QUIZ 2 AE 211

Multiple Choice Theory

Select the BEST answer from the given choices. 1 point each.

The proceeds from a bond issued with detachable share purchase warrants should be
accounted for as *
1 point

Entirely bonds payable

Entirely stockholders' equity
Partly bonds payable and partly unearned revenue
Partly bonds payable and partly stockholders' equity

When the interest payment dates of a bond are May 1 and November 1, and a bond
issue is sold on June 1, the amount of cash received by the issuer will be *
1 point

Decreased by accrued interest from June 1 to November 1

Decreased by accrued interest from May 1 to June 1
Increased by accrued interest from June 1 to November 1
Increased by accrued interest from May 1 to June 1

An entity neglected to amortize the discount on outstanding bonds payable. What is

the effect of the failure to record discount amortization on interest expense and bond
carrying amount, respectively? *
1 point

Understated and understated

Understated and overstated
Overstated and overstated
Overstated and understated

Under a debt restructuring involving substantial modification of terms, the future cash
flows under the new terms shall be discounted using *
1 point

Original effective interest rate

Interest rate under the new terms
Market rate of interest
Prime interest rate

When the bonds are issued with share warrants, the equity component is equal to *
1 point

Zero
The excess of the proceeds over the face amount of the bonds
The market value of the share warrants.
The excess of the proceeds over the fair value of the bonds without the share warrants .

This study source was downloaded by 100000843864916 from CourseHero.com on 09-21-2022 02:51:09 GMT -05:00

https://www.coursehero.com/file/69571197/AE-211-Quiz-2docx/
 QUIZ 2 AE 211

Zero coupon bonds *

1 point

Offer a return in the form of deep discount off the face amount
Result in zero interest expense for the issuer
Result in zero interest revenue for the investor
Are reported as shareholders' equity by the issuer

A bond issued on June 1 of the current year has interest payment dates of April 1 and
October 1. Bond interest expense for the current year ended December 31 is for a
period of *
1 point

Three months
Four months
Six months
Seven months

If the bonds are issued at a premium, this indicates that *

1 point

The effective rate of interest exceeds the nominal rate.

The nominal rate exceeds the effective rate.
The effective rate and nominal rates are the same
No necessary relationship exists between the two rates.

What is the effective interest rate of a bond or other debt instrument measured at
amortized cost? *
1 point

The stated coupon rate of the debt instrument.

The interest rate currently charged by the entity or by others for similar debt instruments.
The interest rate that exactly discounts estimated future cash payments through the expected life
of the debt instrument or when appropriate, a shorter period to the net carrying amount of the
instrument.
The basic risk-free interest rate that is derived from observable government bond prices.

Under the effective interest method of amortization, bond issue cost shall be *
1 point

Recognized as outright expense

Accounted for as a deferred charge
"Lumped" with the premium on bonds payable or "netted" against the discount of bonds payable
"Lumped" with the discount on bonds payable or "netted" against the premium of bonds payable

When bonds are retired prior to maturity date *

1 point

GAAP has been violated

This study source was downloaded by 100000843864916 from CourseHero.com on 09-21-2022 02:51:09 GMT -05:00

https://www.coursehero.com/file/69571197/AE-211-Quiz-2docx/
 QUIZ 2 AE 211

An ordinary gain or loss is probably reported

An extraordinary gain or loss is reported
A gain or loss is not reported

How are the proceeds from issuing a compound instrument allocated between the
liability and equity components? *
1 point

First, the liability component is measured at fair value, and then the remainder of the proceeds is
allocated to the equity component.
First, the equity component is measured at fair value, and then the remainder of the proceeds is
allocated to the liability component.
First, the fair values of both the equity component and the liability components are estimated.
Then the proceeds are allocated to the liability and equity components based on the relation
between the estimated fair value.
The equity component is measured at its intrinsic value. The liability component is measured at
the par amount less the intrinsic value of the equity component.

The gain or loss from extinguishment of a financial liability by issuing equity

instruments is presented as *
1 point

Other income or other expense

Separate line item in the income statement
Component of other comprehensive income
Component of finance cost

Which statement is true about the fair value option for measuring bonds payable? *
1 point

The effective interest method of amortization must be used to calculate interest expense.
Discount or premium is disclosed in the notes to the financial statements.
The fair value of the bond and the principal obligation value must be disclosed.
If the fair value option is elected, it must be applied to all bonds.

It is the amount at which the bond payable is measured at initial recognition minus
principal repayment, and plus or minus the cumulative amortization using the effective
interest method of any discount, premium, and bond issue cost. *
1 point

Amortized cost
Fair value
Face value
Maturity value

If the present value of a note issued in exchange for a property is less than the face
amount, the difference should be *
1 point

This study source was downloaded by 100000843864916 from CourseHero.com on 09-21-2022 02:51:09 GMT -05:00

https://www.coursehero.com/file/69571197/AE-211-Quiz-2docx/
 QUIZ 2 AE 211

Included in the cost of the asset

Amortized as interest expense over the the life of the note
Amortized as interest expense over the the life of the asset
Included in interest expense in the year of issuance

An extinguishment of bonds payable originally issued at a premium is made by

purchase of the bonds between interest dates. Which statement is true at the time of
extinguishment? *
1 point

Any costs of issuing the bonds payable must be amortized up to the purchase date.
The premium on bonds payable must be amortized up to the purchase date.
Interest must be accrued from the last interest date to the purchase date.
All of these statements are true.

What is the main reason for issuing convertible bond? *

1 point

The ease with which convertible bond is sold even if the entity has a poor credit rating.
The fact that equity capital has issue cost and convertible bond has none.
Entities can obtain financing at lower rate.
Convertible bond will always sell at a premium.

The issuer of a 10 year bond sold at par three years ago with interest payable
February 1 and August 1 each year should report on its December 31 balance sheet *
1 point

Liability for accrued interest

An addition to bonds payable
Increase in deferred charge
Contingent liability

A bond or similar instrument convertible by the holder into a fixed number of ordinary
shares of the entity is *
1 point

A compound financial instrument

A primary financial instrument
A derivative financial instrument
An equity instrument

This study source was downloaded by 100000843864916 from CourseHero.com on 09-21-2022 02:51:09 GMT -05:00

https://www.coursehero.com/file/69571197/AE-211-Quiz-2docx/
 QUIZ 2 AE 211

Problems
Answer the following problems. DO NOT put any commas or peso (P) signs on your answers. ROUND-UP all
answers to the NEAREST PESO. Five points each problem - one point answer in google form, 4 points
attached solution in the google classroom using columnar paper or intermediate paper. Identify the problems
by writing the name of the company in your solutions. Solutions should be in good accounting form with final
answers encircled. Please attach properly so that it is readable. 30 points.

A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on
December 31, 2017. The note is dated October 1, 2016, bears interest at 18%, and is
payable in three equal annual installment of P800,000. The first interest and principal
payment was made on October 1, 2017. What amount should be reported as current
liability in the December 31, 2017 balance sheet? *
1 point

Your answer

On May 1, 2018, Luzon Company issued P2,000,000, 5 year, 10% bonds for
P2,300,000. Each P1,000 bonds had two detachable warrants eligible for the
purchase of one share of Luzon’s P100 par ordinary share for P120. Without the
warrants the bonds are selling at P2,078,000. What amount should Luzon Company
recognize as value of the share warrants? *
1 point

Your answer

3. Berry Co. issued P800,000 of 12% face value bonds for P851,706. The bonds
which were dated and issued on April 1, 2017, are due March 31, 2021, and pay
interest semiannually on September 30 and March 31. The company sold the bonds to
yield 10%. How much is carrying value of the bonds payable as of December 31,
2017? *
1 point

Your answer

Apple Company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1,

2017. Interest is paid on June 30 and December 31. The proceeds from the bonds is
P19,604,145. Using effective-interest amortization, how much interest expense will be
recognized in 2017? *

This study source was downloaded by 100000843864916 from CourseHero.com on 09-21-2022 02:51:09 GMT -05:00

https://www.coursehero.com/file/69571197/AE-211-Quiz-2docx/
 QUIZ 2 AE 211

1 point

Your answer

On January 1, 2017, Liza Corporation received P1,000,000 on a noninterest-bearing

note due in three years. The market rate of interest on such date is 10%. The entity
irrevocably elected the fair value option in measuring the notes payable. On
December 31, 2017, the risk factors indicated that the rate of interest applicable to the
borrowing was 9%. The present value factors at 10% and 9% are: (pls see
attachment) What is the carrying amount of the note payable on December 31,
2017? *
1 point

Your answer

The 10% bonds payable of Klein Company had a net carrying amount of P570,000 on
December 31, 2016. The bonds, which had a face value of P600,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On
July 2, 2017, several years before their maturity, Klein retired the bonds at 102. The
interest payment on July 1, 2017 was made as scheduled.What is the loss that Klein
should record on the early retirement of the bonds on July 2, 2017? Ignore taxes. *
1 point

Your answer

This study source was downloaded by 100000843864916 from CourseHero.com on 09-21-2022 02:51:09 GMT -05:00

https://www.coursehero.com/file/69571197/AE-211-Quiz-2docx/
Powered by TCPDF (www.tcpdf.org)