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ANSWERS:
1. D – inflows relate to assets not liabilities
2. D
3. B
4. A
5.
Date Interest payments Interest expense Amortization Present value
Jan. 1, 20x1 4,198,948
Dec. 31, 20x1 480,000 419,894 60,106 4,138,842
4,000,000 face amount – 4,138,842 = 138,842
6.
Initial measurement: (4,000,000 – 192,147) = 3,807,853
Trial using 12%:
(4M x PV of ₱1 @ 12%, n=3) + [400,000 x PV of an ordinary annuity of ₱1 @ 12%, n=3] = 3,807,853
(2,847,120 + 960,733) = 3,807,853 is equal to 3,807,853
❖ The effective interest is 12%.
7.
(700,000 x PV of 1 @4%(a), n=20(b)) + (35,000(c) x PV ordinary annuity @4%, n=20) =
319,471 + 475,661 = 795,132
8.
Erroneous amortization of discount using straight line:
The erroneous straight-line amortization of the discount on bonds payable is computed as follows:
Face amount of bonds 4,000,000
Cash proceeds (3,807,852)
Discount on bonds payable - Jan. 1, 20x1 192,148
Divide by: Term of bonds (in years) 3
Annual amortization (straight line method) 64,049
Interest expense for 20x1 recognized under straight-line method:
Interest paid (4,000,000 x 10%) 400,000
Amortization of discount (see computation above) 64,049
Interest expense under straight-line method 464,049
Carrying amount of bonds on Dec. 31, 20x1 under straight-line method:
Carrying amount - Jan. 1, 20x1 3,807,852
Amortization of discount (see computation above) 64,049
Carrying amount - Dec. 31, 20x1 3,871,901
Amortization of discount under effective interest method:
Amortization table:
Interest Interest Present
Date payments expense Amortization value
Jan. 1, 20x1 3,807,852
Dec. 31, 20x1 400,000 456,942 56,942 3,864,794
Effect on carrying amount of bonds as of Dec. 31, 20x1
Carrying amounts on Dec. 31, 20x1:
Straight-line 3,871,901
Effective interest rate 3,864,794
Difference - overstatement under straight-line 7,107
The carrying amount of the bonds on December 31, 20x1 under the straight-line method is overstated by ₱7,107.
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9. A
Solution:
Cash proceeds including accrued interest (4M x 97%) 3,880,000
Accrued interest sold (4M x 12% x 3/12) (120,000)
Carrying amount of the bonds, April 1, 20x1 3,760,000
10.
Date Interest payments Interest expense Amortization Present value
Jan. 1, 20x1 4,303,264
Dec. 31, 20x1 480,000 430,328 49,672 4,253,592
Dec. 31, 20x2 480,000 425,360 54,640 4,198,948
July 1, 20x3 240,000 209,948 30,052 4,168,896
Carrying amount of bonds retired: (see table above) 4,168,896
Retirement price (Call price):
Retirement price including payment for
accrued interest (4M x 102%) 4,080,000
Accrued interest (4M x 12% x 6/12) (240,000) 3,840,000
Gain on extinguishment of bonds 328,896
11.
Interest on outstanding
Date Principal payments principal balance Interest payments Total payments
Dec. 31, 20x1 4,000,000 12,000,000 x 10% 1,200,000 5,200,000
Dec. 31, 20x2 4,000,000 8,000,000 x 10% 800,000 4,800,000
Dec. 31, 20x3 4,000,000 4,000,000 x 10% 400,000 4,400,000
Date Total payments Interest expense Amortization Present value
Jan. 1, 20x1 11,601,220
Dec. 31, 20x1 5,200,000 1,392,148 3,807,852 7,793,368
12.
The modification is analyzed as follows:
Old terms New terms
Principal 20,000,000 20,000,000
Accrued interest 600,000 -
Remaining term ('n') 3 years
Nominal rate 12% 10%
Direct costs of modification 200,000
Future cash flows PV factors @12%, n=3 Present value
Principal 20,000,000 0.711780 14,235,600
Interest 2,000,000 2.401831 4,803,662
Present value of the modified liability 19,039,262
Carrying amt. of old liability (20M + 600K accrued int.) 20,600,000
Present value of modified liability 19,039,262
Difference 1,560,738
Difference 1,560,738
Divide by: Carrying amount of old liability 20,600,000
7.58%
❖ The modification is NOT substantial. The old liability is not extinguished and NO GAIN OR LOSS on
extinguishment is recognized. The direct costs of modification are treated as an adjustment to the carrying amount
of the existing liability.
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13. (80M x 5%) + (60M x 20%) + (40M x 35%) + (20M x 40%) = 38M
14.
Minor repairs (40M x 3% x 10%) 120,000
Major repairs (40M x 2% x 90%) 720,000
Total 840,000
Multiply by: Present value factor (given) 0.95238
Total 800,000
Multiply by: Risk adjustment (100% + 6%) 106%
Total 848,000
Multiply by: Amount to be settled in 20x2 50%
Warranty provision – Dec. 31, 20x1 424,000
15. 200M – without deduction for reimbursement of impairment loss
16. Ignore/Do nothing
17. 2,800,000 gain on settlement
18. 2,400,000
19. 2,000,000
20.
Estimated premium liability
- Jan. 1, 20x1
Actual cost of premiums
distributed - 20x1 (60,000 x Premium expense - 20x1 (500,000
₱400) 24,000,000 32,000,000 x 80% ÷ 5 x ₱400 )
Actual cost of premiums
distributed - 20x2 (147,600 x Premium expense - 20x2 (900,000
₱400) 59,040,000 57,600,000 x 80% ÷ 5 x ₱400 )
Dec. 31, 20x2 6,560,000