machine was irreparably damaged by Dean Company and became worthless. In October 2014, a court awarded damages of P3,500,000 against Dean in favour
of Ranger. On December 31, 2014, the final outcome of this case was awaiting appeal and was therefore uncertain. However, in the opinion of Ranger’s
attorney, Dean’s appeal would be denied.
On December 31, 2014, what amount of gain should be accrued? a. 150,000
c. 250,000 b. 350,000
d. 0
Answer is d Solution:
The contingent asset and related contingent gain are only disclosed because the case is still under appeal by the defendant.
BONDS PAYABLE and EFFECTIVE INTEREST METHOD
1. Diosa Company issued 5,000, 10-year 10 P1000 bonds on January 1, 2016 at
103 to yield 9. Interest is payable every June 30 and December 31. On June 30, 2016, how much is the amortized premium?
a 150,000 c 18,250
b 36,500 d 65,000
Answer is c
Solution: Interest Paid 5,000,000 x 10 x 612
P250,000 Interest Expense 5,150,000 x 9 x 612
231,750 Amortized Discount
P 18,250
2. On May 1, 2016, Mabuhay Company issued 1,000, P2000 face value 6 bonds
dated January 1, 2016 with interest payments June 30 and December 31. The entity received cash of P2,150,000 plus accrued interest. What is the discount or
premium from the issuance of bonds?
a 110,000 premium b 150,000 discount
c 110,000 discount d 150,000 premium
Answer is a
Solution: Cash Received
P2,150,000 Accrued Interest 2,000,000 x 6 x 412
40,000 Carrying amount of Bonds
P2,110,000 Face Value of Bonds
2,000,000 Premium on Bonds
P 110,000
3. On June 1, 2015, Love Ko To Company issued three thousands, P2000 face
value 10 five-year bonds for P5,568,000. The bonds were issued to yield 12 interest. Interest is payable semi-annually on December 1 and June 1. Using the
effective interest method, what should be the bond interest expense on June 1, 2016?
a 334,080 c 336,125
b 560,208 d 280,104
Answer is a
Solution: First Interest Payment
June 1,2015 to December 1, 2015 Interest expense 5,568,000 x 12 x 612
P334,080
Interest paid 6,000,000 x 10 x 612 300,000
Discount amortization P 34,080
Carrying amount as June 1, 2015 5,568,000
Carrying amount as of December 1, 2015 P5,602,080
Second Interest Payment December 1, 2015 to June 1, 2016
Interest expense 5,602,080 x12 x612 P336,125
Interest expense related to second interest payment yet already recognized on December 2015
336,125 x 16 56,021
Interest expense on June 1, 2016 P280,104
4. Umasa Company issued on January 1, 2015 a one thousand, P5000 face value
8 five-year bonds at 105 and paid bond issue costs of 60,000 to yield 7. Interest is payable annually every December 31. What is the carrying amount of
the bonds on December 31, 2015?
a 5,190,000 c 5,226,700
b 5,153,300 d 5,226,700
Answer is b
Solution: Bonds payable at issue price 5,000,000 x 105
P5,250,000 Bond issue costs
60,000 Carrying amount of bonds, January 1, 2015
P 5,190,000 Interest paid 5,000,000 x 8
P400,000 Interest expense 5,190,000 x 7
363,300 Premium Amortization
P 36,700 Carrying amount
P5,190,000 Premium amortization
36,700 Carrying amount, December 31, 2015
P5,153,300
5. Face Value of bonds 4,000,000
