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  • Mahusay Acc227 Module 4

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    Jeth Mahusay
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    The document contains a series of 10 questions related to bond valuation and accounting. For each question, the student provided the computational work and solution in picture form as instructed. The total interest expense for 2007 based on the information provided in question 10 is $1,568,498.23. This was calculated by adding the interest expense amounts for June 30, 2007 and December 31, 2007, which were determined using the effective interest method of amortization over the 20-year term of the bonds.

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    MAHUSAY ACC227 MODULE 4

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    The document contains a series of 10 questions related to bond valuation and accounting. For each question, the student provided the computational work and solution in picture form as instructed. The total interest expense for 2007 based on the information provided in question 10 is $1,568,498.23. This was calculated by adding the interest expense amounts for June 30, 2007 and December 31, 2007, which were determined using the effective interest method of amortization over the 20-year term of the bonds.

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    83 views4 pages

    Mahusay Acc227 Module 4

    Uploaded by

    Jeth Mahusay
    The document contains a series of 10 questions related to bond valuation and accounting. For each question, the student provided the computational work and solution in picture form as instructed. The total interest expense for 2007 based on the information provided in question 10 is $1,568,498.23. This was calculated by adding the interest expense amounts for June 30, 2007 and December 31, 2007, which were determined using the effective interest method of amortization over the 20-year term of the bonds.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 4

    NAME: JETH A.

    MAHUSAY COURSE/YEAR: BSA-3 TIME/DAYS: 2:30PM-4:00PM

    Instructions: No solution, no credit. Write your computation in a paper then insert here the picture of your solution.
    Each question is worth five (5) points. Convert this to PDF before submitting. Make sure above is properly filled up.

    1. Amstop Company issues 20,000,000 of 10-year, 9% bonds on March 1, 2015 at 97 plus accrued interest. The
    bonds are dated January 1, 2015, and pay interest on June 30 and December 31. What is the total cash received on
    the issue date?

    Total cash received on issue date = Bonds issue price + Accrued interest
    = P20,000,000 x 97% + (P20,000,000 x 9% x (2/12)
    = P19,400,000 + P300,000
    = P19,700,000

    2. A company issue 20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2013. Interest is paid on June 30
    and December 31. The proceeds from the bonds are 19,604,145. Using straight-line amortization, what is the
    carrying value of the bonds on December 31, 2015?

    Solution:

    19,604,145 + (395,855 x 3/20)

    19,604,145 + 237,513 / 4 = 19,663,523.25 is the carrying value of the bonds on December 31,2015.

    3. A company issues 5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006. Interest is paid on June 30 and
    December 31. The proceeds from the bonds are 4,901,036. What is interest expense for 2007, using straight-line
    amortization?

    Solution:

    Interest Expenses = Cash Interest + Discount of Bond Amortization

    = (5,000,000*7.8%) + (5,000,000 – 4,901,036/20)

    = 394,948.2

    4. On January 1, 2005, Matlock Inc. issued its 10 percent bonds in the face amount of $1,500,000. They mature on
    January 1, 2015. The bonds were issued for $1,329,000 to yield 12 percent, resulting in bond discount of $171,000.
    Matlock uses the effective-interest method of amortizing bond discount. Interest is payable July 1 and January 1. For
    the six months ended June 30, 2005, Matlock should report bond interest expense of:

    Solution:

    The bond was issued at a price of 1,329,000. Market rate of the bond is 12% per year. Since it is payable every
    semiannual period, it will be 6% per half year. Interest Expense will be 1,329,000 multiplied by 6%= 79,740.

    5. Richard Company had outstanding share capital with par value of P50,000,000 and a 12% convertible bond
    payable in the face amount of P10,000,000. Interest payment dates of the bond issue are June 30 and December 31.

    The conversion clause in the bond indenture entitled the bondholders to receive 40 shares of P20 par value in
    exchange for each P1,000 bond.
    On June 30, 2015, the holders of P5,000,000 face value bonds exercised the conversion privilege. The market price
    of the bonds on that date was P1,100 per bond and the market price of the share was P30.

    The total unamortized bond discount at the date of conversion was P500,000. The share premium from conversion
    privilege has a balance of P2,000,000 on June 30, 2015.

    What amount of share premium should be recognized by reason of the conversion of bonds payable into share
    capital?

    Solution:

    Bonds Payable 5,000,000

    Share Premium – Conversion Privilege 1,000,000

    Discount of Bonds Payable 250,000

    Share Capital 4,000,000

    Share Premium – Issuance 1,750,000

    6. During 2008, Royal Corporation issued at 95, one thousand of its 8%, P5,000 bonds due in ten years. One
    detachable stock purchase warrants entitling the holder to buy 20 shares of Royal's ordinary shares was attached to
    each bond. Shortly after issuance, the bonds are selling at 10% ex-warrant, and each warrant was quoted at P60.

    What amount, if any, of the proceeds from the bond issuance should be recorded as part of Royal's shareholder's
    equity?

    Solution:

    Cash 4,750

    Discount on Bonds Payable 617

    Bonds Payable 5,000

    Share Warrants Outstanding 367

    Cash of $4,750,000 ($5,000 face value x 95% quoted price) is recognized. The remaining amount of $367,000
    ($4,750 - $4,383) will be assigned to share warrants outstanding which will be part of shareholders' equity.

    On January 1, 2007, Bleeker Co. issued eight-year bonds with a face value of $1,000,000 and a stated interest rate of
    6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

    Present value of 1 for 8 periods at 6% .................................... .627

    Present value of 1 for 8 periods at 8% .................................... .540

    Present value of 1 for 16 periods at 3% .................................. .623

    Present value of 1 for 16 periods at 4% .................................. .534


    Present value of annuity for 8 periods at 6%........................... 6.210

    Present value of annuity for 8 periods at 8%........................... 5.747

    Present value of annuity for 16 periods at 3% ......................... 12.561

    Present value of annuity for 16 periods at 4% ......................... 11.652

    7. The present value of the principal is

    Solution:

    Present value of principal 534,000

    Present value of interest 349,560

    Issue price of bond 883,560

    The present value of 1 for 16 periods at 4% of 0.534 is multiplied to the face value of the bond issued of $1,000,000
    to get the present value of the principal of $534,000. On the other hand, the present value of annuity for 16 periods
    at 4% of 11.652 is multiplied to the semi-annual interest payments of $30,000 ($1,000,000 x 6% stated rate x 6/12)
    to get the present value of the interest of $349,560. The resulting figures are added together to get the present value
    of the bonds of $883,560 ($534,000 + $400,000 x $349,560).

    8. The present value of the interest is

    Solution:

    Present value of principal 534,000

    Present value of interest 349,560

    Issue price of bond 883,560

    The present value of 1 for 16 periods at 4% of 0.534 is multiplied to the face value of the bond issued of $1,000,000
    to get the present value of the principal of $534,000. On the other hand, the present value of annuity for 16 periods
    at 4% of 11.652 is multiplied to the semi-annual interest payments of $30,000 ($1,000,000 x 6% stated rate x 6/12)
    to get the present value of the interest of $349,560. The resulting figures are added together to get the present value
    of the bonds of $883,560 ($534,000 + $400,000 x $349,560).

    9. The issue price of the bonds is

    Solution:

    Present value of principal 534,000

    Present value of interest 349,560

    Issue price of bond 883,560


    The present value of 1 for 16 periods at 4% of 0.534 is multiplied to the face value of the bond issued of $1,000,000
    to get the present value of the principal of $534,000. On the other hand, the present value of annuity for 16 periods
    at 4% of 11.652 is multiplied to the semi-annual interest payments of $30,000 ($1,000,000 x 6% stated rate x 6/12)
    to get the present value of the interest of $349,560. The resulting figures are added together to get the present value
    of the bonds of $883,560 ($534,000 + $400,000 x $349,560).

    10. A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007. Interest is paid on June 30
    and December 31. The proceeds from the bonds are $19,604,145. Using effective-interest amortization, how much
    interest expense will be recognized in 2007?

    Date Interest Paid Interest Expense Amortization Carrying Amount

    Jan 1, 2007 $19,604,145

    June 30, 2007 780,000 784,165.80 4,165.80 $19,608,310.10

    Dec. 31, 2007 780,000 784,332.43 4,332.43 $19,162,643.23

    Total interest expense in 2007 = Interest expense in June 30 + Interest expense in Dec.30

    Total interest expense in 2007 = 784,165.80 + 784,332.43

    Total interest expense in 2007 = $1,568,498.23

    Prepared by:

    ANNA MAE MAGBANUA, CPA

    Instructor

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