University of Luzon

COLLEGE OF ACCOUNTANCY
ACC313/314: Financing Cycle

Name: _________________________________

Problem 1
1. Mariz Company issued 1,000 of its P1,000 face value bonds, 10% dated January 1, 2024.
Principal is due on December 31, 2026 and interest is payable annually every December 31.
The effective interest rate is 8%.

Required:
a. Prepare the necessary journal entries from Year 2024 to Year 2026.
b. How much is the interest expense for the year ended December 31, 2025?
c. What is the carrying amount of the bonds payable as of December 31, 2025?

2. On January 2, 2024, Mezille Co. issued 8% bonds with a face amount of P1,000,000 that
mature on January 2, 2028. Interest is payable semi-annually (June 30 and December 31). The
effective interest rate is 10%.

Required:
a. Prepare the necessary journal entries from Year 2024 to Year 2026.
b. How much is the interest expense for the year ended December 31, 2025?
c. What is the carrying amount of the bonds payable as of December 31, 2025?
d. Assuming Mezille retired the bonds at 103 on September 1, 2026, how much is the gain or
loss on retirement?

Problem 2
The following is an excerpt of Fankee Inc.’s trial balance as of December 31, 2018:
10% Notes payable - Bank, 5 years P3,000,000
12% Bonds payable, 5 years 5,000,000
9% Bonds payable, 3 years 2,000,000

Additional information
a. The Notes payable – Bank which was dated April 1, 2014 pays interest annually every April 1.
As of December 31, 2018, Fankee Inc. has the right to refinance the said loan by issuing Bonds
the proceeds shall be used to settle the obligation. On March 1, 2019 the company issued
P4,000,000 Bonds at face value and used one-half of the proceeds to settle the notes on April 1,
2019. The balance of the maturing obligation was settled out of working capital. The 2018
financial statement were approved for issuance by the BOD on April 15, 2019.

b. The 12% bonds payable was issued on January 1, 2017 at P5,386,087, when the prevailing
market rate for bonds was at 10%. The company recorded the transaction as a debit to cash for
the bond proceeds, credit to the bonds payable account at face value, charging any difference to
interest expense. Interest on the bonds is payable semi-annually every June 30 and December
31. The payment of interests was recorded properly by the company.

c. The 9% bonds payable were issued at P2,150,000 on January 1, 2017. The bonds which pay
annual interest every December 31 matures on December 31, 2020. The bonds are convertible
into 20,000, P100 par value ordinary shares at the option of the holder. The prevailing market
rate of interest for similar debt security without the conversion option on the issuance date was
10%. The company recorded the transaction as a debit to cash for the cash consideration
received, credit to bonds payable at its face value with the difference being charged to interest
expense. The only other entry made by the company in relation to the bonds was the periodic
payment of interest.

Required
University of Luzon
COLLEGE OF ACCOUNTANCY
ACC313/314: Financing Cycle

1. How much from the 10% Notes payable should be presented as non-current liability as of
December 31, 2014?
2. What is the correct carrying value of the 12% Bonds payable as of December 31, 2018?
3. What is the equity component of the 9% bonds payable?
4. Assuming that the 9% bonds payable were converted into ordinary share on December 31,
2018, what is the credit to share premium as a result of the equity conversion?
5. Assuming that the 9% bonds were retired at P2,100,000 on December 31, 2019, when the
prevailing market rate of interest on similar securities without the conversion option is at 8%,
what is the gain or loss to be recognized in the profit or loss as a result of the retirement of
securities?

Problem 3
The shareholders’ equity Hanabi Company on January 1, 2019 showed the following:
Ordinary shares, P50 par, auth. 100,000 shares, 50,000 shares issued P2,500,000
Preference shares, P100 par, authorized 50,000 shares, 20,000 shares
issued. Each preference share is convertible to 3 ordinary shares. 2,000,000
Share premium - Ordinary 600,000
Share premium – Preference 1,200,000
Retained earnings 2,750,000

The following transactions occurred during the year:

a. Reacquired 15,000 ordinary shares on February 1 at P90 per share and placed them in the
treasury.
b. Reissued 8,000 treasury shares at P122 per share on June 4.
c. Reissued 5,000 treasury shares at P75 per share on August 3.
d. Issued stock rights on ordinary shares on September 30. Five stock right entitles the stockholder
to purchase an additional share for P80 per share. The rights shall expire on December 31.
e. On October 1, 5,000 of the preference shares were converted to ordinary shares.
f. All but 3,000 share rights were exercised when the market value of the shares was at P80 per
share on October 11.
g. Declared P3 per share cash dividends on ordinary shares and P6 per share on preference shares
on December 15, to stockholders as of December 31 payable on January 15, 2020.
h. Reported an adjusted net income of P540,000.

Required
1. The entry to record the reissuance of treasury shares in item c
2. The entry to record the conversion of preference share to ordinary shares in item e
3. The entry to record the exercise of stock rights in item f
4. The cash dividend declaration in item g shall involve a debit to retained at:
5. What is the total additional paid in capital as of December 31, 2019?

Problem 4
You have been asked to audit Greystone Company. During the course of your audit, you are asked to
prepare comparative data from the company’s inception to the present. You have determined the
following:
a. Greystone Company’s charter became effective on January 2, 2024, when 2,000 shares of no-
par common and 1,000 shares of 7% cumulative, non-participating, preferred stock were issued.
The no-par common stock had no stated value and was sold at P120 per share, and the preferred
stock was sold at its par value of P100 per share.
b. Greystone was unable to pay preferred dividends at the end of its first year. The owners of the
preferred stock agreed to accept 2 shares of common stock for every 50 shares of preferred
stock owned in discharge of the preferred dividends due on December 31, 2024. The shares
were issued on January 2, 2025. The fair market value was P100 per share for common on the
date of issue.
University of Luzon
COLLEGE OF ACCOUNTANCY
ACC313/314: Financing Cycle

c. Greystone Company acquired all of the outstanding stock of Booth Corporation on May 1,
2026, in exchange for 1,000 shares of Greystone common stock.
d. Greystone split its common stock 3-for-2 on January 1, 2027, and 2-for-1 on January 1, 2028.
e. Greystone offered to convert 20% of the preferred stock to common stock on the basis of two
shares of common for one share of preferred. The offer was accepted, and the other conversion
was made on July 1, 2028.
f. No cash dividends were declared on common stock until December 31, 2026. Cash dividends
per share of common stock were declared as follows:
June 30 December 31
2026 - P3.19
2027 P1.75 P2.75
2028 P1.25 P1.25

Required: Compute for the following:

1. The number of shares of each class of stock outstanding on the last day of each year from 2024
through 2028
2. Total cash dividends applicable to common stock for each year from 2026 through 2028.

Problem 5
At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The grant is
conditional upon the executive remaining in the entity’s employ until the end of year 3.

The share options can be exercised if the entity’s share price increases from P20 at the beginning of
year 1 to above P30 at the end of year 3. If the share price is above P30 at the end of year 3, the share
options can be exercised at any time during the next five years, i.e., by the end of
year 8.

The entity estimates the fair value of the share options on grant date to be P5 per option. This
estimate takes into account the following market condition:
 The possibility that the share price will exceed P30 at the end of year 3, i.e., the share options
become exercisable; and
 The possibility that the share price will not exceed P30 at the end of year 3, i.e., the share
options will be forfeited.

The following actual events occurred in years 1 to 3:

Year 1
 The share price has increased to P24.
 The entity’s estimate of the fair value of the options is P4 at the end of year 1. This takes into
account whether the market condition will be satisfied by the end of year 3.

Year 2
 The share price has decreased to P22. However, the entity remains optimistic that the share
price target will be met by the end of year 3.
 The estimated fair value of the share options is P3. Again, this estimate takes into account the
market condition noted above.

Year 3
 The share price only reaches P28 by the end of year 3.
 The estimated fair value of the share options is zero, as the market condition has not been
satisfied.

Required: Based on the preceding information, determine the following:

1. Compensation expense for year 1
2. Compensation expense for year 2
University of Luzon
COLLEGE OF ACCOUNTANCY
ACC313/314: Financing Cycle

3. Compensation expense for year 3

4. Share options outstanding at the end of year 2
5. Cumulative compensation expense for the three-year period