1.

Defined by IAS 32 as any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities.
A. Financial instrument C. Financial liability
B. Financial asset D. Equity instrument
2. Defined by IAS 32 as any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
A. Financial instrument C. Financial liability
B. Financial asset D. Equity instrument
3. According to the definition of financial asset, financial asset does not include
A. Cash
B. Equity instrument of the issuing entity
C. A contractual right to receive cash or another financial asset from another entity
D. A contract that will or may be settled in the entity’s own equity instruments
4. Which of the following is least likely to be considered a financial instrument?
A. Deferred revenues C. Trade accounts
B. Cash in bank D. Debt securities
5. Debentures are
A. Term bonds C. Unsecured bonds
B. Serial bonds D. Secure bonds
6. Costs incurred in connection with the issuance of 10-year bonds which is 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 from bonds payable and
amortized over the 10-year bond term
7. Which of the following statements is true in relation to the fair value option of measuring a bond
payable?
I. At initial recognition, an entity may revocably designate a bond payable at fair value through
profit or loss.
II. The bond payable is remeasured at every year-end at fair value and any changes in fair value
are recognized in other comprehensive income.
A. I only C. Both I and II
B. II only D. Neither I nor II
8. After initial recognition, bonds payable shall be measured at
I. Amortized cost using the effective interest method.
II. Fair value through profit or loss
III. Fair value through other comprehensive income
A. I and II C. II and III
B. I and III D. I,II and III
9. How would the amortization of premium affect the carrying amount of bonds payable and net
income, respectively
A. Increase and increase C. Decrease and increase
B. Decrease and decrease D. Increase and decrease
10. The amortization of discount on a term bonds payable using effective interest method will lead
to
A. Decreasing interest expense and decreasing carrying amount of bonds over time.
B. Increasing interest expense and increasing carrying amount of bonds over time.
C. Decreasing interest expense and increasing carrying amount of bonds over time.
D. Increasing interest expense and decreasing carrying amount of bonds over time.
11. Bonds issued at a premium
A. Effective rate exceeds the nominal rate C. Effective rate and nominal rate are equal
 B. Nominal rate exceeds effective rate D. No relationship between the two rates
12. An entity issued a bond with stated rate that is less than the effective rate. Bond issuance date
coincides with interest date. The entity should report on the first interest payment
A. An interest expense that is less than the cash payment
B. An interest expense that is greater than cash payment
C. A debit to discount on bonds payable
D. A debit to premium on bonds payable
13. At the beginning of the first year, an entity issued bonds at a discount. The entity incorrectly use
straight line method instead of effective interest method of amortization. How would the
following be affected at year-end of the first year?
Carrying amount of bonds Retained earnings
A. Overstated Understated
B. Understated Overstated
C. Overstated Overstated
D. Understated Understated
14. A five-year term bond was issued on January 1 of year 1 at a premium. The carrying amount of
the bonds on December 31 of year 2 would be
A. Higher than the carrying amount on January 1 of year 1.
B. Higher than the carrying amount on December 31 of year 1.
C. Higher than the carrying amount on December 31 of year 3.
D. Lower than the carrying amount on December 31 of year 3.
15. When using effective interest method of amortization, the periodic amortization on a term bond
would
A. Increase if the bonds were issued at a discount.
B. Decrease if the bonds were issued at a premium.
C. Increase whether the bonds were issued at a discount of premium.
D. Decrease whether the bonds were issued at a discount of premium.
16. When bonds issuance includes payment of bond issue cost, the bond issue cost
A. Increases both bond discount and carrying amount of bonds payable.
B. Increases both bond premium and carrying amount of bonds payable.
C. Increases bond premium and decreases carrying amount of bonds payable.
D. Increases bond discount and decreases carrying amount of bonds payable.
17. There would be a loss on early retirement of bonds payable if
A. Retirement price exceeds carrying amount of bonds payable
B. Carrying amount of bonds payable exceeds retirement price
C. The bonds were originally issued at a discount.
D. The bonds were originally issued at a premium.
18. Gain or loss on the retirement of bonds is
A. A component of other comprehensive income C. Part of a share premium
B. Direct adjustment to retained earnings D. Recognized in profit or loss
19. The floating of new bonds payable the proceeds from which are used in paying the original
bonds payable.
A. Treasury bond C. Early retirement of bond
B. Bond refunding D. Bond refinancing
20. Which of the following is an example of compound financial liability
A. Treasury bonds C. Share warrants
B. Preference shares D. Convertible bonds
21. When cash proceeds from bonds issued with warrants exceeds the fair value of the bonds
without the warrants, the excess shall be credited to
A. Share capital C. Retained earnings
B. Share premium D. Premium on bonds payable
22. On March 01, Year 1. Lagpak Inc. issued at 102 plus accrued interest, 1,000 of its 9% P1,000 par
value bonds. The bonds are dated January 01, Year 1 and mature on January 01, Year 11.
Interest is payable semi-annually every June 30 and December 31. Lagpak paid transaction costs
directly attributable to bond issuance amounting to P5,000. The company elected the fair value
option of measuring financial liabilities. The bonds are quoted at 103 on December 31, Year 1.
Realized net cash flow from the bond issuance would be
A. 1,025,000 C. 1,040,000
B. 1,030,000 D. 1,045,000
23. Refer to the preceding problem. What amount of gain/(loss) from change in fair value of bonds
would the entity recognized for Year 1.
A. 15,000 gain C. 10,000 gain
B. 15,000 loss D. 10,000 loss
24. A 12%, P1 million total par value bonds were issued for P1,049,737 and yielded 10% effective
rate. The bond was issued on March 1, Year 1 and matures after 3 years. Interest is payable
every March 31. What is the interest expense to be recognized for Year 2?
A. 104,973 C. 101,818
B. 103,471 D. 103,722
25. Refer to the preceding problem. What is the carrying amount of bonds on December 31, Year 2?
A. 1,034,711 C. 1,020,937
B. 1,037,215 D. 1,018,182
26. Nga-nga Corp. issued a total of P4 million par value bonds on January 01, Year 1. Nominal
interest is 10% and effective interest is 9%. Interest is payable annually every December 31 and
the bonds will mature on December 31, Year 4. Pertinent present value factors are as follows:
9% 10%
Present value of 1 for 4 periods 0.70843 0.68301
Present value of ordinary annuity of 1 for 4
periods 3.23972 3.16987
What is the issue price of the bonds?
A. 4,000,000 C. 4,129,608
B. 4,400,000 D. 4,119,520
27. Refer to the preceding problem. What amount of interest expense would be recognized for Year
1?
A. 371,665 C. 366,335
B. 369,115 D. 363,305
28. Refer to the preceding problem. What is the carrying amount of the bonds payable on December
31, Year 1?
A. 4,129,608 C. 4,070,387
B. 4,101,273 D. 4,036,722
29. Refer to the preceding problem. After interest and principal payments of the bonds on
December 31, Year 2, the 40% of the bonds were retired at 99. What amount of gain/(loss) on
early retirement of bonds would be recognized?
A. 44,155 loss C. 56,509 loss
B. 44,155 gain D. 56,509 gain
30. Lagota Co. issued a total of P4 million par value bonds on January 01, Year 1. Nominal interest is
9% and effective interest is 10%. Interest is payable annually every December 31. Likewise, the
bonds mature annually for four years in equal installments beginning December 31, Year 1.
Pertinent present value factors are as follows:

9% 10%
Present value of ordinary annuity of 1 for 4
periods 3.23972 3.16987
 Present value of 1 for 1 period 0.91743 0.90909
Present value of 1 for 2 periods 0.84168 0.82645
Present value of 1 for 3 periods 0.77218 0.75131
Present value of 1 for 4 periods 0.70843 0.68301
What is the issue price of the bonds?
A. 3,916,991 C. 1,973,559
B. 2,948,690 D. 3,948,690
31. Refer to the preceding problem. What is the interest expense for Year 2
A. 391,699 C. 294,869
B. 360,000 D 270,000
32. After interest and principal payments of the bonds on December 31, Year 2, the remaining bonds
were reacquired at 99. What amount of gain/(loss) on acquisition of treasury bonds would be
recognized?
A. 6,441 loss C. 21,310 loss
B. 6,441 gain D. 21,310 gain
33. During Year 1, Royal Corporation issued at 95, one thousand of its 8%, P5,000 par value bonds
due in 10 years. One detachable share warrants entitling the holder to buy 20 ordinary shares
(P50 par) of Royal’s ordinary shares for P55.was attached to each bond. Shortly after issuance,
the bonds are selling at 10% ex-warrant, and each warrant is quoted P60. The PV of 10% for an
ordinary annuity of P1 for 10 periods is 6.145 and the PV of P1 at 10% for 10 periods is 0.385.
What amount of the proceeds from bond issuance will be recorded as part of shareholders’
equity?
A. 60,000 C. 250,000
B. 225,000 D. 367,000
34. Refer to the preceding problem. If the warrants were exercised, the journal entry to record the
exercise of warrants would include a credit to share premium - ordinary amounting to
A. 100,000 C. 467,000
B. 327,000 D. none
35. On January 1, Year 1, Trader Company issued its 8%, 5-year convertible bonds with face amount
of P6 million for P5,900,000. Interest is payable every December 31. The debt instrument is
convertible into 50,000 ordinary shares with P100 par. When the bonds were issued, the
prevailing market rate for similar debt without conversion option is 10%. (Use 4 decimal places
for PV factors) What is the portion of the proceeds representing the component of equity?
A. None C. 355,016
B. 100,000 D. 454,800
36. When the conversion option was exercised, the bonds have carrying amount of P5,850,000. The
journal entry on the exercise of the conversion privilege will include a credit to share premium
amounting to
A. 850,000 C. 504,320
B. 353,470 D. 1,205,016