Chapter 50 Bonds Payable

Question 50-1
Explain the measurement of bonds payable.
Answer 50-1
PFRS 9, paragraph 5.1.1, provides that bonds payable are not designated at fair value through profit or
loss shall be measured initially at fair value minus transaction costs that are directly attributable to the
issue of the bonds payable.
The fair value of the bonds payable is equal to the present value of the future cash payments to settle the
bond liability.
Bond issue costs shall be deducted from the fair value or issue price of the bonds payable in measuring
initially the bonds payable.
However, if the bonds are designated and accounted for “at fair value through profit or loss”, the bond
issue costs are treated as expense immediately.
PFRS 9, paragraph 5.3.1, provides that after initial recognition, bonds payable shall be measured either:
a. At amortized cost using the effective interest method
b. At fair value through profit or loss
The “amortized cost” of bonds payable is the amount at which the bond liability is measured initially
minus principal repayment, plus cumulative amortization of discount or minus cumulative amortization of
premium using the effective interest method.
Question 50-2
Explain the fair value option of measuring bonds payable.
Answer 50-2
PFRS 9, paragraph 4.2.2, provides that at initial recognition, bonds payable may be irrevocably
designated as at fair value through profit or loss.
In other words, under the fair value option, the bonds payable shall be measured initially at fair value and
remeasured at every year-end at fair value and any changes in fair value are recognized in profit or loss.
However, any change in fair value attributable to the credit risk of the bond payable designated at fair
value through profit or loss is recognized in other comprehensive income.
There is no more amortization of bond issue cost, bond discount and bond premium.
As a matter of fact, interest expense is recognized using the nominal or stated interest rate and not the
effective interest rate.
Question 50-3 Multiple choice (PFRS 9)
1. Bonds payable not designated at fair value through profit or loss shall be measured initially at
a. Fair value
b. Fair value plus bond issue cost
c. Fair value minus bond issue cost
d. Face amount
2. After initial recognition, bonds payable shall be measured at
a. Amortized cost using the effective interest method.
b. Fair value through profit or loss by irrevocable designation.
c. Amortized cost using the effective interest method or fair value through other comprehensive
income.
d. Amortized cost using the effective interest method or fair value through profit or loss by
irrevocable designation.
3. The amortized cost of bonds payable means
a. Face amount plus premium on bonds payable
b. Face amount minus discount on bonds payable
c. Face amount minus bond issue cost
d. Face amount plus premium on bonds payable or minus discount on bonds payable
4. Which statement is true about the fair value option for measuring bonds payable?
a. The effective interest method of amortization must be used to calculate interest expense.
b. Discount or premium is disclosed in the notes to the financial statements.
c. The fair value of the bond and the principal obligation value must be disclosed.
d. If the fair value option is elected, it must be applied to all bonds.
Question 50-4 Multiple choice (IAA)
1. Most corporate bonds are
a. Mortgage bonds
b. Debenture bonds
c. Secured bonds
d. Collateral bonds
2. The method used to pay interest depends on whether the bonds are
a. Registered or coupon
b. Mortgage or unmortgaged
c. Indebentured or debentured
d. Callable or redeemable
3. Zero-coupon bonds
a. Offer a return in the form of a deep discount off the face amount
b. Result in zero interest expense for the issuer
c. Result in zero interest revenue for the investor
d. Are reported as shareholders’ equity by the issuer
4. Bonds payable should be reported as noncurrent at
a. Face amount less any unamortized discount or plus any unamortized premium
b. Current market price
c. Face amount less any unamortized premium or plus any unamortized discount
d. Face amount less accrued interest since the last interest payment date
5. In the amortization of discount on bonds payable
a. The interest expense is less with each successive interest payment
b. The total effective interest is equal to the amount of the discount plus the total cash interest paid
c. The carrying amount of the bonds payable declines eventually to face amount
d. The reduction in the discount is less with each successive interest payment
6. An amortization schedule for bonds issued at a premium
a. Summarized the amortization of the premium on bonds payable, a contra-asset account
b. Is reported in the statement of financial position
c. Is a schedule that reflects the changes in the bonds payable over the term to maturity
d. All of these are correct
7. When bonds are retired prior to maturity date
a. GAAP has been violated
b. An ordinary gain or loss is probably reported
c. An extraordinary gain or loss is reported
d. A gain or loss is not reported
8. An entity has bonds outstanding in which the market rate of interest has risen. The entity elected the
fair value option. What will the entity report for the year?
a. Interest expense and a gain
b. Interest expense and a loss
c. A gain and no interest expense
d. A loss and no interest expense
9. The discount on bonds payable is reported as
a. A prepaid expense
b. An expense account
c. A current liability
d. A contra-liability
10. To evaluate the risk and quality of an individual bond issue, investors rely heavily on
a. Bond ratings provided by investment houses
b. Newspaper articles
c. Bond interest payments
d. The audit report
Question 60-5 Multiple choice (AICPA Adapted)
1. Bonds that mature on a single date are called
a. Term bonds
b. Serial bonds
c. Callable bonds
d. Convertible bonds
2 Bonds issued with scheduled maturities at various dates are called
a. Convertible bonds
b. Terms bonds
c. Serial bonds
d. Callable bonds
3. Debentures are
a. Unsecured bonds
b. Secured bonds
c. Ordinary bonds
d. Serial bonds
4. How would the amortization of premium on bonds payable affect the carrying amount of bond and net
income, respectively?
a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase
5. How would the amortization of discount on bonds payable affect the carrying amount of bond and net
income, respectively?
a. Increase and Decrease
b. Increase and Increase
c. Decrease and Decrease
d. Decrease and Increase
6. Unamortized bond discount should be reported as
a. Direct deduction from the face amount of the bond
b. Direct deduction from the present value of the bond
c. Deferred charge
d. Part of the bond issue cost
7. 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
a. Decreased by accrued interest from June 1 to November 1
b. Decreased by accrued interest from May 1 to June 1
c. Increased by accrued interest from June 1 to November 1
d. Increased by accrued interest from May 1 to June 1
8. The issuer of a bond sold at face amount with interest payable February 1 and August 1 should report
a. Liability for accrued interest
b. An addition to bonds payable
c. Increase in deferred charge
d. Contingent liability
9. A bond issued on June 1 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
a. Three months
b. Four months
c. Six months
d. Seven months
10. A bond was issued at a discount with a call provision. When the bond issuer exercised the call
provision on as interest date, the amount of bond liability derecognized should have equaled the
a Call price
b. Call price less unamortized discount
c. Face amount less unamortized discount
d. Face amount plus unamortized discount
QUESTION 50-6 Multiple choice (IAA)
1. When bonds are sold between interest dates, any accrued interest is credited to
a. Interest payable
b. Interest revenue
c. Interest receivable
d. Bonds payable
2. Which statement is true about accrued interest on bonds sold between interest dates?
a. The accrued interest is computed at the effective rate.
b. The accrued interest will be paid to the seller when the bonds mature.
c. The accrued interest is extra income to the buyer.
d. All of the statements are not true.
3. Which statement is true about a premium on bonds payable?
a. The premium or bonds payable is a contra shareholders' equity account.
b. The premium on bonds payable is an account that appears only on the books of the investor.
c. The premium on bonds payable increases when amortization entries are made until maturity date.
d. The premium on bonds payable decreases when amortization entries are made until the balance
reaches zero at maturity date.
4. The amortization of discount on bonds payable
a. Decreases the face amount of bonds payable.
b. Decreases the amount of interest expense.
c. Decreases the carrying amount of bonds payable.
d. Increases the carrying amount of bonds payable.
5. The carrying amount of a bond liability is
a. Call price of the bond plus bond discount or minus bond premium.
b. Face amount of the bond plus related premium or minus related discount.
c. Face amount of the bond plus related discount or minus related premium.
d. Maturity value of the bond plus related discount or minus related premium.
6. The proceeds from the issue of the bonds payable
a. Will always be equal to the face amount.
b. Will always be less than the face amount.
c. Will always be more than the face amount.
d. May be equal, more or less than the face amount depending on market interest rate.
7. 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?
a. Any costs of issuing the bonds payable must be amortized up to the purchase date.
b. The premium on bonds payable must be amortized up to the purchase date.
c. Interest must be accrued from the last interest date to the purchase date.
d. All of these statements are true.
8. When bonds are retired prior to maturity with proceeds from a new bond issue, any gain or loss from
the early extinguishment should be
a. Amortized over the remaining original life of the retired bond issue,
b. Amortized over the life of the new bond issue.
c. Recognized in retained earnings
d. Recognized in income from continuing operations.
9. 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?
a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated
10. An entity neglected to amortize the premium on outstanding bonds payable. What is the effect of the
failure to record premium amortization on interest expense and bond carrying amount, respectively?
a. Understated and understated
b. Understated and overstated
c. Overstated and overstated
d. Overstated and understated