CHAPTER 8 Caselette - Audit of Liabilities

PROBLEM 1CHAPTER 8 Audit of LiabilitiesProblem 1

In conjunction with your December 31, 2007, annual audit of the financial statements of SweetHeart Company, you have obtained and examined the December 31, 2007, accounts payable trial balance. Your examination of this trial balance disclosed the following open vouchers:

a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher covered a cash transfer to the factory payroll bank account for the pay period ended December 28, 2007. The payroll cash transfer was made January 3, 2008, and payroll checks covering this pay period were distributed to factory employees on January 4, 2008.

b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000 credit covered the principal and interest due on a ten-year installment loan. The loan was granted to SweetHeart Company on January 1, 2007. Terms of the loan agreement call for ten equal annual installment payments of P100,000, each plus interest at 8 percent. Principal and interest payments are due January 5, 2008 2017. The voucher indicated that the Loan Payable and Interest Expense accounts had been properly charged.

c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher covered on invoice from AC Company for a new computer machine. The computer machine was installed December 10, 2007, and the Office Equipment account was properly charged.

d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480. This voucher covered income taxes withheld from employees during December 2007.

e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit covered the total interest and principal due on a 180-day P40,000 note payable to the CJ Company. Charges to the Note Payable and Interest Expense had been properly handled.

f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher represented a P200,000 advance payment to SS Company for a special order of ten boxes. The P200,000 check was mailed to SS Company on January 2, 2008.

Questions

1.Accounts payable at year-end is

a. Overstated by P716,940c. Overstated by P516,940

b. Overstated by P666,940d. Overstated by P466,940

2.The entry to adjust Voucher # 778 is

a.Accounts payable180,000c. Loans payable100,000

Loans payable100,000 Interest expense 80,000

Interest payable 80,000Accounts payable180,000

b.Accounts payable180,000d. Loans payable100,000

Loans payable100,000 Interest payable 80,000

Interest expense 80,000Accounts payable180,000

3.The entry to adjust Voucher # 741 is

a.Accounts payable others50,000

Accounts payable50,000

b.Accounts payable50,000

Accounts payable others50,000

c.Accounts payable others50,000

Machinery50,000

d.No adjustment

4.The current liability of the company at year-end is

a. Overstated by P340,000c. Understated by P200,000

b. Overstated by P140,000d. Understated by P 60,000

Solution

1. Accounts payable380,000

Salaries payable380,000

2.Accounts payable180,000

Loans payable100,000

Interest payable 80,000

3.Accounts payable 50,000

AP others 50,000


Income tax payable 65,480


Notes payable 40,000


6.Cash200,000

Accounts payable200,000

Answer:

1. C2. A3. B4. C

Problem 2

In conjunction with your firms examination of the financial statements of Ronryan Company as of December 31, 2007, you obtained from the voucher register the information shown in the work paper below.

ItemEntry DateDescription AmountAccount Charged

1.12/18/07Supplies, purchased FOB

destination, 12/15/07;

received, 12/17/07 15,000Supplies on hand

2.12/18/07Auto insurance, 12/15/07

to 12/15/08 24,000Prepaid insurance

3.12/21/07Repair services; received

12/20/07 19,000Repairs and Main.

4.12/21//07Merchandise shipped FOB

shipping point, 12/20/07;

received, 12/24/07 12,300Inventory

5.12/21/07Payroll, 12/07/07 12/21/07

(12 working days) 69,000Sal. and wages

6.12/26/07Subscription to Tax Journals

for 2008 5,000Dues & subs

7.12/28/07Utilities for December 200724,000Utilities expense

8.12/28/07Merchandise shipped FOB

destination, 12/24/07;



shipping point, 12/26/07;


10.1/5/08Payroll 12/21/07 1/05/08

(12 working days. 4 working

days in January) 72,000Sal. and wages


destination, 1/03/08,


12.1/14/08Interest on bank loan,

10/10/07 to 01/10/08 30,000Interest expense

13.1/15/08Manufacturing equipment

installed, 12/29/07 254,000Machinery

14.1/15/08Dividends declared,

12/15/07 160,000Dividends payable

Accrued liabilities of 12/31/07 were as follows:

Accrued payrollP 48,000

Accrued interest payable 26,667

Dividends payable 160,000

The accruals made on December 31, 2007 were reversed effective January 1, 2008.

Review the data given above and prepare adjusting journal entries to correct the accounts on December 31, 2007. Assume that the company follows FOB terms for recording inventory purchases.

Questions

1.The entry to adjust item #2 is

a.Insurance expense24,000c. Insurance expense 1,000

Prepaid insurance24,000 Prepaid insurance1,000

b.Insurance expense1,000d. No adjustment

Prepaid insurance1,000


a.Salaries expense48,000c. Accrued payroll48,000

Accrued payroll48,000 Salaries expense24,000

b.Accrued payroll 48,000Cash 72,000

Salaries expense48,000d. No adjustment


a.Interest expense26,667c. Interest expense26,667

Interest payable26,667 Interest payable 3,333

b.Interest expense30,000Cash 30,000

Interest payable30,000d. No adjustment

4.The entry to adjust item #13

a.Machinery254,000c. No adjustment

AP others254,000

b.AP others254,000d. No adjustment since payment

Machinery254,000 was made on Jan. 15, 2008

5.The entry to adjust item #14

a.Dividends declared160,000c. No adjustment

Dividends payable160,000

b.Dividends payable160,000d. No adjustment since payment

Dividends declared160,000 was made on Jan. 15, 2008.

Solution

1.No Adjustment

2.Insurance expense1,000

Prepaid insurance1,000

3.No Adjustment

4. No Adjustment

5.No Adjustment

6.Prepaid subscription5,000

Dues and subscription5,000

7.No adjustment


Inventory111,000

9.No adjustment

10.No adjustment

11.No adjustment

12.No adjustment

13.Machinery 254,000

AP others254,000

14.No adjustment

Answer:

1.B2. D3. D4. A5. C

Problem 3 - ADJUSTMENT FOR LOSS CONTINGENCIES

The following items have not been reflected in the financial statements of ALTAGRACIA CORP. for the year ended December 31, 2007. You are asked if the information should be adjusted and disclosed in the financial statements, disclosed only in the financial statement, or no adjustment or disclosure.

1. Altagracia owns a small warehouse located on the banks of a river in which it stores inventory worth approximately P250,000. Altagracia is not insured against flood losses. The river last overflowed its banks 200 years ago.

a. Adjusted and disclosed in the financial statements.

b. Only disclosure is required in the financial statements.

c. No adjustment or disclosure required in the financial statements.

2. Altagracia offers an unconditional warranty on its toys. Based on past experience, Altagracia estimates its warranty expense to be 1% of sales. Sales during 2007 were P5,000,000.




3. On October 30, 2007, a safety hazard related to one of Altagracias toy products was discovered. It is considered probable that Altagracia will be liable for an amount in the range of P50,000 to P250,000.




4. On November 29, 2007, Altagracia initiated a lawsuit seeking P125,000 in damages from a patent infringement.




5. On December 15, 2007, a former employee filed a lawsuit seeding P50,000 for unlawful dismissal. Altagracias attorneys believe the suit is without merit. No court date has been set.




6. On December 12, 2007, Conchita guaranteed a bank loan of P500,000 for its presidents personal use.




7. On January 5, 2008, a warehouse containing a substantial portion of Altagracias inventory was destroyed by fire. Altagracia expects to recover the entire loss, except for a P125,000 deductible from insurance.




8. On January 5, 2008, inventory purchased FOB shipping point from a foreign country was detained at that coutnrys border because of political unrest. The shipment is valued at P750,000. Altagracias attorneys have stated that it is probable that Altagracia will be able to obtain the shipment.




9. On January 30, 2008, Altagracia issued P5,000,000 bonds at a premium of P250,000.




10. On February 14, 2008, the BIR assessed Altagracia an additional P200,000 for the 2001 tax year. Altagracias attorneys and tax accountants have stated that it is likely that the BIR will agree to a P150,000 settlement.




Solution

1.CNo adjustment nor disclosure

2.AAccrue at P50,000


4.BNo adjustment only disclosure for gain contingency

5.CNo adjustment nor disclose

6.ANo adjustment disclosure is required

7.BOnly disclosure subsequent events

8.AAccrue since it is probable

9.BOnly disclosure subsequent events


Problem 4 - BONUS COMPUTATION

Maria Rosa, president of the Villa Nova Company, has a bonus arrangement with the company under which she receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year, the net income before deducting either the provision for income taxes or the bonus is P4,650,000. The bonus is deductible for tax purposes, and the tax rate is 32%.

Questions

1. The amount of Maria Rosas bonus is

a. P 465,000.00b. P 364,285.71c. P 339,270.39d. P 296,069.42

2. The appropriate provision for income tax for the year is

a. P 1,488,000.00b. P 1,393,258.43c. P 1,371,428.57d. P 1,379,433.48

3. The entry to record the bonus (which will be paid in the following year) is

a.Bonus expense296,069.42

Bonus payable296,069.42

b.Bonus expense339,270.39


c.Bonus expense465,000.00


d. No entry

Solution

1.Answer: D

B = 10% (P4,650,000 B T)

T = 32% (P4,650,000 B)

B = 10% (P4,650,000 B (32% x P4,650,000 B)

= 10% (P4,650,000 B (P1,488,000 - .32B)

= 10% (P4,650,000 B P1,488,000 + .32B

= P465,000 - .10B P148,800 + .032B

= P316,200 - .068B

1.068B= P316,200

= P296,097.42

2.Answer: B

T = 32% (P4,650,000 P296,067.42)

= P1,393,258.43

3.Answer: A

Bonus expense296,097.42


Problem 5 - PREMIUMS

In the packages of its products, ALONDRA, INC. includes coupons that may be presented at retail stores to obtain discounts on other Alondra products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Alondra honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Alondra estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Alondra during 2007 is as follows:

Consumer expiration date12/31/07

Total payments to retailers as of 12/31/07165,000

Liability for unredeemed coupons as of 12/31/07 99,000

Questions

1. The total face amount of coupons issued in 2007 is

a. P 600,000b. P 440,000c. P 400,000d. P 240,000

2.Coupons expense at year-end is

a. P 440,000b. P 400,000c. P 264,000d. P 240,000

4. Estimated liability for unredeemed coupons is

a. P 219,000b. P 123,000c. P 99,000d. P 3,000

Solution

Coupons issued400,000 squeezed figure

X 60%

Coupons to be redeemed240,000Answer:

Plus: Handling cost (10%) 24,0001. C 2. C3. C

Total Cost264,000

Less: payment165,000

Estimated liability 99,000

Problem 6 - DEBT RESTRUCTURING: ASSET SWAP, EQUITY SWAP AND MODIFICATION OF TERMS

MARIANA CORPORATION is having financial difficulty and therefore has asked NALOOY Bank to restructure its P3 million note outstanding. The presented note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Presented below are four independent situations. Determine the journal entry that Mariana would make for each of the following types of debt restructuring.

1. NALOOY Bank agrees to take an equity interest in Mariana by accepting common stock valued at 2,400 in exchange for relinquishing its claim on this note. The common stock has a par value of P1,200,000.

a.Notes payable3,000,000

Common stock3,000,000

b.Notes payable3,000,000


APIC1,800,000

c.Notes payable3,000,000


Interest expense 300,000

APIC1,500,000

d.No adjustment

2. NALOOY Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of P2,000,000 and a fair value of P2,500,000.

a.Notes payable3,000,000

Land2,500,000

Gain on debt restructuring 500,000

b.Notes payable3,000,000

Land2,000,000


Gain on exchange 200,000


c.Notes payable3,000,000

Land2,000,000



d.No adjustment

3. NALOOY Bank agrees to modify the terms of the note, indicating that Dolores does not have to pay any interest on the note over the 3-year period.

a.Interest payable300,000

Gain on debt restructuring300,000

b.Loss on debt restructuring300,000

Interest expense300,000

c.Interest expense900,000

Gain on debt restructuring900,000

d.No adjustment

4. NALOOY Bank agrees to reduce the principal balance due to P2,000,000 and require interest only in the second and third year at a rate of 10%.

a.Notes payable old3,000,000

Notes payable new2,400,000


b.Notes payable- old3,000,000


c.Notes payable old3,000,000



d.No adjustment

Solution

1.B

Notes payable3,000,000


APIC1,800,000

2.C


Land2,000,000



3.DNo Adjustment

4.A

Notes payable old3,000,000



Problem 7 - CURRENT LIABILITY

The December 31 trial balance of the Ruel Corporation includes, among others, the following:

Long-term Notes which are payable in annual installment

of P10,000 on February 1 of each yearP 60,000

Rental income received in advance 16,000

Notes payable, which are trade notes, with the exception of P20,000

Notes payable to bank on June 30 of the following year 60,000

Accounts payable which include account with debit balance of P2,000 80,000

Notes Receivable which have been reduced by notes discounted of

P20,000 that are not yet due and on which the Corporation is

contingently liable 100,000

Accounts Receivable, which include accounts with credit balances

of P10,000 and past due accounts of P6,000 on which a loss

of 80% is anticipated 200,000

Merchandise Inventory, which includes goods held for consignment,

P8,000, and goods received on December 31 of P12,000; neither

of these items having been recorded as a purchase 180,000

Questions

1. What is the amount of the current liabilities on December 31?

a. P 190,000b. P 184,000c. P 178,000d. P 170,000

2.The long-term debt at year-end is

a. P 70,000b. P 50,000c. P 30,000d. P 0

Solution

Long-term Notes which are payable in annual installment

of P10,000 on February 1 of each year P 10,000

Rental income received in advance 16,000

Notes payable, which are trade notes, with the exception of P20,000

Notes payable to bank on June 30 of the following year 60,000

Accounts payable which include account with debit balance of P2,000 82,000

Accounts Receivable, which include accounts with credit balances

of P10,000 and past due accounts of P6,000 on which a loss

of 80% is anticipated 10,000

Merchandise Inventory, which includes goods held for consignment,

P8,000, and goods received on December 31 of P12,000; neither

of these items having been recorded as a purchase 12,000

TOTAL CURRENT LIABILITIESP 190,000

Answer:

1.A2. Long-term liability P50,000

Problem 8

Abam Corporation is selling audio and video appliances. The companys fiscal year ends on March 31. The following information relates the obligations of the company as of March 31, 2007.

Notes payable

Abam has signed several long- term notes with financial institutions. The maturities of these notes are given below. The total unpaid interest for all of these notes amount to P340,000 on March 31, 2007.

Due date Amount

April 31, 2007P 600,000

July 31, 2007 900,000

September 1, 2007 450,000

February 1, 2008 450,000

April 1, 2008- March 31, 2011 2,700,000

P5,100,000

Estimated warranties:

Abam has one year product warranty on some selected items. The estimated warranty liability on sales made during the 2005-2006 fiscal year and still outstanding as of March 31, 2006, amounted to P252,000. The warranty costs on sales made from April 1, 2006 to March 31, 2007 are estimated at P630,000. The actual warranty costs incurred during 2006- 2007 fiscal year as follows:

Warranty claims honored on 2005- 2006P252,000

Warranty claims honored on 2006- 2007 sales 285,000

Total P537,000

Trade payables

Accounts payable for supplies, goods and services purchases on open account amount to P560,000 as of March 31, 2007.

Dividends

On march 10, 2007, Abams board of directors declared a cash dividend of P0.30 per common share and a 10% common stock dividend. Both dividends were to be distributed on Aptil 5, 2007 to common stockholders on record at the close of business on March 31, 2007. As of March 31, 2007, Abams has 5 million, P2 par value common stock shares issued and outstanding.

Bonds payable

Abams issued P5,000,000, 12% bonds, on October 1, 2001 at 96. The bonds will mature on October 1, 2011. Interest is paid semiannually on October 1 and April 1. Abams uses straight line method to amortize bond discount.

Based on the forgoing information, determine the adjusted balances of the following as of March 31, 2007:

Questions

1. Estimated warranty payable

a. P252,000b. P345,000c. P630,000d. P882,000

2. Unamortized bond discount

a.P110,000b. P200,000c. P100,000d. P90,000

3. Bond interest payable

a.P0b. P300,000c. P150,000d. P250,000

4. Total current liabilities

a. P6,445,000b. P5,105,000c. P5,445,000d. P3,945,000

5. Total noncurrent liabilities

a. P7,700,000b. P7,590,000c. P7,500,000d. P7,610,000

Solution

1.B

Total Warranty Expense882,000

Less: Paid warranty537,000

Est. liability345,000

2.D

Discount on BP (P5M x 4%)200,000

Amortization (200,000/120 x 66)110,000

(Oct. 1, 1998 March 31, 2004)______

Unamortized discount on BP 90,000

3.DP5M x 12% x 6/12 = P300,000

4.CNotes payable2,400,000

Interest payable 640,000 (340,000 + 300,000)

Est. liability 345,000

Trade payable 560,000

Dividends payable1,500,000

Total Current Liability5,445,000

5.D


Bonds payable4,910,000

Total7,610,000

BONDS PAYABLE

Problem 9

On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of P1,000,000 due January 1, 2015. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest of 6%.

Questions

1.The bonds were issued on January 1, 2007 at

a. A premiumc. Book value

b. An amortized value d. A discount

2.Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective interest amortization method, LACEA COMPANY recorded interest expense for the 6 months ended June 30, 2007, in the amount of

a. P 70,000b. P 63,769c. P 35,000d. P 31,884

3.Same information in number 2. LACEA COMPANY recorded interest expense for the 6 months ended December 31, 2007, in the amount of

a. P 70,000b. P 63,769c. P 31,884d. P 31,791

4.The carrying value of the bonds on July 1, 2008 is:

a. P 1,056,578b. P 1,056,484c. P 1,053,276d. P 1,053,179

5.A bond issue sold at a premium is valued on the statement of financial position at the

a. Maturity value.

b. Maturity value plus the unamortized portion of the premium.

c. Cost at the date of investment.

d. Maturity value less the unamortized portion of the premium.

Solution

1. B

If nominal rate is less than the yield rate, there is discount

If nominal rate is more than the yield rate, there is premium

2.D

Date

Interest expense

Interest paid

Amortization

Carrying Value

1,062,809

July 2007

31,884

35,000

3,116

1,059,693

December 2007

31,791

35,000

3,209

1,056,484

July 2008

31,695

35,000

3,305

1,053,179

Interest expense = Carrying value of the note X yield rate x 6/12

Interest paid = Face value of the note X nominal rate x 6/12

Amortization = Interest expense Interest paid

Carrying value end = Carrying value beg. Amortization

3.D4. D5. B

Problem 10

The following data were obtained from the initial audit of Popoy Company:

DebitCreditBalance

15%, 10-year Bonds Payable, dated

January 1, 2006.

Cash proceeds from issue on January 1,

2007 of 500, P1,000 bonds522,500522,500

Bonds Interest Expense

Cash paid Jan. 2, 200837,500 37,500

Cash paid July 1, 200837,500 75,000

Accrual December 31, 200837,500112,500

Accrued Interest on Bonds

Balance Jan. 1, 200837,500 37,500

Accrual Dec. 31 200837,500 75,000

Treasury Bonds

Redemption price and interest to date

on 100 bonds permanently retired

October 1, 2008109,000109,000

Questions

1.What should be the correct original entry to account for the issuance of bonds at January 1, 2007?

DEBITCREDIT

a.Cash522,500Bonds Payable500,000

Discount on BP 22,500

b.Cash500,000Bonds Payable500,000

c.Cash522,500Bonds Payable500,000

Premium on BP 22,500

d.Cash522,500Bonds payable522,500

2.The adjusting entry to accrue interest on bonds payable at December 31, 2007?

DEBITCREDIT

a.Cash 37,500Interest income 37,500

b.Interest expense 37,500Interest payable 37,500

c.Interest receivable 37,500Interest income 37,500

d.Interest expense 37,500Interest income 37,500

3.The reversing entry related to accrual on bond interest expense at January 1, 2008?

DEBITCREDIT

a.Interest income 37,500Cash 37,500

b.Interest payable 37,500Interest expense 37,500

c.Interest payable 37,500Retained earnings 37,500

d.Retained earnings 37,500Interest expense 37,500

4.The journal entry to record payment of interest due on July 1, 2008?

DEBITCREDIT

a.Cash 37,500Interest payable 37,500

b.Interest payable 37,500Cash 37,500

c.Interest receivable 37,500Cash 37,500

d.Interest expense 37,500Cash 37,500

5.The reversing entry related to accrual on bond interest expense at January 1, 2009?

DEBITCREDIT

a.Interest income 37,500Cash 37,500

b.Interest payable 30,000Interest expense 30,000

c.Interest payable 15,000Interest expense 15,000

d.Interest income 37,500Interest expense 37,500

6.The adjusting entry that should have been made to amortize on bond premium at December 31, 2007?

DEBITCREDIT

a.Premium on BP2,500Interest expense2,500

b.Premium on BP2,500Retained earnings2,500

c.Premium on BP2,250Interest expense2,250

d.Premium on BP2,250Retained earnings2,250

7.The correcting entry to adjust for the error related to amortization on bond premium in 2008 is?

DEBITCREDIT

a.Premium on BP2,500Retained earnings2,500

b.Premium on BP2,500Interest expense2,500

c.Premium on BP4,875Interest expense2,375

Retained earnings2,500

d.Premium on BP4,875Retained earnings4,875

8.The correct entry to record retirement of 100 bonds on October 1, 2008?

a.Interest expense 3,750Cash109,000

Bonds payable100,000

Premium on BP 3,625

Loss on retirement 1,625

b.Interest expense 3,750Cash109,000


Premium on BP 3,625

Retained earnings 1,625

c.Interest expense 3,750Cash109,000


Premium on BP 3,713


d.Interest expense 3,750Cash109,000


Premium on BP 3,713


Solution

1.CCash522,500


Bond premium 22,500

2.BInterest expense37,500

Interest payable37,500

3.BInterest payable37,500


4.DInterest expense37,500

Cash37,500

5.BInterest payable30,000


6.ABond premium2,500

Interest expense2,500 (P22,500/108 x 12 = P2,500)

7.CBond premium4,875

Retained earnings2,500 (P22,500/108 x 12 = P 2,500)

Interest expense2,375 (P22,500/108 x 9 = P 1,875

4/5 x P22,500/108 x 3 = 500)

8.AOE: Treasury Bonds109,000

Cash109,000

CE: Bonds payable100,000

Bond premium 3,625



Cash109,000

Adj: Bonds payable100,000

Bond premium 3,625



Treasury Bodns109,000

Problem 10

When the LUAYON MANUFACTURING COMPANY was expanding its metal window division, it did not have enough capital to finance the expansion. So, management sought and received approval from the board of directors to issue bonds. The company planned to issue P5,000,000 of 8 percent, five-year bonds in 2007. Interest would be paid on June 30 and December 31 of each year. The bonds would be callable at 104, and each P1,000 bond would be convertible into 30 shares of P10 par value common stock.

On January 1, 2007, the bonds were sold at 96 because the market rate of interest for similar investment was 9 percent. The company decided to amortize the bond discount by using the effective interest method.

On July 1, 2009, management called and retired half the bonds, and investors converted the other half into common stock. As inducement, the company agrees to pay additional P100,000 to the holders of the convertible bonds.

Questions

1.Carrying value of the bonds at December 31, 2007 is:

a.P 4,840,000b. P 4,832,720c. P 4,832,000d. P 4,816,000

2.Carrying value of the bonds at December 31, 2008 is:

a.P 4,880,000b. P 4,868,451c. P 4,866,880 d. P 4,850,000

3.Interest expense at December 31, 2008 is:

a.P 432,000b. P 432,720c. P 435,731d. P 437,339

4.Carrying value of the bonds converted is:

a.P 2,500,000b. P 2,456,235c. P 2,450,000d. P 2,443,765

5.Additional paid-in capital in the conversion of bonds is:

a.P 1,706,234b. P 1,793,766c. P 1,693,766d. P 1,684,225

6.Carrying value of retired bonds is:

a.P 2,500,000b. P 2,456,235c. P 2,450,000d. P 2,443,765

7.Loss on early retirement of bonds is:

a.P 156,235b. P 150,000c. P 143,765d. P 100,000

8.Interest expense on the bonds at December 31, 2009 is:

a. P 438,161b. P 400,000c. P 219,080d. P 200,000

9.The company should record gain or loss on conversion of:

a. Loss of P100,000c. Loss of P50,000

b. Gain of P100,000d. No gain or loss on conversion

Solution

July 1, 2009Bonds payable2,500,000

Loss on bond retirement 156,235


Cash2,600,000


Debt conversion expense 100,000


Common stock 750,000

APIC1,693,765

Cash 100,000

Date

Interest expense

Interest paid

Amortization

Carrying Value

4,800,000

June 2007

215,000

200,000

16,000

4,816,000

December 2007

216,720

200,000

16,720

4,832,720

June 2008

217,472

200,000

17,472

4,850,192

December 2008

218,259

200,000

18,259

4,868,451

June 2009

219,080

200,000

19,080

4,887,531

Answer:1. b2. b3. c4. d5. c

6. d7. a8. c9. d

Problem 11

In connection with your firms annual examination of the December 31, 2007 financial statements of the NUNEZA CORPORATION, your have been assigned the duty of auditing long-term liabilities for the year ended December 31, 2007. In the course of performing your work, you obtain the following evidence and information related to a new bond issue sold during 2007:

1. NUNEZA floated a new issue of P800,000 par value, 15-year, 10 percent bonds during the latter half of the second quarter of the year.

2.The new bond issue was dated July 1, 2007 and it was sold on that date for P689,872. This price provided an effective interest rate on the bond issue of 12 percent.

3.Interest on a new bond issue was payable semiannually on January 1 and July 1.

4.NUNEZA paid P12,000 cash for printing, legal, and other fees in connection with the issuance of the bonds.

5.The NUNEZA CORPORATION accounts related to this new bond reflect these bond transactions as follows:

Bond Payable, 2007 Issue

CR 7/1/07 P 800,000

Unamortized Bond Discount, 2007 Bond Issue

CD 7/1/07 P110,128

CD 7/1/07 12,000JV 12/31/07 P 4,070.93

Bond Interest Expense, 2007 Bond Issue

JV 12/31/07 P 4,070.93

VR 12/30/07 40,000.00

Legend: CD Cash Disbursement

CR Cash Receipts

JV Journal Vouchers

VR Voucher Register

Questions

1.Amortization of bond issue cost is:

a. P 800.00b. P 400.00c. P 240.00d. P 120.00

2.Amortization of bond discount is:

a. P 1,392b. P 2,679c. P 3,671d. P 4,071

3.Carrying value of the bonds at year-end is:

a. P 693,943b. P 693,543c. P 692,551d. P 691,264

4The accrued interest expense at year-end is:

a. P 40,000b. P 41,392c. P 80,000d. P 82,785

5.The recorded amortization of bond discount is overstated by:

a. P 400b. P 1,392c. P 2,679d. P 0

6.The carrying value of the bond issue cost at year-end is:

a. P 11,880b. P 11,760c. P 11,600d. P 11,200

Solution

1.BP12,000/15 x 6/12 = P400

2.A3. D4. A

Date

Interest expense

Interest paid

Amortization

Carrying Value

689,872

December 2007

41,392

40,000

1,392

691,264

July 2008

41,476

40,000

1,476

692,740

December 2008

41,564

40,000

1,564

694,304

5.CPer record- P 4,071

Per audit- 1,392

Adj.- P 2,679

6.C(P12,000 P400)

Problem 12

On July 1, 2007 Salem Corporation issued P2,000,000 of 7% bonds payable in 10 years. The bonds pay interest semiannually. Each P1,000 bond includes a detachable stock purchase right. Each right gives the bondholder the option to purchase for P30, one share of P1 par value common stock at any time during the next 10 years. The bonds were sold for P2,000,000. The value of the stock purchase rights at the time of issuance was P100,000.

Questions

1.How many warrants were issued?

a. 2,000,000b. P 66,667c. 20,000d. 2,000

2.If the bondholder will exercise all his rights, the additional paid-in capital will be

a. P 158,000b. P 150,000c. P 58,000d. P 0

Solution

Cash2,000,000

Discount on bonds payable 100,000


Common stock warrants outstanding 100,000

Proceeds2,000,000

Less: Cost of Warrants 100,000

Cost of the bonds1,900,000

If warrant will exercise:

Cash60,000

CSWO 100,000

Common stock 2,000

APIC158,000

Answer: 1. D2. A

Problem 13

Friendly Corporation issued P500,000, 6%, nonconvertible bonds with detachable stock purchase warrants. Each P1,000 bond carried 20 detachable stock purchase warrants, each of which called for one share of friendly common stock, par P50, at the specified option price of P60 per share. The bonds sold at 106, and the detachable stock purchase warrants were immediately quoted at P1 each on the market.

Questions

1. The entry to record the issuance of the bonds is

a.Cash500,000


b.Cash530,000


Premium on bonds payable 20,000

CS warrants outstanding 10,000

c.Cash530,000



d.Cash530,000



2.The entry to record the subsequent exercise of the 10,000 stock purchase warrants is

a.Cash600,000

Premium on BP 20,000


Additional paid-in capital120,000

b.Cash500,000

Common stock500,000

c.Cash600,000

Common stock500,000


d.Cash600,000

CS warrants outstn. 10,000

Common stock500,000


3. Assuming the Goode Company did not exercise the 10,000 stock purchase warrants in questions above, what is the entry for Goode Company (the investor) in the acquisition of the bonds (including the stock purchase warrants).

a.Investment in bonds500,000

Cash500,000

b.Investment in bonds500,000

Invest. in warrants 30,000

Cash530,000

c.Investment in bonds530,000

Cash530,000

d.Investment in bonds470,000

Cash470,000

4. The entry in the subsequent sale to another investor of half of the stock purchase warrants at P1.50 each is

a.No adjustment

b.Cash7,500

Gain on sale7,500

c.Cash750

Investment in bonds500

Gain on sale250

d.Cash7,500

Investment in bonds5,000

(P1 x 10,000 x 1/2)

Gain on sale2,500

5. The entry in the Subsequent exercise of the remaining half of the stock purchase warrants (by tendering them to Friendly Corporation). The market value of the stock was P62 per share is

a.Investment in stock305,000

Cash300,000

(10,000 warrants x x P60)

Investment in bonds 5,000

b.Investment in bonds305,000

Cash305,000

c.Investment in stock300,000

Cash300,000

d.Investment in bonds 5,000

Investment in stock300,000

Cash305,000

Solution

1.BCash530,000



Common stock warrants outstanding 10,000

2.DCash600,000


Common stock500,000

APIC110,000

3.CInvestment in bonds530,000

Cash530,000

4.DCash 7,500


(P1 x 10,000 x )

Gain on sale 2,500

5.AInvestment in stock305,000

Cash300,000

(10,000 warrants x x P60)


Problem 14

In your initial audit of EMILIA CORP., you find the following ledger account balances.

12% Bonds Payable maturity date, 1/1/2015

1/2/05CR P5,000,000

Treasury Bonds

10/1/07 CD P1,100,000

Bond Discount

1/2/05 CD P 500,000

Bond Interest Expense

1/1/07 CD P 300,000

7/1/07 CD 300,000

The bonds were redeemed for permanent cancellation on October 1, 2007, at 107 plus accrued interest.

Questions

1. Adjusted balance of bonds payable on December 31, 2007.

a.P 5,000,000b. P 4,000,000c. P 3,900,000d. P 3,000,000

2. Adjusted balance of bond discount on December 31, 2007.

a.P 360,000b. P 352,500c. P 327,500d. P 280,000

3. Bond interest expense for 2007.

a.P 917,500b. P 870,000c. P 680,000d. P 617,500

4. Gain or loss on bond redemption.

a.P 170,000b. P 142,500c. P 127,500 d. P 97,500

Solution


Bond discount100,000



--------------------------------------------------------------

OE: Treasury bonds1,100,000

Cash1,100,000

CE: Bonds payable1,000,000* 1/5 x P500,000 = P100,000

Interest expense 30,000100,000/120 x 33 (27,500)

Loss on early extinguishmentUnamortized disc.

of debt 142,500 for the P100,000

Bonds discount 72,500 * bond P 72,500

Cash1,100,000

Adj: Loss on early extinguishment

of debt 142,500



Bonds discount 72,500

Treasury bonds1,100,000

----------------------------------------------------------------



----------------------------------------------------------------


Bonds discount 47,500

P100,000 bond / 10 years x 9/12= P 7,500

P400,000 bond / 10 years = 40,000

P47,500

Answer:

1.B2. D3. D4. B

Problem 15

At December 31, 2006, the Core Corporation had the following liability and equity account balances:

11% Bonds payable, at face valueP2,500,000


Common stock 4,000,000

Additional paid in capital 1,147,500

Retained earnings 1,232,500

Treasury stock, at cost 162,500

Transactions during 2007 and other information relating to the Corporations liability and equity accounts were as follows:

The bonds were issued on December 31, 2005, for P2,689,000 to yield 10%. The bonds mature on December 31, 2012. Interest is payable annually on December 31. The Corporation uses the effective interest method to amortize bond premium.

At December 31, 2006, the corporation had 1,000,000 authorized shares of P10 par common stock.

On November 2, 2007, the Corporation borrowed P2,000,000 at 9%, evidenced by a note payable to Premium Bank. The note is payable in five equal annual principal installments of P400,000. The first principal and interest payment is due on November 2, 2008.

Questions

1.How much is the bond premium amortization for 2007?

a. P 7,381b. P 6,710c. P 6,500d. P 6,100

2.What is the carrying value of the bonds payable on December 31, 2007?

a. P 2,689,000b. P 2,682,900c. P 2,676,190d. P 2,668,809

3.How much is the 2007 interest expense on bonds payable?

a. P 275,000b. P 268,900c. P 268,290d. P 267,619

4.What is the treasury stock balance on December 31, 2007?

a. P 165,200b. P 163,500c. P 162,500d. P 162,000

5.What is the long-term portion of the note payable to bank as of December 31, 2007?

a. P 2,000,000b. P 1,600,000c. P 1,400,000d. P 1,000,000

6.What is the 2007 total interest expense?

a. P 305,000b. P 298,900c. P 298,290d. P 297,619

Solution

Interest InterestCarrying

PaidExpenseAmort.Value

Dec. 31, 20052,689,000

2006275,000268,9006,1002,682,900

2007275,000268,2906,7102,676,190

2008275,000267,6197,3812,668,809

Answer:

1.B2. C3. C4. C5. B

6.Notes Payable P2,000,000 x 9% x 2/12 = P 30,000


Total298,290

Problem 16

The STEPHANY CO. sold P6,000,000 of 9% bonds on October 1, 1999, at P5,747,280 plus accrued interest. The bonds were dated July 1, 1999; interest payable semiannually on January 1 and July 1; redeemable after June 30, 2004 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible into P10 par value common stock as follows:

Until June 30, 2004, at the rate of 6 shares for each P1,000 bond.

From July 1, 2004, to June 30, 2007, at the rate of 5 shares for each P1,000 bond.

After June 30, 2007, at the rate of 4 shares for each P1,000 bond.

The bonds mature 10 years form their issue date. The company adjust its books monthly and closes its books as of December 31 each year.

The following transactions occur in connection with the bonds:

2005

July 1P2,000,000 of bonds were converted into stock.

2006

Dec 31P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued interest. These were immediately retired.

2007

July 1The remaining bonds were called for redemption and accrued interest was paid. For purposes of obtaining funds for redemption and business expansion, an P8,000,000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2007, and are due in 20 years.

Questions

1. What is the carrying value of bonds payable at December 31, 1999?

a. P 5,747,280b. P 6,000,000c. P 5,753,760d. P 5,749,440

2. What is the total interest expense for 1999?

a. P 128,520b. P 47,160c. P 141,480d. P 135,000

3. In recording the bond conversion on July 1, 2005, how much should be credited to the additional paid-in capital account?

a. P 1,796,320b. P 1,965,440c. P 1,845,440d. P 1,865,440

4. What is the gain or loss on bond conversion on July 1, 2005?

a. P 0b. P 1,796,320c. P 1,865,440d. P 34,560

5. What is the carrying value of the bonds reacquired on December 31, 2006?

a. P 989,200b. P 957,880c. P 1,010,800d. P 981,700

6. What is the gain (loss) on bond reacquisition on December 31, 2006?

a. P 3,300b. (P 3,300)c. P 34,620d. (P 34,620)

7. What is the carrying value of the bonds retired on July 1, 2007?

a. P 3,000,000b. P 2,974,080c. P 2,873,640d. P 3,025,920

8. What is the gain (loss) on bond retirement on July 1, 2007?

a. (P 25,920)b. P 25,920c. (P 12,960)d. P 0

Solution

October 1, 1999Cash5,882,280

Discount on Bond payable 252,720



Dec. 31, 1999Interest expense 6,480

Discount on Bond Payable 6,480

P 252,720/117 x 3 = P6,480



July 1, 2005Bond payable2,000,000



Additional paid-in capital1,865,440

Dec. 31, 2005Bonds payable1,000,000




Cash1,037,500





Cash3,135,000

Answer:

1.C2. C3. D4. A5. A

6. B7. B8. A

Problem 17

From the following accounts and supplementary information, prepare working papers and any adjusting entries covering your audit of bonds payable in connection with your first examination of the Corporation, as of December 31, 2007.

6% 25-year Debenture Bonds, Due January 1, 2027

DRCR Balance

January 1, 2002 CR P500,000.00P500,000.00

Bond Premium

DRCR Balance

January 1, 2002 CR P 25,000.00P 25,000.00

Treasury Bonds

DRCR Balance

October 1, 2007 CD P104,500.00P104,500.00


DRCR Balance

January 1, 2007 CDP 15,000.00P 15,000.00

July 1, 2007 CD 15,000.00 30,000.00

The treasury bonds were purchased at a price of 103 plus accrued interest through a broker. The bonds are not to be reissued and the client asked you to prepare an adjusting entry writing off the bonds.

Questions

1.The December 31, 2007 Bonds Payable is

a. P 500,000b. P 450,000c. P 400,000d. P 395,500

2.The December 31, 2007 Bond Premium is

a. P 20,050b. P 16,000c. P 15,000d. P 14,750

3.The December 31, 2007 Accrued Interest Payable is

a. P 30,000b. P 26,050c. P 15,000d. P 12,000

4.The December 31, 2007 Bond Interest Expense is

a. P 27,550b. P 26,050c. P 25,000d. P 24,050

Solution

Bond premium 4,000



Bonds premium 4,050


Treasury bonds104,500

Gain on bond redemption/retirement 1,050





Bonds premium 950

Interest expense 950

P25,000 x 4/5 = P 20,000/25 = P 800

P 5,000 x 9/12 = 150

P 950

Answer:

1.C2. B3. D4. A

Problem 18

In the course of your initial examination of the accounts of Paul Company, you obtain the following information related to the companys bonds payable as of December 31, 2007:

12% 25-year Bonds Payable, 2006 issue

01/01/2006Balance-P 4,000,000 Cr

Treasury Bonds

10/01/2007Balance-P 540,000 Dr

Bond Premium

01/01/2006Balance-P 200,000 Cr


01/01/2007Balance-P 240,000 Dr

07/01/2007Balance-P 240,000 Dr

The treasury bonds were acquired at a price of 105 plus accrued interest. The treasury bonds will be available for reissuance.

Questions

Based on the information presented above and the result of your audit, answer the following:

1.The adjusted balance of the bonds payable account as of December 31, 2007 is:

a.P 4,000,000b. P 3,500,000c. P 3,460,000d. P 3,360,000

2.The adjusted balance of the treasury bonds account as of December 31, 2007 is:

a.P 540,000b. P 525,000c. P 500,000d. P 0

3.The unadjusted balance of the bond premium account as of December 31, 2007 should be

a.P 200,000b. P 160,000c. P 140,000d. P 0

4.The total bond interest expense that should be reported by the company for the year 2007 is

a.P 480,000b. P 472,750c. P 465,000d. P 457,250

5.The loss on the acquisition of treasury bonds is

a.P 19,750b. P 15,000c. P 4,750d. P 0

6.The carrying value of the bonds payable as of December 31, 2007 should be

a.P 4,000,000b. P 3,860,000c. P 3,640,000d. P 3,360,000

Solution

OE: Treasury bonds540,000

Cash540,000

CE: Bonds payable500,000

Bonds premium 20,250



Cash540,000

Proceeds = Principal x 105 + {x (12%) (3/12)}

540,000= x (105) + .03x

540,000= 1.03x

500,000= x

500,000/4,000,000 x 200,000 = 25,000 Discount

( 4,750) 25,000/300 x 57

20,250 Unamortized Bonds Premium


Bonds premium 20,250



Treasury Bonds540,000

To record the amortization:

Bond premium39,750

Interest expense 7,750 *

Retained earnings32,000 (200,000/300 x 48)

3,500,000/4,000,000 x 200,000 = 175,000/300 x 12 = 7,000

500/4,000,000 x 200,000 = 25,000/300 x 9= 750

7,750

To record accrual of interest



Answer:

1.B2. D3. C4. D5. C6. D

Problem 19

In the course of your initial examination of the accounts of Maricel Company, you obtain the following information related of the companys bonds payable as of December 31, 2004.

12% Bonds Payable Due January 1, 2007

01/01/2004 P3,000,000 face 01/01/1997P 6,000,000

value bonds purchased at

90 and retiredP 2,700,000

Discount on Bonds Payable

01/01/1997P 300,000

Questions

Based on the above and the result of your audit, answer the following:

1.How much is the Discount on bonds payable as of December 31, 2004?

a.P 90,000b. P 45,000c. P 30,000d. P 15,000

2.How much is the carrying amount of bonds payable as of December 31, 2004?

a.P 3,000,000b. P 3,030,000c. P 2,970,000d. P 2,955,000

3.How much is the total interest expense for the year ended December 31, 2004?

a.P 390,000b. P 375,000c. P 360,000d. P 345,000

4.How much is the gain on early retirement of bonds?

a.P 345,000b. P 270,000c. P 255,000d. P 0

Solution

Entry retirement of bonds

OE: Bonds payable2,700,000

Cash2,700,000

CE: Bonds payable3,000,000

Gain on retirement 255,000


Cash2,700,000

(3M/6M x 300,000 = 150,000/10 x 3 = P45,000 unamortized)


Gain on retirement255,000


Retained earnings210,000 (300,000/10 x 7 = 210,000)

Interest expense 15,000 (3M/6M x 300,000/10)

Discount on bonds payable225,000



3,000,000 x 12% = 360,000

Answer:

1.C2. C3. B4. C

Problem 20

On January 1, 2007, CPA NAKO company issued eight-year bonds with a face value of P2,000,000 and a stated interest rate of 6% payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are:

Present value of 1 for 8 periods at 6%00.627




Present value of annuity of 1 for 8 periods at 6% 6.210

Present value of annuity of 1 for 8 periods at 8% 5.747

Present value of annuity of 1 for 10 periods at 3%12.561

Present value of annuity of 1 for 10 periods at 4%11.652

Questions

1.The present value of the principal is

a.P 1,068,000b. P 1,080,000c. P 1,246,000d. P 1,254,000

2.The present value of the interest is

a.P 689,640b. P 699,120c. P 745,200d. P 753,660

3.The issue price of the bonds is

a.P 1,767,120b. P 1,769,640c. P 1,779,120d. P 1,999,200

Solution

1.

B

P2,000,000 x .54 = P1,080,000

2.

B

P2M x 6% x 6/12 = P60,000; P60,000 x 11.652 = P699,120

3.

C

P1,080,000 + P699,120 = P1,779,120

Problem 21

In connection of your audit of the liabilities of Cring-Cring Company, you noted that on December 31, 2006. The company issued P2,000,000 8% serial bonds. To be repaid in the amount of P400,000 each year. Interest is payable annually on December 31. The bonds were issued to yields 10% a year. The bond proceeds were P1,902,800 based on the present value at December 31, 2006 of five annual payments as follows:

Due datesPrincipal Interest

12/31/07P400,000 P160,000

12/31/08 400,000 128,000

12/31/09 400,000 96,000

12/31/10 400,000 64,000

12/31/11 400,000 32,000

The company uses the effective method in amortizing bond premium or discount.

Questions:

1. How much is the amortization of discount for 2007?

a. P 19,440b. P 30,326c. P 47,770d. P 97,200

2. How much is the carrying value of the bonds payable as of December 31, 2007?

a. P 1,933,080b. P 1,665,920c. P 1,633,080d. P 1,533,586

Solution

Principal

Interest

Total

PV factors

Total PV

Payment

Payment

Payment

2007

400,000

160,000

560,000

0.90909

509,091

2008

400,000

128,000

528,000

0.82645

436,366

2009

400,000

96,000

496,000

0.75131

372,650

2010

400,000

64,000

464,000

0.68301

316,917

2011

400,000

32,000

432,000

0.62092

268,237

Total Present Value

1,903,260

Face value

2,000,000

Discount on BP

96,740

Int. paid

Int. exp.

Amort

Principal

Book

Payment

Value

1,903,260

2007

160,000

190,326

30,326

400,000

1,533,586

2008

128,000

153,359

25,359

400,000

1,158,945

2009

96,000

115,894

19,894

400,000

778,839

2010

64,000

77,884

13,884

400,000

392,723

2011

32,000

39,272

7,272

400,000

-

Note: Ignore the present value given in the problem.

Answer:

1.P 30,3262. P 1,533,586

Problem 22

The STEPHANY CO. sold P6,000,000 of 9% bonds on October 1, 1999, at P5,747,280 plus accrued interest. The bonds were dated July 1, 1999; interest payable semiannually on January 1 and July 1; redeemable after June 30, 2004 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible into P10 par value common stock as follows:

Until June 30, 2004, at the rate of 6 shares for each P1,000 bond.

From July 1, 2004, to June 30, 2007, at the rate of 5 shares for each P1,000 bond.

After June 30, 2007, at the rate of 4 shares for each P1,000 bond.

The bonds mature 10 years form their issue date. The company adjust its books monthly and closes its books as of December 31 each year.

The following transactions occur in connection with the bonds:

2005

July 1P2,000,000 of bonds were converted into stock.

2006

Dec 31P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued interest. These were immediately retired.

2007

July 1The remaining bonds were called for redemption and accrued interest was paid. For purposes of obtaining funds for redemption and business expansion, an P8,000,000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2007, and are due in 20 years.

Questions

1. What is the carrying value of bonds payable at December 31, 1999?

a. P 5,747,280b. P 6,000,000c. P 5,753,760d. P 5,749,440

2. What is the total interest expense for 1999?

a. P 128,520b. P 47,160c. P 141,480d. P 135,000

3. In recording the bond conversion on July 1, 2005, how much should be credited to the additional paid-in capital account?

a. P 1,796,320b. P 1,965,440c. P 1,845,440d. P 1,865,440

4. What is the gain or loss on bond conversion on July 1, 2005?

a. P 0b. P 1,796,320c. P 1,865,440d. P 34,560

5. What is the carrying value of the bonds reacquired on December 31, 2006?

a. P 989,200b. P 957,880c. P 1,010,800d. P 981,700

6. What is the gain (loss) on bond reacquisition on December 31, 2006?

a. P 3,300b. (P 3,300)c. P 34,620d. (P 34,620)

7. What is the carrying value of the bonds retired on July 1, 2007?

a. P 3,000,000b. P 2,974,080c. P 2,873,640d. P 3,025,920

8. What is the gain (loss) on bond retirement on July 1, 2007?

a. (P 25,920)b. P 25,920c. (P 12,960)d. P 0

Solution

October 1, 1999Cash5,882,280

Discount on Bond payable 252,720



Dec. 31, 1999Interest expense 6,480

Discount on Bond Payable 6,480

P 252,720/117 x 3 = P6,480



July 1, 2005Bond payable2,000,000



Additional paid-in capital1,865,440

Dec. 31, 2005Bonds payable1,000,000




Cash1,037,500





Cash3,135,000

Answer:

1.C2. C3. D4. A5. A

6. B7. B8. A

Problem 23

On January 1, 2005, GEOFFREY Inc. issued P100,000, 10%, 10-year bonds when the market rate of interest was 8%. Interest is payable on June 30 and December 31. The following financial information is available.

SalesP300,000

Cost of Sales 180,000

Gross profit 120,000

Interest expense ?

Depreciation expense (14,500)

Other expenses (82,000)

Net income ?

December 31, 2005Jan. 1, 2005

Accounts receivableP55,000 P48,000

Inventory 87,000 93,000

Accounts payable 60,000 58,000

All purchases of inventory are on account. Other expenses are paid for in cash.

The following are present value factors of P1.00 for 20 periods:

4%5%

PV of 1 0.4564 0.3769

PV of an ordinary annuity of 1 13.5903 12.4622

The company uses the straight-line method for amortizing premiums and discounts.

Questions:

1. What is the carrying value of bonds on January 1, 2005?

a. P 113,592b. P 100,000c. P 86,408d. P 112,223

2. How much was paid to bondholders for interest during 2005?

a. P 8,000b. P 11,087c. P 10,000d. P 9,087

3. What is the carrying value of the bonds on December 31, 2005?

a. P 98,641b. P 113,592c. P 100,000d. P 112,223

4. What is the interest expense for 2005?

a. P 8,641b. P 10,000c. P 5,000d. P 6,359

5. How much was paid for inventory purchases?

a. P 172,000b. P 186,000c. P 184,000d. P 174,000

6. What is Geoffreys net income for 2005?

a. P 13,500b. P 17,141c. P 23,000d. P 14,859

7. How much was received from customers in 2003?

a.P 283,000b. P 245,000c. P 293,000d. P 307,000

Solution

1. APresent value / carrying value of bonds on January 1, 2003:

P100,000 x 0.4564P45,640

P100,000 x 5% = P5,000 x 13.5903 67,592

TotalP113,592

2. CCash paid for interest (P100,000 x 10%)P 10,000

3. DFace ValueP100,000

Premium on bonds (P13,592 P1,359) 12,333

Carrying value, December 31, 2005P112,233

4. ANominal Interest (P100,000 x 10%)P 10,000

Premium amortization (P13,592 / 10 years) (1,359)

Interest expenseP 8,641

5. AInventoryAccounts Payable

Jan. 1 93,000 180,000 CDJ 58,000Jan.1

Purchases 174,000 Payments 172,000 174,000 Purchases

Dec. 31 87,000 60,000 Dec. 31

6. DGross ProfitP120,000

Interest expense (8,641)

Depreciation expense (14,500)

Other expense (82,000)

Net IncomeP 14,859

7. CAccounts Receivable

Jan. 1 48,000293,000 collections

Sales 300,000

Dec.31 55,000

Problem 6

In connection with the audit of the companys financial statements for the year ended December 31, 2004 the Camille Corporation presented to their records. This is the first time the company has been audited. The company issued serial bonds on April 1, 2001. Your audit showed the following details of the issue and the accounts as of December 31, 2004.

Total face valueP2, 000,000

Date of bondMarch 1, 2001

Total proceedsP2, 742,400

Interest rate12% per annum

Interest payment dateMarch 1

Maturity dates and amount

Date of maturityAmount

March 1, 2004 P 400,000

March 1, 2005 400,000

March 1, 2006400,000

March 1, 2007400,000

March 1, 2008200,000

March 1, 2009 200,000

P2,000,000

Since the corporation had excess cash, bonds o0f P400,000 scheduled to be retired on March 1, 2006 were retired on April 1, 2004 at 98%.

Serial Bonds Payable

3/1/04 VR P 400,000

4/1/01 CR P 2,742,400

4/1/04 VR 396,000

Accrued Interest Payable

1/2/04 GJ P 200,000

Interest Expense

3/1/04 VR P 240,000

Questions:

Based on the information presented above and the result of your audit, answer the following.

1. The adjusted balance of the bonds payable accounts as of December 31, 2004 is

a. P 2,000,000b. P 1,600,000c. P 1,942,400d. P 1,200,000

2. The unamortized bond premium as of December 31, 2004 should be

a. P 192,800b. P 172,800c. P 169,976d. P 174,682

3. The accrued interest payable as of December 31, 2004 is

a. P 200,000b. P 120,000c. P 144,000d. P 320,000

4. The bond interest expense that should be reported by the corporation for the year 2004 is

a. P 67,208b. P 63,801c. P 65,600d. P 45,960

5. The gain on early retirement of bonds is

a. P 63,200b. P 62,298c. P 63,801d. P 0

Solution -

Computation of amortization rate

Period covered BondMonths PesoPremium

Dates From To Outstanding Outstanding Months Amortization

2001Apr 1Dec. 312,000,000 918,000,000108,000

2002Jan 1Dec. 312,000,000 1224,000,000144,000

2003Jan 1Dec. 312,000,000 1224,000,000144,000

2004Jan 1FEB. 282,000,000 2 4,000,000 24,000

Mar 1Dec. 311,600,000 1016,000,000 96,000

2005Jan 1FEB. 281,600,000 2 3,200,000 19,200

Mar 1Dec. 311,200,000 1012,000,000 72,000

2006Jan 1FEB. 281,200,000 2 2,400,000 14,400

Mar 1Dec. 31 800,000 10 8,000,000 48,000

2007Jan 1FEB. 28 800,000 2 1,600,000 9,600

Mar 1Dec. 31 400,000 10 4,000,000 24,000

2008 Jan 1FEB. 28 400,000 2 800,000 4,800

Mar 1Dec. 31 200,000 10 2,000,000 12,000

2009Jan 1FEB. 28 200,000 2 400,000 2,400

Mar 1Dec. 31 - - - - .

95**120,400,000 722,400

Amortization rate = Total Premium / Total peso month

=P722,400 / P120,400,000

=0.006

*Peso months x amortization rate

**term of 96 months (8 x 12) less 1 month after date of bonds

1. D

Bonds payable (P2,000,000 P400,000 P400,000)1,200,000

2. B

Total proceeds2,742,400

Less accrued interest payable (P2,000,000 x 12% x 1/12) 20,000

Issue price2,722,400

Less face value2,000,000

Total bond premium 722,400

Less:

Amortization:

Prior years (2001 and 2003)396,000

Current year (2004)

Bonds retired on maturity4,800

(P400,000 x 0.006 x 2 mos.)

Bonds retired prior to maturity7,200

(P400,000 x 0.006 x 3 mos.)

Remaining bonds86,40098,400 494,400

(P1,200,000 x 0.006 x 12 mos.)

Unamortized premium cancelled on bonds retired prior to maturity 55,200

(P400,000 x 0.006 x 23 mos.) .

Unamortized bond premium, 12/31/04 172,800

Alternative computation:

Remaining AmortizationUnamortized

Maturity date Amountmonths rate premium

March 1, 2005 400,000 2 0.006 4,800

March 1, 2006 - - 0.006

March 1, 2007 400,000 26 0.006 62,400

March 1, 2008 200,000 38 0.006 45,600

March 1, 2009 200,000 50 0.006 60,000

1,200,000 172,800

3. B

Accrued interest (P1,200,000 x 12% x 10/12)120,000

4. C

Interest expense

Remaining bonds (P1,200,000 x 12%)144,000

Bonds retired on maturity

(P400,000 x 12% x 2/12) 8,000

Bonds retired prior to maturity

(P400,000 x 12% x 2/12) 12,000

Bond premium amortization for 2004

(see computation in no. 2)(98,400)

65,600

5. A

Retirement price (P400,000 x 98%)392,000

Less carrying value of bonds retired:

Face value400,000

Add unamortized bond premium, 4/1/04 to 2/28/06

(P400,000 x .006 x 23mos.)655,200455,200

Gain on early retirement of bonds63,200

PAGE

232

CHAPTER 8 Caselette - Audit of Liabilities

Documents

accounts payable others50

accounts payable of

accounts payable of

accounts payable180

expense accounts

loan payable

accounts payable50

accounts payable trial