3/14/22, 6:31 PM Quiz: Quiz #2: Compound Financial Instruments - Notes Payable

Quiz #2: Compound Financial Instruments - Notes

Payable
Started:
Mar 14 at 5:02pm

Quiz Instructions
Compute for the correct answers/Choose the letter of the best answer. Round off your answers to the
nearest whole number.

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Question 1 2 pts

On January 1, 2021, Rowlet Corporation. Issued a 3 year, 8,000, P1,000 convertible

bonds at 110. Interest is to be paid annually at the stated coupon rate of 12% every
December 31. Each bond is convertible, at the holder’s option, into 30, P25 par value
common share at any time up to maturity. On the date of issuance, prevailing market
interest rate for similar debt without the conversion privilege was 9%. On the same
date market price of one common share was P30. 

What is the equity component of the convertible debt?

 (PVF 4 Decimal)

192,352

Question 2 2 pts

On January 1, 2023, Kegin Company sold a P2,000,000, twenty-year, 8 percent bond

issue for P2,120,000. Each P1,000 bond has two detachable warrants, each of which
permits the purchase of one share for P30. The shares have a par value of P25 per
share, immediately after the sale of the bonds, the fair values are bonds without
warrants 96, warrants 21, and ordinary share 28. What is included in the entry to
record the bond issue?
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Cr. bond premium P36,000

Dr. bond discount P80,000

Cr. bond premium P120,000

Cr. share warrants outstanding P84,000

Question 3 2 pts

On December 31, 2019, Claudine Company issued 5,000 of 8% 10-year P1,000 face
value bonds with detachable warrants at 110. Each bond carried a detachable
warrant for 10 ordinary shares of P100 par value at a specified option price of P120.
Immediately after issuance, the market value of the bonds without warrants was
P4,800,000 and the market value of the warrants was P1,200,000.

What is the share premium from the subsequent exercise of all share warrants?

1,200,000

Question 4 2 pts

On January 1, 2021, Rowlet Corporation. Issued a 3 year, 8,000, P1,000 convertible

bonds at 110. Interest is to be paid annually at the stated coupon rate of 12% every
December 31. Each bond is convertible, at the holder’s option, into 30, P25 par value
common share at any time up to maturity. On the date of issuance, prevailing market
interest rate for similar debt without the conversion privilege was 9%. On the same
date market price of one common share was P30. 

Assuming that the convertible bonds above were converted on January 1, 2023,
how much should be credited to Share premium from the equity conversion?

 (PVF 4 Decimal)

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2,412,699

Question 5 2 pts

Mae Jong Corporation issues 1,000 convertible bonds at the beginning of 2021. The
bonds have a four-year term with a stated rate of interest of 6 percent, and are issued
at par with a face value of P1,000 per bond (total proceeds received from issuance of
the bonds are P1,000,000). Interest is payable annually at December 31. Each bond
is convertible into 250 ordinary shares with a par value of P1. The market rate of
interest on similar non-convertible debt is 9 percent. Compute the liability component
of Mae Jong’s convertible debt. 

PV of Ordinary Annuity for 4

  PV of 1 for 4 periods
periods

6% 0.79209 3.46611

9% 0.70843 3.23972

The issuance of convertible bonds increased the entity’s equity by:

902,813

Question 6 2 pts

On December 31, 2019, Claudine Company issued 5,000 of 8% 10-year P1,000 face
value bonds with detachable warrants at 110. Each bond carried a detachable
warrant for 10 ordinary shares of P100 par value at a specified option price of P120.
Immediately after issuance, the market value of the bonds without warrants was
P4,800,000 and the market value of the warrants was P1,200,000.

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On December 31, 2019, what is the carrying amount of bonds payable?

4,000,000

Question 7 2 pts

On January 1, 2019, Mayleen Company issued 5,000 convertible bonds with P1,000
face value per bond. The bonds matures in three years and are issued at 110.
Interest is payable annually every December 31 at nominal 6% interest rate. Each
bonds is convertible at anytime up to maturity into 100 shares with par value of P5. It
is reliably determined that the bonds would sell only at P4,600,000 without the
conversion privilege. What is the equity component of the original issuance of the
convertible bonds?

891,000

Question 8 2 pts

On December 31, 2019, after recording interest and amortization, Lyka Company
converted P5,000,000 of 12% convertible bonds into 50,000 shares of P50 par value.
on the conversion date, the carrying amount of the bonds payable was P6,000,000,
the market value of the bonds was P6,500,000, and the share was publicly trading at
P150. The entity incurred P100,000 in connection with the conversion. When the
bonds were originally issued, the equity component was recorded at P1,500,000.
What amount of share premium should be recorded as a result of the conversion?

1,000,000

Question 9 2 pts

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During 2024, Warriors Corporation issued at 95, one thousand of its 8%, P5,000
bonds due in ten years. One detachable share warrants entitling the holder to buy 20
shares of Warriors ordinary shares was attached to each bond. Shortly after
issuance, the bonds are selling at 10% ex-warrants, and each warrants was quoted
at P60. What amount, if any, of the proceeds from the bond issuance should be
recorded as part of Warriors Shareholders’ equity? (PVF 4 Decimal)

367,000

Question 10 2 pts

On January 1, 2021, Rowlet Corporation. Issued a 3 year, 8,000, P1,000 convertible

bonds at 110. Interest is to be paid annually at the stated coupon rate of 12% every
December 31. Each bond is convertible, at the holder’s option, into 30, P25 par value
common share at any time up to maturity. On the date of issuance, prevailing market
interest rate for similar debt without the conversion privilege was 9%.

On the same date market price of one common share was P30. What is the
resulting bonds payable carrying value as of December 31, 2021?

 (PVF 4 Decimal)

8,422,236

Use the following information for the next five (5) questions:

On January 1, 2026, a company acquired inventory with a list price of P1,300,000

and a cash price of P994,760 by issuing P1,200,000, noninterest bearing note
payable. Principal is due in three equal payments every December 31 beginning on
December 31, 2026. The effective rate of interest interpolated for the cash price is
10%.
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Question 11 2 pts

How much is the carrying amount of the note on initial recognition?

Question 12 2 pts

How much is the interest expense for 2026?

Question 13 2 pts

How much is the carrying amount of the note on December 31, 2026?

Question 14 2 pts

How much is the noncurrent portion of the note on December 31, 2026?

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Question 15 2 pts

How much is the current portion of the note on December 31, 2026?

Question 16 2 pts

A company purchased machinery on December 31, 2026, paying P80,000 down and
agreeing to pay the balance in 4 equal installments of P60,000 payable each
December 31. Implicit in the purchase price is an assume interest of 12%. What is
the carrying amount of the note at December 31, 2027?

(PVF 5 decimal)

Question 17 2 pts

On October 1, 2019, a company acquired land by issuing a two-year note, 12%,

P4,000,000 note payable. Principal is due on October 31, 2021 but interests are due
annually every October 1. Boxer uses the calendar year as its accounting period.
How much is the interest expense recognized in 2019?
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Use the following information for the next three (3) questions:

On January 1, 2019, a company acquired transportation equipment by paying cash of

P400,000 and issuing a noninterest-bearing note payable of P4,000,000 due in 4
equal annual installments starting December 31, 2019. The prevailing rate of interest
of this type of note is 12%.

(PVF 6 decimal)

Question 18 2 pts

How much is the interest expense in 2019?

341,654

Question 19 2 pts

How much is the carrying amount of the note on December 31, 2019?

2,505,464

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Question 20 2 pts

How much is the noncurrent portion of the note on December 31, 2019?

2,847,120

Question 21 1 pts

When a note payable is issued for property, goods, or services, the note is initially
measured at

a. the fair value of the property, goods, or services.

b. the fair value of the note.

c. using an imputed interest rate to discount all future payments on the note.

d. choice (a) except when this is not determinable, in which case, whichever is the more
clearly determinable between (b) and (c).

Question 22 1 pts

When debt is issued at a discount, interest expense over the term of the debt equals
the cash interest paid:

a. Minus discount.

b. Minus discount minus face amount.

c. Plus discount.

d. Plus discount plus face amount:

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Question 23 1 pts

A debt instrument with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place

A. The present value of the debt instrument must be approximated using an imputed interest
rate.

B. It should not be recorded until the fair value of the property becomes evident.

C. The board of directors of the entity receiving the property should estimate a value for the
property that will serve as a basis for the transactions.

D. The directors of both entities involved in the transactions should negotiate a value to be
assigned to the property.

Question 24 1 pts

The discount on note payable should be reported as

A. Addition to the face amount of the note

B. Deferred charge separate from the note

C. Deferred credit separate from the note

D. Direct deduction from the face amount of the note

Question 25 1 pts

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Interest payment dates of a bond issue are March 1 and September 1 20x1. The
bond was issued on June 1. 20x1. Interest expense for the year ended December 31,
20x1 would be for:

a. four (4) months

b. six (6) months

c. Seven (7) months

d. ten (10) months

Question 26 1 pts

Which of the following statements is not correct?

a. The principal amount of a debt is the cash or cash equivalent amount borrowed.

b. When a noncash asset is acquired and the stated rate of interest is different from the
current market rate of interest, the cost of the asset is the present value of the future cash
payments discounted at the current market rate of interest rather than at the stated interest
rate

c. A company that receives cash in an amount less than the face amount of a noninterest-
bearing note payable should record the note at its discounted present value.

d. The carrying amount of a noninterest-bearing note payable due in lump sum will decrease
as time goes by.

Question 27 1 pts

Discount on Notes Payable is charged to interest expense

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a. equally over the life of the note.

b. only in the year the note is issued.

c. using the effective interest method.

d. only in the year the note matures.

Question 28 1 pts

On November 1, 20x1, a company purchased a new machine that it does not have to
pay for until November 1, 20x3. The total payment on November 1, 20x3, will include
both principal and interest. Assuming interest at a 10% rate, the cost of the machine
would be the total payment multiplied by what time value of money concept?

a. PV of annuity of P1.

b. PV of P1.

c. FV of annuity of P1.

d. FV of P1.

Question 29 1 pts

When a note payable is exchanged for property, goods, or services, the stated
interest rate is presumed to be fair unless

a. no interest rate is stated.

b. the stated interest rate is unreasonable.

c. the stated face amount of the note is materially different from the current cash sales price
for similar items or from current market value of the note.

d. any of these.
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Question 30 1 pts

If the present value of a note which is issued in exchange for a plant asset is less
than its face amount. the difference should be

a. Included in the cost of the asset.

b. Amortized as interest expense over the life of the note.

c. Amortized as interest expense over the life of the plant asset.

d. Reported as interest expense in the year of issuance of the note.

Question 31 1 pts

Interest expenses are

a. incurred only on interest-bearing obligations

b. incurred due to passage of time.

c. not incurred on bonds issued

d. incurred only when the effective interest rate is stated in the instrument

Question 32 1 pts

A discount on note payable is charged to interest expense

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A. Equally over the life of the note

B. Only in the year the note issued

C. Using the effective interest method

D. Only in the year the note matures

Question 33 1 pts

A short-term note payable may include all of the following except:

a. trade notes payable.

b. nontrade notes payable.

c. unearned revenue.

d. a current maturity of a long-term liability.

Question 34 1 pts

Which of the following is not true about the discount on short-term notes payable?

a. The Discount on Notes Payable account has a debit balance.

b. The Discount on Notes Payable account should be reported as an asset on the balance
sheet.

c. When there is a discount on a note payable, the effective interest rate is higher than the
stated discount rate.

d. All of these are true.

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Question 35 1 pts

When a note payable is issued for property, goods or services, the present value of
the note is measured by

A. The fair value of the property, goods or services.

B. The fair value of the note.

C. Using imputed interest rate to discount all future payments on the note.

D. Any of these

Question 36 1 pts

Interest expenses are

a. incurred only on interest-bearing obligations

b. incurred due to passage of time.

c. not incurred on bonds issued

d. incurred only when the effective interest rate is stated in the instrument

Question 37 1 pts

Which of the following statements is incorrect?

a. When bonds are retired, all of the premium or discount associated with the bonds must be
canceled.

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b. When convertible bonds are retired before they are converted, a gain or loss may be
recorded.

c. When convertible bonds are retired before they are converted, the retirement price must
be allocated to both the debt component and equity feature of the convertible bonds.

d. At the date of retirement of convertible bonds which were not converted, the excess of the
retirement price over the fair value of the convertible bonds without the equity feature
measured on initial recognition is recognized as gain or loss on extinguishment of debt.

Question 38 1 pts

Which of the following is incorrect regarding a compound financial instrument?

a. A compound financial instrument is a financial instrument that, from the issuer's

perspective, contains both a liability and an equity element.

b. The issuer accounts for the elements of a compound financial instrument separately.

c. Convertible bonds and bonds with detachable share warrants are examples of compound
financial instruments

d. The issue price of a compound financial instrument is allocated to the liability and equity
components based on their relative fair values.

Question 39 1 pts

Which of the following may be used to determine the amount to be assigned to the
equity component of a compound financial instrument?

a. Cash proceeds from issuance of the compound instrument minus the fair value of the
liability component without the equity feature

b. Cash proceeds multiplied by the fair value of the equity component over the sum of the fair
values of the liability and equity components

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c. Present value of future cash flows from the liability component discounted using an
effective interest rate

d. Cash proceeds divided by two

Question 40 1 pts

Which of the following statements is incorrect regarding the subsequent accounting

for compound financial instruments?

a. Upon the conversion of convertible bonds, the equity component recognized on initial
recognition of the convertible bonds is recognized in profit or loss.

b. Upon the conversion of convertible bonds, the equity component recognized on initial
recognition of the convertible bonds is transferred within equity.

c. Upon the conversion of convertible bonds, any conversion costs incurred is deducted
directly in equity.

d. Share capital is credited only when the convertible bonds are actually converted.

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