1-June 1, 2021 (262,688 x 2/5 x 5/6) 87,563
June 1-December 1, 2021 104,329
December 1-31, 2021 (103,546 x 1/6) 17,258
January 1-June 1, 2022 (103,546 x 5/6) 86,288
June 1-December 1, 2022 102,723
December 1-31, 2022 (101,859 x 1/6) 16,977
Interest Expense 392,658 205,988
5-19. (Ohio Company)

(a)
Amortization of premium for 2018 (see table)

185,270

(b)
Carrying value of bonds on December 31, 2018 (see table)

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11,849,272

Date
Interest Paid
Interest Expense
Premium
Amortization
Bond Carrying Value

01/02/18
-
-
-
12,684,120

12/31/18
1,200,000
1,014,730
185,270
12,498,850

12/31/19
1,200,000
999,908
200,092
12,298,758

12/31/20
1,200,000
983,901
216,099
12,082,659

12/31/21
1,200,000
966,613
233,387
11,849,272

12/31/21

7,109,563

12/31/22
720,000
568,765

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Chapter 5 – Financial Liabilities

151,235
6,958,328

(c)
Carrying value of bonds called (11,849,272 x 4/10)

4,739,709

Call price/retirement price (4,000,000 x 110%)

4,400,000

Gain on retirement of bonds

339,709

(d)
Interest expense for year 2022 (see table)

568,765

(e)
Carrying value of the bonds, December 31, 2022

6,958,328

5-20. (Jim Company)

Nominal Effective Discount Bond

Date Interest Interest Amortization Carrying value
03/01/18 3,926,000
09/01/18 170,000 176,670 6,670 3,932,670
03/01/19 170,000 176,970 6,970 3,939,640
09/01/19 170,000 177,284 7,284 3,946,924
03/01/20 170,000 177,612 7,612 3,954,536
09/01/20 170,000 177,954 7,954 3,962,490
03/01/21 170,000 178,312 8,312 3,970,802
09/01/21 170,000 178,686 8,686 3,979,488
03/01/22 170,000 179,077 9,077 3,988,565

(a) Interest expense recorded on September 1, 2018 P176,670

Discount amortization recorded on September 1, 2018 P 6,670

(b) Carrying amount of the bonds, September 1, 2019 P3,946,924

Amortization through December 31, 2019 (7,612 x 4/6) 5,075
Carrying amount of the bonds, December 31, 2019 P3,951,999

(c) Retirement price (4M x 1.01) P4,040,000

Accrued interest (4,000,000 x 8.5% x 1/12) 28,333

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Chapter 5 – Financial Liabilities

Amount of cash paid on September 30, 2021 P4,068,333

(d) Carrying value, September 1, 2021 (see table) P3,979,488

Amortization through September 30, 2021 (9,077 x 1/6) 1,513
Carrying value, September 30, 2021 P3,981,001
Retirement price (at 101) 4,040,000
Loss on retirement of bonds P 58,999

5-21. (Kim Company)

(a) Issue price of the bonds

Principal Interest Amount
Due Date Due Due Due PV Factor Present Value
12/31/18 2,000,000 800,000 2,800,000 0.8929 2,500,120
12/31/19 2,000,000 640,000 2,640,000 0.7972 2,104,608
12/31/20 2,000,000 480,000 2,480,000 0.7118 1,765,264
12/31/21 2,000,000 320,000 2,320,000 0.6355 1,474,360
12/31/22 2,000,000 160,000 2,160,000 0.5674 1,225,584
Selling price of bonds P9,069,936

(b) Amortization Table

Principal Interest Effective Discount Carrying
Due Date Due Due Interest Amortization Value, end
12/31/15 P9,069,936
12/31/16 2,000,000 800,000 1,088,392 288,392 7,358,328
12/31/17 2,000,000 640,000 882,999 242,999 5,601,327
12/31/18 2,000,000 480,000 672,159 192,159 3,793,486
12/31/19 2,000,000 320,000 455,218 135,218 1,928,704
12/31/20 2,000,000 160,000 231,296 71,296* -0-
*Adjusted; difference is due to rounding off.

(c)
2019
Dec. 31 Interest Expense 1,088,392
Discount on Bonds Payable 288,392
Cash 800,000

31 Bonds Payable 2,000,000

Cash 2,000,000
2020
Dec. 31 Interest Expense 882,999
Discount on Bonds Payable 242,999
Cash 640,000

31 Bonds Payable 2,000,000

Cash 2,000,000

5-22. (Blue Sapphire Corporation)

(a) Issue price of the bonds

Principal Interest Amount
Due Date Due Due Due PV Factor Present Value
12/31/18 2,000,000 960,000 2,960,000 0.9259 2,740,664

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12/31/19 2,000,000 720,000 2,720,000 0.8573 2,331,856

12/31/20 2,000,000 480,000 2,480,000 0.7938 1,979,784
12/31/21 2,000,000 240,000 2,240,000 0.7350 1,646,400
Selling price of bonds 8,698,704

(b) Amortization Table

Principal Interest Effective Premium Carrying
Due Date Due Due Interest Amortization Value, end
01/01/18 8,698,704
12/31/18 2,000,000 960,000 695,896 264,104 6,434,600
12/31/19 2,000,000 720,000 514,768 205,232 4,229,368
12/31/20 2,000,000 480,000 338,349 141,651 2,087,717
12/31/21 2,000,000 240,000 152,283 87,717* -0-
*Adjusted; difference is due to rounding off.

(c)
2018
Jan. 1 Cash 8,698,704
Bonds Payable 8,000,000
Premium on Bonds Payable 698,704

Dec. 31 Interest Expense 695,896

Premium on Bonds Payable 264,104
Cash 960,000

Bonds Payable 2,000,000

Cash 2,000,000

2019
Dec. 31 Interest Expense 514,768
Premium on Bonds Payable 205,232
Cash 720,000

Bonds Payable 2,000,000

Cash 2,000,000

2020
Dec. 31 Interest Expense 338,349
Premium on Bonds Payable 141,651
Cash 480,000

Bonds Payable 2,000,000

Cash 2,000,000

2021
Dec. 31 Interest Expense 152,283
Premium on Bonds Payable 87,717
Cash 240,000

Bonds Payable 2,000,000

Cash 2,000,000

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Chapter 5 – Financial Liabilities

5-23. (a) (South Company)

Notes Payable 900,000

Interest Payable 90,000
Accumulated Depreciation 400,000
Equipment 1,000,000
Gain on Disposal of Equipment 200,000
Gain on Debt Restructuring 190,000

(b) (Joy Company)

Bonds Payable 10,000,000

Interest Payable 900,000
Ordinary Share Capital 7,500,000
Share Premium – Ordinary 900,000
Gain on Debt Restructuring 2,500,000

(c) (Capshell)

Notes Payable 10,000,000

Interest Payable 1,000,000
Restructured Notes Payable 7,459,264
Gain on Debt Restructuring 3,540,736

Present value of future payments:

8,000,000 x 0.7972 6,377,600
8,000,000 x 8% x 1.6901 1,081,664
Total 7,459,264
Carrying value of liability 11,000,000
Difference 3,540,736

3,740,736/11,000,000 = 32%, thus the restructuring qualifies

as a derecognition of the old liability and creation of a new
liability.

The old liability shall be cancelled; the new liability shall be

measured based on the discounted cash flow of the future
payments discounted at the entity’s incremental borrowing
rate considering its credit rating:

(d) (Solid Company)

Notes Payable 3,000,000

Interest Payable 330,000
Restructured Notes Payable 3,111,024
Premium on Restructured Notes Payable 218,976

Present value of future payments

3,000,000 x 0.5935 = 1,780,500
3,000,000 x 12% x 3.6959 = 1,330,524
Total 3,111,024
Carrying value of liability 3,330,000
Difference 218,976

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Chapter 5 – Financial Liabilities

218,976/3,330,000 = 6.6% which is < 10% of 3,330,000.

Thus, the debt restructuring does not qualify for derecognition
of the old obligation. No gain shall be recognized and a new
effective interest rate shall be computed.

MULTIPLE CHOICE QUESTIONS

Theory

MC1 D MC6 A MC11 D MC16 B MC21 B

MC2 B MC7 A MC12 D MC17 B MC22 A
MC3 B MC8 C MC13 C MC18 B
MC4 C MC9 C MC14 C MC19 D
MC5 D MC10 D MC15 C MC20 A

Problems

MC23 D Reported amount of accounts payable P540,000

Goods in transit purchased FOB shipping point 40,000
Goods lost in transit but shipped FOB shipping point 15,000
Correct amount of accounts payable, December 31, 2019 P585,000

MC24 A Net proceeds (100%-10%) 90%

Effective interest rate (10%/90%) 11.11%

MC25 A Interest expense (59,737 – 10,000) x 10% P4,974

Carrying amount of note, January 1, 2019 P49,737
Reduction in principal at December 31, 2019
Annual payment P20,000
Interest expense 4,974 15,026
Carrying amount of note, December 31, 2019 P34,711

MC26 B Interest expense for 2019 (2,400,000 x 12%) P288,000

MC27 D Carrying value, December 31, 2019 (2,400,000 -1,000,000 + 288,000) P1,688,000
Amount due on December 31, 2020 (current)
Annual payment P1,000,000
Amortization of discount (1,688,000 x 12% 202,560 P797,440

MC28 B Discount on notes payable, January 1, 2019 (3,000,000 – 2,400,000) P600,000

Amortization of discount on December 31, 2019 (see above) 288,000
Discount on notes payable, December 31, 2019 P312,000

MC29 B Debenture bonds P1,000,000

Serial bonds P2,000,000

MC30 D Present value of maturity value (1,000,000 x .38554) P385,540

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Chapter 5 – Financial Liabilities

Present value of interest payments (1M x 8% x 6.14457) 491,566

Total issue price P877,106

MC31 B Present value of maturity value (1,000 x 0.31) P310.00

Present value of interest payment (1,000 x 4% x 11.47) 458.80
Issue price per P1,000 bond P768.80

MC32 A Issue price (2,000,000 x 0.97) P1,940,000

Accrued interest (2,000,000 x 10% x 3/12) 50,000
Cash received from bond issuance P1,990,000

MC33 B Bond price without warrants (2,000 x 1,040) P2,080,000

Face value of bonds 2,000,000
Premium on bonds payable P 80,000

MC34 B Retirement price (4,000,000 x 0.97) P3,880,000

Accrued interest (4,000,000 x 12% x 3/12) 120,000
Total cash paid for retirement of bonds P4,000,000

MC35 C Carrying amount of bonds retired (1,000,000 + 70,000) P1,070,000

Retirement price (1,000,000 x .96) 960,000
Gain on retirement of bonds P 110,000

MC36 A Accrued interest (1,000,000 x 12% x 1/12) P10,000

MC37 B Issue price (1,000,000 x 1.02) P1,020,000

Transaction costs (50,000)
Initial carrying amount, February 1, 2019 P 970,000

MC38 D Carrying value of bonds converted (1,000,000 -30,000 + 50,000) P1,020,000

Par value of shares issued upon conversion (40,000 sh x 20) (800,000)
Expenses incurred in connection with the conversion (10,000)
Share premium upon conversion P 210,000

MC39 D No gain or loss is recognized upon conversion of bonds.

MC40 C Interest expense (1,032,880 x 10% x 6/12) P51,644

MC41 A Carrying amount, July 1, 2019 P1,032,880

Amortization of premium
Effective interest (1,032,880 x 5%) 51,644
Nominal interest (1,000,000 x 6%) 60,000 8,356
Carrying amount, December 31, 2019 P1,024,524

MC42 A Carrying amount, January 1, 2019 P1,878,000

Effective interest (1,878,000 x 10%) 187,800
Nominal interest (2,000,000 x 9%) 180,000 7,800
Carrying amount, December 31, 2019 P1,885,800

MC43 B Carrying amount, January 1, 2019 (10M – 1,145,000) = P8,855,000

Effective interest (8,855,0000 x 6%) P531,300
Nominal interest (10M x 5%) 500,000
Increase in carrying amount (amort of discount), Jan. 1- Jun 30 P 31,300

MC44 C Effective interest (5M x 1.136 = 5,680,000; 5,680,000 x 4%) P 227,200

MC45 A Unamortized bond premium, June 30, 2018 (2,100,000 – 2,000,000) P100,000
Effective interest (2,100,000 x 6%) P126,000

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Chapter 5 – Financial Liabilities

Nominal interest (2,000,000 x 7%) 140,000 14,000

Unamortized bond premium, June 30, 2019 P 86,000

MC46 D Interest expense, January 1-June 30 (1,032,880 x 5%) P51,644

Interest expense, July 1-December 31
(6% x 1,000,000) – 51,644 = 8,356; (1,032,880 – 8,356) x 5% 51,226
Total interest expense for 2019 P102,870

MC47 D Carrying value, December 31, 2019 P1,902,800

Principal paid (400,000)
Amortization of discount
Effective interest (1,902,800 x 10%) 190,280
Nominal interest (2,000,000 x 8%) 160,000 30,280
Carrying value, December 31, 2020 P1,533,080

MC48 D Carrying value of the debt (5,000,000 + 500,000) P5,500,000

Carrying value of land transferred 3,000,000
Amount taken to profit or loss P2,500,000
MC49 D Carrying value of the debt (6,000,000 + 600,000) P6,600,000
Present value of restructured debt
6,000,000 x 0.621 3,726,000
6M x 12% x 3.791 2,729,520 6,455,520
Gain on restructuring P 144,480
144,480/6,600,000 = 2%; this is less than 10%;
Hence, no gain is recognized P0

MC50 C Carrying value of the debt (6,000,000 + 600,000) P6,600,000

Present value of restructured debt
5,000,000 x 0.6209 3,104,500
5M x 12% x 3.7908 2,274,480 5,378,980
Gain on debt restructuring P1,221,020

MC51 B Carrying value of the debt (8,000,000 + 640,000) P8,640,000

Present value of restructured debt
6,000,000 x 0.8573 5,143,800
6M x 10% x 1.7833 1,069,980 6,213,780
Gain on debt restructuring P2,426,220

MC52 B Carrying value of the debt (10,000,000 + 1,000,000) P11,000,000

Market value of shares issued (150,000 x 65) 9,750,000
Amount reported in profit or loss P 1,250,000

80