NATIONAL UNIVERSITY

College of Business and Accountancy

3rd term, A.Y. 2023-2024
BAIACC2X – INTERMEDIATE ACCOUNTING 2
QUIZ NO. 2

Name: _________________________________________________ Section: _____________

1. Which of the following statements regarding interest method of allocation is not true?
a. The term “interest method of allocation” refers to both to the convention for periodic reporting and to the
several approaches dealing with changes in estimated future cash flows.
b. Interest method of allocation is reporting convention that uses present value technique in the absence of a
fresh-start measurement to compute changes in the carrying amount of an asset or liability from one period
to the next.
c. Interest method of allocation is grounded in the notion of current cost.
d. Holding gains and losses are generally excluded from the allocation system.

2. Which of the following is not an objective of using the present value in accounting measurement?
a. To capture the value of an asset or a liability in the context of a particular entity.
b. To estimate fair value.
c. To capture the economic difference between sets of future cash flows.
d. To capture elements of that taken together would comprise a market price if one existed.

3. Cost incurred in connection with the issuance of ten-year bonds which sold at a slight premium shall be?
a. Charged to Retained Earnings when the bonds are issued.
b. Expensed in the year in which incurred.
c. Capitalized as organization cost.
d. Reported in the statement of financial position as a deduction against bonds payable and amortized over the
ten-year bond term.

4. Under international accounting standard, the valuation method used for bonds payable is?
a. Historical cost.
b. Discounted cash flow valuation at current yield rate.
c. Maturity amount.
d. Discounted cash flow valuation at yield rate at issuance.

5. How would the amortization of premium on bonds payable affect each of the following?
Carrying amount of bond Net income
a. Increase Decrease
b. Increase Increase
c. Decrease Decrease
d. Decrease Increase

6. A 20-year bond was issued at a premium with a call provision to retire the bond. When the bond issuer exercised
the call provision on an interest date, the call price exceeded the carrying amount of the bond. The amount of
bond liability removed from the accounts should have equaled the
a. Cash paid .
b. Face amount plus unamortized premium.
c. Call price plus unamortized premium.
d. Current market price.

7. When bonds are issued with share purchase warrants, a portion of the proceeds should be allocated to equity
when the bonds are issued with?

I. Detachable share purchase warrants

II. Nondetachable share purchase warrants

a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.

8. Bondholders exchange their convertible bonds for the entity’s ordinary shares. The carrying amount of these
bonds was lower than market value but greater than the par value of the ordinary shares issued. If the book value
method is used, which of the following correctly states an effect of the conversion?
a. Shareholders’ equity is increased.
b. Share premium is decreased.
c. Retained earnings increased.
d. A loss is recognized.

9. When the bonds are retired prior to maturity with proceeds from a new bond issue, any gain or loss from the
early extinguishment of debt 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 in the period of extinguishment.
d. Recognized in income from continuing operations in the period of extinguishment.

10. 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. Understate and understate.
b. Understate and overstate.
c. Overstate and overstate.
d. Overstate and understate.

Problem 1
On January 1, 2024, an enti ty issued at 98 plus accrued interest, 2,000 of 10% P1,000 f ace val ue bonds. The bonds are
dated January 1, 2024, mature on January 1, 2028, and pay interest annually on December 31. The entity paid bond
issue cost of P70,000. The effective rate i s 12% after considering the bond issue cost. The entity used the effective interest
method of amor tization. On June 30, 2027, the entity retired half of the bonds at 96 plus accrued interest.
1. How much is the total interest expense that should be reported for 2025?
A. 226,800
B. 230,016
C. 233,618
D. None of the above.
2. What is the carrying amount of the bonds payable on December 31, 2026?
A. 1,916,800
B. 1,946,816
C. 1,980,434
D. None of the above.
3. What is the carrying amount of the bond s that should be retired on June 30, 2027?
A. 980,434
B. 999,260
C. 999,630
D. None of the above.
4. What is the gain/(loss) on retirement of bond s that should be recorded on June 30, 2027?
A. (39,630)
B. 39,630
C. 36,930
D. None of the above.
5. What is the carrying amount of the bonds payable on December 31, 2027?
A. 1,999,260
B. 999,630
C. 1,000,000
D. None of the above.
6. The journal entry to record the retirement of the bonds payable on June 30, 2027 includes?
A. Debit to Bonds Payable P999,630
B. Credit to Discount on Bonds Payable P39,630
C. Credit to Gain on bond retirement P39,630
D. None of the above.

Problem 2
On January 1, 2024, an enti ty i ssued at 110 plus accrued intere st, 2,000 of 10% P1,000 face value bonds. The bonds are
dated January 1, 2024, mature on January 1, 2028, and pay interest annually on December 31. The entity paid bond
issue cost of P30,000. The effective rate i s 8% after considering the bond i ssue cost. The entity used the effective interest
method of amor tization. On July 1, 2027, the entity r etired half of the bond s at 99 plus accrued interest.
7. How much is the total interest expense that should be reported for 2024?
A. 173,600
B. 200,000
C. 171,480
D. None of the above.
8. What is the carrying amount of the bonds payable on December 31, 2026?
A. 2,170,000
B. 2,115,088
C. 2,084,295
D. None of the above.
9. What is the carrying amount of the bond s that should be retired on June 30, 2027?
A. 1,000,000
B. 1,033,833
C. 1,185,625
D. None of the above.
10. What is the gain or loss on retirement of bonds that should be recorded on June 30, 2027?
A. 45,655
A. ,
 B. 43,833
C. 33,846
D. None of the above.
11. What is the carrying amount of the bonds payable on December 31, 2027?
A. 1,000,000
B. 1,033,833
C. 1,185,625
D. None of the above.
12. The journal entry to record the retirement of the bonds payable on June 30, 2027 includes?
A. Debit to Bonds Payable P1,033,833
B. Debit to Premium on Bonds Payable P33,333
C. Credit to Gain on bond retirement P 43,833
D. None of the above.

Problem 3
An entity issued 8,000 of 8% 10-year P1,000 face amount bonds with detachab le warrants at 110. Each bond carried a
detachable warrant for 20 ordinary share s of P10 par value at a specified option price of P30. Immediately after i ssuance,
the market value of the bond s without warrants wa s P7,400,000 and the market value of the wa rrants was P600,000.
13. How much is the initial carrying amount of the bonds payable that should be recorded?
A. 7,000,000
B. 7,400,000
C. 8,000,000
D. None of the above
14. How much is the share warrants outstanding at the date of bond issuance?
A. 1,000,000
B. 1,400,000
C. 600,000
D. None of the above
15. How much is the cash proceeds at the date of exercise of the share warrants?
A. 4,000,000
B. 4,800,000
C. 4,600,000
D. None of the above
16. How much is the shar e premium from the subsequent exercise of the share warrants?
A. 4,000,000
B. 4,800,000
C. 4,600,000
D. None of the above

Problem 4
On December 31, 2024, an entity had outstanding 10%, P4,000,000 face amount convertible bonds payable
maturing on December 31, 2027. Interest is payable on July 1 and January 1. Each P1,000 bond is convertible into 40
shares of P15 par value. On December 31, 2024, the premium on bonds payable was P350,000.

On December 31, 2024, 2,800 quantities of the bonds were converted when each share had a market price of P35. The
entity incurred P100,000 connection with the conversion. No equity component was recognized when the bond s were
originally issued.

17. How much is the share premium from the iss uance of shares as a result of the bond conver sion should be recorded
on December 31, 2024?
A. 1,365,000
B. 100,000
C. 1,265,000
D. None of the above
18. How much is the cost incurred in connection with bond conversion that is treated as an outright expense?
A. 100,000
B. 123,750
C. 183,750
D. None of the above
19. What is the carrying amount of unconverted bonds payable that should be reported at December 31, 2024 after
conversion?
A. 1,200,000
B. 1,265,000
C. 1,305,000
D. None of the above
20. The journal entry to record the conversion of the bond s payable includes?
A. Debit to Bonds Payable P2,000,000
B. Debit to Premium on Bonds Payable P245,000
C. Credit to Share premium P1,680,000
D. None of the above.