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
4.Accounts payable 65,480
Income tax payable 65,480
5.Accounts payable 41,460
Notes payable 40,000
Interest payable 1,460
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;
received, 1/2/08 111,000Inventory
9.12/28/07Merchandise shipped FOB
shipping point, 12/26/07;
received, 1/3/08 84,000Inventory
10.1/5/08Payroll 12/21/07 1/05/08
(12 working days. 4 working
days in January) 72,000Sal. and wages
11.1/10/08Merchandise shipped FOB
destination, 1/03/08,
received, 1/10/08 38,000Inventory
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
2.The entry to adjust item #10 is
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
3.The entry to adjust item #12 is
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
8.Accounts payable 111,000
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.
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.
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.
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.
4. On November 29, 2007, Altagracia initiated a lawsuit seeking P125,000 in damages from a patent infringement.
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.
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.
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.
6. On December 12, 2007, Conchita guaranteed a bank loan of P500,000 for its presidents personal use.
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.
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.
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.
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.
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.
9. On January 30, 2008, Altagracia issued P5,000,000 bonds at a premium of P250,000.
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.
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.
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.
Solution
1.CNo adjustment nor disclosure
2.AAccrue at P50,000
3.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
10.AAccrue at P150,000
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
Bonus payable339,270.39
c.Bonus expense465,000.00
Bonus payable465,000.00
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
Bonus payable296,097.42
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
Common stock1,200,000
APIC1,800,000
c.Notes payable3,000,000
Common stock1,200,000
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
Interest expense 300,000
Gain on exchange 200,000
Gain on debt restructuring 500,000
c.Notes payable3,000,000
Land2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
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
Gain on debt restructuring 600,000
b.Notes payable- old3,000,000
Notes payable new3,000,000
c.Notes payable old3,000,000
Notes payable new2,600,000
Gain on debt restructuring 400,000
d.No adjustment
Solution
1.B
Notes payable3,000,000
Common stock1,200,000
APIC1,800,000
2.C
Notes payable3,000,000
Land2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
3.DNo Adjustment
4.A
Notes payable old3,000,000
Notes payable new2,400,000
Gain on debt restructuring 600,000
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 semi- annually 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
Notes payable2,700,000
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
Bonds payable100,000
Premium on BP 3,625
Retained earnings 1,625
c.Interest expense 3,750Cash109,000
Bonds payable100,000
Premium on BP 3,713
Loss on retirement 1,537
d.Interest expense 3,750Cash109,000
Bonds payable100,000
Premium on BP 3,713
Retained earnings 1,537
Solution
1.CCash522,500
Bonds payable500,000
Bond premium 22,500
2.BInterest expense37,500
Interest payable37,500
3.BInterest payable37,500
Interest expense37,500
4.DInterest expense37,500
Cash37,500
5.BInterest payable30,000
Interest expense30,000
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
Interest expense 3,750
Loss on retirement 1,625
Cash109,000
Adj: Bonds payable100,000
Bond premium 3,625
Interest expense 3,750
Loss on retirement 1,625
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
Discount on BP 56,235
Cash2,600,000
Bonds payable2,500,000
Debt conversion expense 100,000
Discount on BP 56,235
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
Bonds payable2,000,000
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
Bonds payable500,000
b.Cash530,000
Bonds payable500,000
Premium on bonds payable 20,000
CS warrants outstanding 10,000
c.Cash530,000
Bonds payable500,000
Premium on bonds payable 30,000
d.Cash530,000
Bonds payable500,000
CS warrants outstanding 30,000
2.The entry to record the subsequent exercise of the 10,000 stock purchase warrants is
a.Cash600,000
Premium on BP 20,000
Bonds payable500,000
Additional paid-in capital120,000
b.Cash500,000
Common stock500,000
c.Cash600,000
Common stock500,000
Additional paid-in capital100,000
d.Cash600,000
CS warrants outstn. 10,000
Common stock500,000
Additional paid-in capital110,000
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
Bonds payable500,000
Premium on bonds payable 20,000
Common stock warrants outstanding 10,000
2.DCash600,000
CS warrants outstanding 10,000
Common stock500,000
APIC110,000
3.CInvestment in bonds530,000
Cash530,000
4.DCash 7,500
Investment in bonds 5,000
(P1 x 10,000 x )
Gain on sale 2,500
5.AInvestment in stock305,000
Cash300,000
(10,000 warrants x x P60)
Investment in bonds 5,000
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
Retained earnings100,000
Bond discount100,000
Retained earnings300,000
Interest expense300,000
--------------------------------------------------------------
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
Interest expense 30,000
Bonds payable1,000,000
Bonds discount 72,500
Treasury bonds1,100,000
----------------------------------------------------------------
Interest expense 240,000
Interest payable 240,000
----------------------------------------------------------------
Interest expense 47,500
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
Premium on bonds payable 176,190
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
Bonds payable268,290
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
Bonds payable6,000,000
Interest expense 135,000
Dec. 31, 1999Interest expense 6,480
Discount on Bond Payable 6,480
P 252,720/117 x 3 = P6,480
Interest expense270,000
Interest payable270,000
July 1, 2005Bond payable2,000,000
Discount on bonds payable 34,560
Common stock 100,000
Additional paid-in capital1,865,440
Dec. 31, 2005Bonds payable1,000,000
Interest expense 45,000
Loss on retirement 3,300
Discount on bonds payable 10,800
Cash1,037,500
July 1, 2007Bonds payable3,000,000
Interest expense 135,000
Loss on retirement 25,920
Discount on bonds payable 25,920
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
Bond Interest Expense
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
Retained earnings 4,000
Bonds payable100,000
Bonds premium 4,050
Interest expense 1,500
Treasury bonds104,500
Gain on bond redemption/retirement 1,050
Retained earnings 15,000
Interest expense 15,000
Interest expense 12,000
Interest payable 12,000
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
Bond Interest Expense
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
Interest expense 15,000
Loss on retirement 4,750
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
Adj: Bonds payable500,000
Bonds premium 20,250
Interest expense 15,000
Loss on retirement 4,750
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
Interest expense210,000
Interest payable210,000
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
Discount on bonds payable 45,000
Cash2,700,000
(3M/6M x 300,000 = 150,000/10 x 3 = P45,000 unamortized)
Adj: Bonds payable300,000
Gain on retirement255,000
Discount on bonds payable 45,000
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
Interest expense360,000
Interest payable360,000
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 1 for 8 periods at 8%00.540
Present value of 1 for 10 periods at 3%00.623
Present value of 1 for 10 periods at 4%00.534
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
Bonds payable6,000,000
Interest expense 135,000
Dec. 31, 1999Interest expense 6,480
Discount on Bond Payable 6,480
P 252,720/117 x 3 = P6,480
Interest expense270,000
Interest payable270,000
July 1, 2005Bond payable2,000,000
Discount on bonds payable 34,560
Common stock 100,000
Additional paid-in capital1,865,440
Dec. 31, 2005Bonds payable1,000,000
Interest expense 45,000
Loss on retirement 3,300
Discount on bonds payable 10,800
Cash1,037,500
July 1, 2007Bonds payable3,000,000
Interest expense 135,000
Loss on retirement 25,920
Discount on bonds payable 25,920
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
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