De La Salle Lipa

College of Business, Economics, Accountancy and Management

Accountancy Department
Financial Accounting 2 – Non-Current Liabilities

Name:______________________________ Score:____________
Year & Section:___________

Direction: Encircle the letter of the best answer.

1. On March 1, 2014, Eavesdropper Company issued 5,000 of its P 1,000 bonds at 110 plus accrued interest. The entity paid bond
issue cost of 300,000. The bonds were dated November 1, 2013, mature on November 1, 2023 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, 2014?
a. 5,700,000 c. 5,400,000
b. 5,200,000 d. 5,500,000

2. During 2014, Edible Company issued 3,000 of its 9% P 1,000 face value bonds at 102. In connection with the sale of bonds, the
entity paid the following costs:
Promotion cost 20,000
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. 400,000 c. 300,000
b. 380,000 d. P 0

3. On January 1, 2014, Fabulous Company issued 9% bonds in the amount of P 5M which mature on January 1, 2024. The bonds were
issued for 4,695,000 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, 2014?
a. 4,695,000 c. 4,714,500
b. 4,704,750 d. 5,000,000

4. On January 1, 2014, Fallacy Company issued 5-year bonds with face value of P 5M at 110. The entity paid bond issue cost of
80,000 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, 2014, what should be reported as
carrying amount of the bonds payable?
a. 5,000,000 c. 5,345,200
b. 5,400,000 d. 5,430,000

5. On December 31, 2014, Gaiety Company issued 5,000 of its 8% 10-year P 1,000 face value bonds with detachable warrants at 110.
Each bond carried a detachable warrant for 10 ordinary shares of 100 par value at a specified option price of 120. Immediately after
issuance, the market value of the bonds without warrants was 4.8M and the market value of the warrants was 1.2M.
On December 31, 2014, what amount should be reported as bonds payable?
a. 5,500,000 c. 4,400,000
b. 4,800,000 d. 5,000,000

6. Habitable Company issued 5,000 convertible bonds on January 1, 2014. The bonds have a three-year term and are issued at 110
with a face value of 1,000 per bond. Interest is payable annually in arrears at a nominal 6% interest rate. Each bond is convertible at
any time up to maturity into 100 shares with par value of P 5. It is reliably determined that the bonds would sell only at 4.6M without
the conversion privilege. What is the equity component of the issuance of the convertible bonds on January 1, 2014?
a. 500,000 c. 900,000
b. 400,000 d. P 0

7. On July 1, 2014, after recording interest and amortization, Hackneyed Company converted P 5M of its 12% convertible bonds into
50,000 shares of P 50 par value. On the conversion date, the carrying amount of the bonds was P 6M, the market value of the bonds
was P 6.5M, and the share was publicly trading at 150. The entity incurred 100,000 in connection with the conversion. When the
bonds were originally issued, the equity component was recorded at P 1.5M. 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
8. On September 1, 2013, Rabid Company borrowed on a P 1,350,000 note payable form a bank. The note bears interest at 12% and is
payable in three equal annual principal payments of P 450,000. On this date, the bank’s prime rate was 11%. The first annual payment
for interest and principal was made on September 1, 2014. On December 31, 2014, what amount should be reported as accrued interest
payable?
a. 54,000 c. 36,000
b. 49,500 d. 33,000

9. On March 1, 2013, Radiance Company borrowed P 1M and signed a two-year note bearing interest at 12% per annum compounded
annually. Interest is payable in full at maturity on February 28, 2015. What amount should be reported as accrued interest payable on
December 31, 2014?
a. 100,000 c. 232,000
b. 120,000 d. 240,000

10. Sacrilege Company frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a
12% interest rate, with interest payable at maturity. The entity repaid each loan on its scheduled maturity date.
Date of loan Amount Maturity date Term of loan
11/1/2013 500,000 10/31/2014 1 year
2/1/2014 1,500,000 7/31/2014 6 months
5/1/2014 800,000 1/31/2015 9 months

The entity records interest expense when the loans are repaid. As a result only interest expense of 150,000 was recorded in 2014. If no
correction is made, by what amount would 2014 interest expense be understated?
a. 54,000 c. 64,000
b. 62,000 d. 72,000

11. Bonds that mature on a single date are called

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

12. They are high-risk, high-yield bonds issued by companies that are heavily in debt or otherwise in weak financial condition
a. zero-interest bonds c. junk bonds
b. unsecured bonds d. bearer bonds

13. Bonds that provide the issuing corporation the right to call and retire the bonds prior to their maturity
a. callable bonds c. convertible bonds
b. registered bonds d. secured bonds

14. In theory, 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 bond maturity value 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 to be made during the life of the bond
d. the sum of the face amount of the bond and the periodic interest payments

15. Market price of a bond issued at a discount is the present value of its principal amount at the market (effective) rate of interest
a. plus the present value of all future interest payments at the market rate of interest
b. plus the present value of all future interest payments at the rate of interest stated on the bond
c. minus the present value of all future interest payments at the market rate of interest
d. minus the present value of all future interest payments at the rate of interest stated on the bond

16. For a bond issue that sells for more than its par or face value, the market rate of interest is
a. dependent on the rate stated on the bond c. less than the rate stated on the bond
b. equal to the rate stated on the bond d. higher than the rate stated on the bond

17. Unamortized bond premium should be reported on the balance sheet of the issuer as a
a. direct addition to the face amounts of the bonds c. deferred credit
b. direct addition to the present value of the bonds d. deduction on the issue costs

18. Which of the following is true when the effective interest method of amortizing bond discount is used?
a. the interest rate decreases each period c. interest expense remains constant for each period
b. interest expense increases each period d. interest expense varies from period to period

19. JKL Co. neglected to amortize premium on outstanding 20-year bonds payable. What is the effect of the failure to record premium
amortization on interest expense and bond carrying value, respectively?
a. Understated, understated c. overstated, overstated
b. understated, overstated d. overstated, understated
20. MNO Co. neglected to amortize discount on outstanding 20-year bonds payable. What is the effect of the failure to record discount
amortization on interest expense and bond carrying value, respectively?
a. Understated, understated c. overstated, overstated
b. understated, overstated d. overstated, understated

21. PQR, Inc. issued bonds with a maturity amount of 500,000 and a maturity of ten years from date of issue. If the bonds were issued
at a discount, this indicates that
a. the yield rate of interest exceeded the stated rate c. the yield and stated rates are the same
b. the stated rate of interest exceeded the yield rate d. no necessary relationship exists between the two rates

22. Under the effective interest method of bond discount or premium amortization, the periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds
b. the effective (yield) rate of interest multiplied by the face value of the bonds
c. the stated (nominal) rate of interest multiplied by the beginning-of-period carrying amount of the bonds
d. the effective (yield) rate of interest multiplied by the beginning-of-period carrying amount of the bonds

23. When the effective interest method is used to amortize bond premium or discount, the periodic amortization will
a. increase if the bonds were issued at a discount c. increase if the bonds were issued at a premium
b. decrease if the bonds were issued at a premium d. increase if the bonds were issued at either a discount or a premium

24. If bonds are issued between interest payment dates, the entry on the books of the issuing corporation could include a
a. debit to Interest payable c. credit to Interest expense
b. credit to Interest receivable d. credit to Unearned interest

25. The interest rate written in the terms of the bond indenture is known as
a. coupon rate c. stated rate
b. nominal rate d. coupon rate, nominal rate, stated rate

26. When the interest payment dates of a bond are April and October 1, and the bond is issued on June 1, the amount of interest
expense at December 31 of the year of issuance would be for
a. two months c. six months
b. seven months d. eight months

27. How would the carrying amount of the bonds payable be affected by amortization of each of the following:
Discount Premium
a. No effect No effect
b. Increase No effect
c. Increase Decrease
d. Decrease Increase

28. How are the proceeds from issuing a compound instrument allocated between the liability and equity components?
a. First, the liability component is measured at fair value, and then the remainder is allocated to the equity instrument.
b. First, the equity component is measured at fair value, and then the remainder is allocated to the liability component
c. The proceeds are allocated to the liability and equity components based on the relation between their respective fair values.
d. The liability component is measured at face value less the intrinsic value of the equity component.

29. Use of the effective interest method in amortizing a discount on bonds payable would result
a. A decreasing amount of discount amortization each period over the life of the bonds.
b. A constant amount of discount amortization each period over the life of the bonds.
c. An increasing amount of discount amortization each period over the life of the bonds.
d. Cannot be determined from the information given.

30. In theory, the proceeds from the sale of a bond will be equal to the
a. Face value of the bond
b. 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. Face value of the bond plus the present value of the interest payments made during the life of the bond.
d. Face value of the bond plus interest payments made during the life of the bond.