CHAPTER 8 Caselette - Audit of Liabilities

CHAPTER 8 Audit of Liabilities
Problem 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.

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 P716,940
b. Overstated by P666,940
c. Overstated by P516,940
d. Overstated by P466,940
2.
The entry to adjust Voucher # 778 is

a. Accounts payable
180,000
Loans payable
100,000
Interest payable
80,000
b. Accounts payable
180,000
Loans payable
100,000
Interest expense
80,000
3.
The entry to adjust Voucher # 741 is

a. Accounts payable others
50,000
Accounts payable
b. Accounts payable
50,000
Accounts payable others
c. Accounts payable others
50,000
Machinery
d. No adjustment
4.
c. Loans payable
100,000
Interest expense
80,000
Accounts payable
180,000
d. Loans payable
100,000
Interest payable
80,000
Accounts payable
180,000
50,000
50,000
50,000
The current liability of the company at year-end is

a. Overstated by P340,000
c. Understated by P200,000
b. Overstated by P140,000
d. Understated by P 60,000
Solution
1. Accounts payable
Salaries payable
380,000
380,000
211
This
2.
Accounts payable
Loans payable
Interest payable
3. Accounts payable
AP others
4. Accounts payable
Income tax payable
5. Accounts payable
Notes payable
Interest payable
6. Cash
Accounts payable
Answer:
1. C
2. A
180,000
50,000
65,480
41,460
100,000
80,000
50,000
65,480
40,000
1,460
200,000
200,000
3. B
4. 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.
Item
Entry Date
Description
1.
12/18/07
Supplies, purchased FOB

destination, 12/15/07;
received, 12/17/07
2.
12/18/07
3.
12/21/07
4.
12/21//07
Amount
Account Charged
15,000
Supplies on hand
24,000
Prepaid insurance
19,000
Repairs and Main.
Merchandise shipped FOB

shipping point, 12/20/07;
received, 12/24/07
12,300
Inventory
69,000
Sal. and wages
Auto insurance, 12/15/07

to 12/15/08
Repair services; received
12/20/07
5.
12/21/07
Payroll, 12/07/07 12/21/07

(12 working days)
6.
12/26/07
Subscription to Tax Journals

for 2008
5,000
Dues & subs
7.
12/28/07
Utilities for December 2007
24,000
Utilities expense
8.
12/28/07

destination, 12/24/07;
received, 1/2/08
111,000
Inventory

shipping point, 12/26/07;
received, 1/3/08
84,000
Inventory
9.
12/28/07
10.
1/5/08
11.
1/10/08
12.
1/14/08
Payroll 12/21/07 1/05/08

(12 working days. 4 working
days in January)
destination, 1/03/08,
received, 1/10/08
72,000
Sal. and wages
38,000
Inventory
Interest on bank loan,

10/10/07 to 01/10/08
30,000
Interest expense
13.
1/15/08
Manufacturing equipment
installed, 12/29/07
254,000
Machinery
14.
1/15/08
Dividends declared,
12/15/07
160,000
Dividends payable
212
Accrued liabilities of 12/31/07 were as follows:

Accrued payroll
Accrued interest payable
Dividends payable
P 48,000
26,667
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 expense
24,000
Prepaid insurance
24,000
b. Insurance expense
1,000
Prepaid insurance
1,000
2.

a. Salaries expense
48,000
Accrued payroll
48,000
b. Accrued payroll
48,000
Salaries expense
48,000
c. Accrued payroll
Salaries expense
Cash
d. No adjustment
48,000
24,000

a. Interest expense
26,667
Interest payable
26,667
b. Interest expense
30,000
Interest payable
30,000
c. Interest expense
Interest payable
Cash
d. No adjustment
26,667
3,333
3.
4.
5.
c. Insurance expense 1,000

Prepaid insurance
1,000
d. No adjustment
The entry to adjust item #13

a. Machinery
254,000
AP others
254,000
b. AP others
254,000
Machinery
254,000
c. No adjustment
d. No adjustment since payment
was made on Jan. 15, 2008
The entry to adjust item #14

a. Dividends declared
160,000
Dividends payable 160,000
b. Dividends payable
160,000
Dividends declared 160,000
Solution
1. No Adjustment
2. Insurance expense
1,000
Prepaid insurance
3. No Adjustment
4.
No Adjustment
5. No Adjustment
6. Prepaid subscription
5,000
Dues and subscription
7. No adjustment
8. Accounts payable
111,000
Inventory
9. No adjustment
10. No adjustment
11. No adjustment
12. No adjustment
13. Machinery
254,000
AP others
14. No adjustment
Answer:
1. B
2. D
3. D
72,000
c. No adjustment
d. No adjustment since payment
was made on Jan. 15, 2008.
1,000
5,000
111,000
254,000
4. A
213
5. C
30,000
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
a.
b.
c.
January 30, 2008, Altagracia issued P5,000,000 bonds at a premium of P250,000.

Adjusted and disclosed in the financial statements.
Only disclosure is required in the financial statements.
No adjustment or disclosure required in the financial statements.
214
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. C
No adjustment nor disclosure
2. A
Accrue at P50,000
3. A
Accrue at P50,000
4. B
No adjustment only disclosure for gain contingency
5. C
No adjustment nor disclose
6. A
No adjustment disclosure is required
7. B
Only disclosure subsequent events
8. A
Accrue since it is probable
9. B
Only disclosure subsequent events
10. A
Accrue 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 465,000.00
b. P 364,285.71
2.
3.
c. P 339,270.39
The appropriate provision for income tax for the year is

a. P 1,488,000.00
b. P 1,393,258.43
c. P 1,371,428.57
d. P 296,069.42
d. P 1,379,433.48
The entry to record the bonus (which will be paid in the following year) is
a. Bonus expense
296,069.42
Bonus payable
296,069.42
b. Bonus expense
339,270.39
Bonus payable
339,270.39
c. Bonus expense
465,000.00
Bonus payable
465,000.00
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 expense
296,097.42
Bonus payable
296,097.42
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 date
12/31/07
215
Total payments to retailers as of 12/31/07

Liability for unredeemed coupons as of 12/31/07
165,000
99,000
Questions
1. The total face amount of coupons issued in 2007 is
a. P 600,000
b. P 440,000
c. P 400,000
2.
4.
d. P 240,000
Coupons expense at year-end is

a. P 440,000
b. P 400,000
c. P 264,000
d. P 240,000
Estimated liability for unredeemed coupons is

a. P 219,000
b. P 123,000
c. P 99,000
d. P
Solution
Coupons issued
X
Coupons to be redeemed
Plus: Handling cost (10%)
Total Cost
Less: payment
Estimated liability
400,000 squeezed figure

60%
240,000
Answer:
24,000
1. C
2. C
264,000
165,000
99,000
3,000
3. C
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 payable
3,000,000
Common stock
3,000,000
b. Notes payable
3,000,000
Common stock
1,200,000
APIC
1,800,000
c. Notes payable
3,000,000
Common stock
1,200,000
Interest expense
300,000
APIC
1,500,000
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 payable
3,000,000
Land
2,500,000
Gain on debt restructuring
500,000
b. Notes payable
3,000,000
Land
2,000,000
Interest expense
300,000
Gain on exchange
200,000
500,000
c. Notes payable
3,000,000
Land
2,000,000
Gain on exchange
500,000
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 payable
300,000
216
b.
c.
d.
4.

Loss on debt restructuring
Interest expense
Interest expense
No adjustment
300,000
300,000
300,000
900,000
900,000
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 old
3,000,000
Notes payable new
2,400,000
600,000
b. Notes payable - old
3,000,000
Notes payable new
3,000,000
c. Notes payable old
3,000,000
Notes payable new
2,600,000
400,000
d. No adjustment
Solution
1. B
Notes payable
3,000,000
Common stock
APIC
2. C
Notes payable
3,000,000
Land
Gain on exchange
3. D No Adjustment
4. A
Notes payable old
3,000,000
Notes payable new
1,200,000
1,800,000
2,000,000
500,000
500,000
2,400,000
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 year
Rental income received in advance
Notes payable, which are trade notes, with the exception of P20,000
Notes payable to bank on June 30 of the following year
Accounts payable which include account with debit balance of P2,000
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
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
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
Questions
1. What is the amount of the current liabilities on December 31?
a. P 190,000
b. P 184,000
c. P 178,000
2.
The long-term debt at year-end is

a. P 70,000
b. P 50,000
c. P 30,000
Solution
Long-term Notes which are payable in annual installment
of P10,000 on February 1 of each year
Rental income received in advance
Notes payable, which are trade notes, with the exception of P20,000
Notes payable to bank on June 30 of the following year
217
P 60,000
16,000
60,000
80,000
100,000
200,000
180,000
d. P 170,000
d. P 0
P 10,000
16,000
60,000
Accounts payable which include account with debit balance of P2,000

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
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
TOTAL CURRENT LIABILITIES
Answer:
1. A
2. Long-term liability P50,000
82,000
10,000
12,000
P 190,000
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
April 31, 2007
July 31, 2007
September 1, 2007
February 1, 2008
April 1, 2008- March 31, 2011
Amount
600,000
900,000
450,000
450,000
2,700,000
P5,100,000
P
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- 2006
Warranty claims honored on 2006- 2007 sales
Total
P252,000
285,000
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.
P252,000
2.
c. P630,000
d. P882,000
a.
Unamortized bond discount

P110,000
b. P200,000
c. P100,000
d. P90,000
a.
Bond interest payable

P0
c. P150,000
d. P250,000
3.
4.
b. P345,000
b. P300,000
Total current liabilities

218
a. P6,445,000
5.
b. P5,105,000
c. P5,445,000
d. P3,945,000
Total noncurrent liabilities

a. P7,700,000
b. P7,590,000
c. P7,500,000
d. P7,610,000
Solution
1. B
Total Warranty Expense
882,000
Less: Paid warranty
537,000
Est. liability
345,000
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. D P5M x 12% x 6/12
= P300,000
4. C
Notes payable
2,400,000
Interest payable
640,000 (340,000 + 300,000)
Est. liability
345,000
Trade payable
560,000
Dividends payable
1,500,000
Total Current Liability
5,445,000
5. D
Notes payable
2,700,000
Bonds payable
4,910,000
Total
7,610,000
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 premium
b. An amortized value
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 70,000
b. P 63,769
c. P 35,000
d. 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 70,000
b. P 63,769
c. P 31,884
d. P 31,791
4.
The carrying value of the bonds on July 1, 2008 is:

a. P 1,056,578
b. P 1,056,484
c. P 1,053,276
5.
c. Book value
d. A discount
d. P 1,053,179
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
July 2007
December 2007
31,884
31,791
35,000
35,000
219
Amortization
3,116
3,209
Carrying Value
1,062,809
1,059,693
1,056,484
July 2008
31,695
35,000
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. D
4. D
5. B
3,305
1,053,179
Problem 10
The following data were obtained from the initial audit of Popoy Company:
15%, 10-year Bonds Payable, dated

January 1, 2006.
Cash proceeds from issue on January 1,
2007 of 500, P1,000 bonds
Bonds Interest Expense
Cash paid Jan. 2, 2008
Cash paid July 1, 2008
Accrual December 31, 2008
Debit
Balance
522,500
37,500
37,500
37,500
Accrued Interest on Bonds

Balance Jan. 1, 2008
Accrual Dec. 31 2008
Treasury Bonds
Redemption price and interest to date
on 100 bonds permanently retired
October 1, 2008
Credit
522,500
37,500
75,000
112,500
37,500
37,500
109,000
37,500
75,000
109,000
Questions
1. What should be the correct original entry to account for the issuance of bonds at January 1,
2007?
DEBIT
CREDIT
a. Cash
522,500
Bonds Payable
500,000
Discount on BP
22,500
b. Cash
500,000
Bonds Payable
500,000
c. Cash
522,500
Bonds Payable
500,000
Premium on BP
22,500
d. Cash
522,500
Bonds payable
522,500
2.
The adjusting entry to accrue interest on bonds payable at December 31, 2007?
DEBIT
CREDIT
a. Cash
37,500
Interest income
37,500
b. Interest expense
37,500
Interest payable
37,500
c. Interest receivable
37,500
Interest income
37,500
d. Interest expense
37,500
Interest income
37,500
3.
The reversing entry related to accrual on bond interest expense at January

DEBIT
CREDIT
a. Interest income
37,500
Cash
b. Interest payable
37,500
Interest expense
c. Interest payable
37,500
Retained earnings
d. Retained earnings
37,500
Interest expense
4.
5.
The journal entry to record payment of interest due on July 1, 2008?

DEBIT
CREDIT
a. Cash
37,500
Interest payable
b. Interest payable
37,500
Cash
c. Interest receivable
37,500
Cash
d. Interest expense
37,500
Cash
1, 2008?
37,500
37,500
37,500
37,500
37,500
37,500
37,500
37,500
The reversing entry related to accrual on bond interest expense at January 1, 2009?
DEBIT
CREDIT
220
a.
b.
c.
d.
Interest
Interest
Interest
Interest
income 37,500
payable
30,000
payable
15,000
income
37,500
Cash
Interest expense
Interest expense
Interest expense
37,500
30,000
15,000
37,500
6.
The adjusting entry that should have been made to amortize on bond premium at December
31, 2007?
DEBIT
CREDIT
a. Premium on BP
2,500
Interest expense
2,500
b. Premium on BP
2,500
Retained earnings
2,500
c. Premium on BP
2,250
Interest expense
2,250
d. Premium on BP
2,250
Retained earnings
2,250
7.
The correcting entry to adjust for the error related to amortization on bond premium in 2008
is?
DEBIT
CREDIT
a. Premium on BP 2,500
Retained earnings
2,500
b. Premium on BP 2,500
Interest expense
2,500
c. Premium on BP 4,875
Interest expense
2,375
Retained earnings
2,500
d. Premium on BP 4,875
Retained earnings
4,875
8.
The correct entry to record

a. Interest expense
Bonds payable
Premium on BP
Loss on retirement
b. Interest expense
Bonds payable
Premium on BP
Retained earnings
c. Interest expense
Bonds payable
Premium on BP
Loss on retirement
d. Interest expense
Bonds payable
Premium on BP
Retained earnings
Solution
1. C
2.
3.
4.
5.
6.
7.
8.
retirement of 100 bonds on October 1, 2008?

3,750
Cash
109,000
100,000
3,625
1,625
3,750
Cash
109,000
100,000
3,625
1,625
3,750
Cash
109,000
100,000
3,713
1,537
3,750
Cash
109,000
100,000
3,713
1,537
Cash
522,500
Bonds payable
500,000
Bond premium
22,500
Interest expense 37,500
Interest payable 37,500
Cash
37,500
Bond premium
2,500
Interest expense 2,500 (P22,500/108 x 12 = P2,500)
Bond premium
4,875
Retained earnings
2,500 (P22,500/108 x 12 = P 2,500)
Interest expense 2,375 (P22,500/108 x 9
= P 1,875
4/5 x P22,500/108 x 3 =
500)
OE: Treasury Bonds
109,000
Cash
109,000
CE: Bonds payable
100,000
Bond premium
3,625
Interest expense
3,750
Loss on retirement
1,625
Cash
109,000
Adj: Bonds payable
100,000
Bond premium
3,625
Interest expense
3,750
Loss on retirement
1,625
221
Treasury Bodns
109,000
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 4,840,000
b. P 4,832,720
c. P 4,832,000
d. P 4,816,000
2.
Carrying value of the bonds at December 31, 2008 is:

a. P 4,880,000
b. P 4,868,451
c. P 4,866,880
d. P 4,850,000
3.
Interest expense at December 31, 2008 is:

a. P 432,000
b. P 432,720
c. P 435,731
d. P 437,339
4.
Carrying value of the bonds converted is:

a. P 2,500,000
b. P 2,456,235
c. P 2,450,000
d. P 2,443,765
5.
Additional paid-in capital in the conversion of bonds is:

a. P 1,706,234
b. P 1,793,766
c. P 1,693,766
d. P 1,684,225
6.
Carrying value of retired bonds is:

a. P 2,500,000
b. P 2,456,235
c. P 2,450,000
d. P 2,443,765
7.
Loss on early retirement of bonds is:

a. P 156,235
b. P 150,000
c. P 143,765
d. P 100,000
8.
Interest expense on the bonds at December 31, 2009 is:

a.
P 438,161
b. P 400,000
200,000
9.
The company should record gain or loss on conversion of:

a. Loss of P100,000
c. Loss of P50,000
b. Gain of P100,000
d. No gain or loss on conversion
Solution
July 1, 2009
Bonds payable
Loss on bond retirement
Discount on BP
Cash
Bonds payable
Debt conversion expense
Discount on BP
Common stock
APIC
Cash
Date
Interest expense
June 2007
December 2007
June 2008
December 2008
June 2009
Answer: 1. b
2,500,000
156,235
2,500,000
100,000
Interest paid
215,000
216,720
217,472
218,259
219,080
2. b
c. P 219,080
4. d
222
56,235
2,600,000
56,235
750,000
1,693,765
100,000
Amortization
200,000
200,000
200,000
200,000
200,000
3. c
d.
16,000
16,720
17,472
18,259
19,080
5. c
Carrying Value
4,800,000
4,816,000
4,832,720
4,850,192
4,868,451
4,887,531
6. d
7. a
8. c
9. 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
CD 7/1/07
CD 7/1/07
Unamortized Bond Discount, 2007 Bond Issue

P110,128
12,000
JV 12/31/07
P 4,070.93
JV 12/31/07
VR 12/30/07
Legend:
Bond Interest Expense, 2007 Bond Issue

P 4,070.93
40,000.00
CD Cash Disbursement
CR Cash Receipts
JV Journal Vouchers
VR Voucher Register
Questions
1. Amortization of bond issue cost is:
a. P 800.00
b. P 400.00
c. P 240.00
d. P 120.00
2.
Amortization of bond discount is:

a. P 1,392
b. P 2,679
c. P 3,671
d. P 4,071
3.
Carrying value of the bonds at year-end is:

a. P 693,943
b. P 693,543
c. P 692,551
d. P 691,264
The accrued interest expense at year-end is:

a. P 40,000
b. P 41,392
c. P 80,000
d. P 82,785
5.
The recorded amortization of bond discount is overstated by:

a. P 400
b. P 1,392
c. P 2,679
d. P 0
The carrying value of the bond issue cost at year-end is:

a. P 11,880
b. P 11,760
c. P 11,600
d. P 11,200
6.
Solution
1. B
P12,000/15 x 6/12 = P400
2. A
3. D
4. A
Date
Interest expense
5.
6.
December 2007
July 2008
December 2008
C
Per record
Per audit
Adj.
C
(P12,000 P400)
Interest paid
41,392
41,476
41,564
- P 4,071
- 1,392
- P 2,679
40,000
40,000
40,000
223
Amortization
1,392
1,476
1,564
Carrying Value
689,872
691,264
692,740
694,304
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. 2,000,000
b. P 66,667
2.
c. 20,000
d.
2,000
If the bondholder will exercise all his rights, the additional paid-in capital will be
a. P 158,000
b. P 150,000
c. P 58,000
d. P 0
Solution
Cash
2,000,000
Discount on bonds payable
100,000
Bonds payable
Common stock warrants outstanding
Proceeds
Less: Cost of Warrants
Cost of the bonds
If warrant will exercise:
Cash
CSWO
Common stock
APIC
Answer: 1. D
2,000,000
100,000
2,000,000
100,000
1,900,000
60,000
100,000
2. A
2,000
158,000
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. Cash
500,000
Bonds payable
500,000
b. Cash
530,000
Bonds payable
500,000
Premium on bonds payable
20,000
CS warrants outstanding
10,000
c. Cash
530,000
Bonds payable
500,000
30,000
d. Cash
530,000
Bonds payable
500,000
30,000
2.
The entry to record the subsequent exercise of the 10,000 stock purchase warrants is
a. Cash
600,000
Premium on BP
20,000
Bonds payable
500,000
Additional paid-in capital
120,000
b. Cash
500,000
Common stock
500,000
c. Cash
600,000
Common stock
500,000
100,000
d. Cash
600,000
CS warrants outstn.
10,000
Common stock
500,000
224
3.

110,000
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 bonds
500,000
Cash
500,000
b. Investment in bonds
500,000
Invest. in warrants
30,000
Cash
530,000
c. Investment in bonds
530,000
Cash
530,000
d. Investment in bonds
470,000
Cash
470,000
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. Cash
7,500
Gain on sale
7,500
c. Cash
750
Investment in bonds
500
Gain on sale
250
d. Cash
7,500
Investment in bonds
5,000
(P1 x 10,000 x 1/2)
Gain on sale
2,500
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 stock
305,000
Cash
300,000
(10,000 warrants x x P60)
Investment in bonds
5,000
b. Investment in bonds
305,000
Cash
305,000
c. Investment in stock
300,000
Cash
300,000
d.
Investment in bonds
Investment in stock
Cash
5,000
300,000
305,000
Solution
1. B
Cash
2.
3.
4.
5.
530,000
Bonds payable
Common stock warrants outstanding
Cash
600,000
Common stock
APIC
Investment in bonds
530,000
Cash
Cash
7,500
Investment in bonds
(P1 x 10,000 x )
Gain on sale
Investment in stock
305,000
Cash
(10,000 warrants x x P60)
Investment in bonds
500,000
20,000
10,000
10,000
500,000
110,000
530,000
5,000
2,500
300,000
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
1/2/05 CR P5,000,000
225
Treasury Bonds
10/1/07 CD P1,100,000
Bond Discount
1/2/05
1/1/07
7/1/07
CD P 500,000
Bond Interest Expense
CD P 300,000
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 5,000,000
b. P 4,000,000
c. P 3,900,000
2.
a.
Adjusted balance of bond discount on December 31, 2007.

P 360,000
b. P 352,500
c. P 327,500
d. P 280,000
a.
Bond interest expense for 2007.

P 917,500
b. P 870,000
c. P 680,000
d. P 617,500
a.
Gain or loss on bond redemption.

P 170,000
b. P 142,500
c. P 127,500
d. P
3.
4.
d. P 3,000,000
Solution
Retained earnings
100,000
Bond discount
100,000
Retained earnings
300,000
Interest expense
300,000
-------------------------------------------------------------OE: Treasury bonds
1,100,000
Cash
1,100,000
CE: Bonds payable
1,000,000
Interest expense
30,000
Loss on early extinguishment
of debt
142,500
Bonds discount
72,500 *
Cash
1,100,000
Adj: Loss on early extinguishment
of debt
142,500
Interest expense
30,000
Bonds payable
1,000,000
Bonds discount
72,500
Treasury bonds
1,100,000
---------------------------------------------------------------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. B
2. D
3. D
4. B
97,500
* 1/5 x P500,000 = P100,000

100,000/120 x 33
(27,500)
Unamortized disc.
for the P100,000
bond
P 72,500
Problem 15
At December 31, 2006, the Core Corporation had the following liability and equity account
balances:
11% Bonds payable, at face value
P2,500,000
226

Common stock
Additional paid in capital
Retained earnings
Treasury stock, at cost
176,190
4,000,000
1,147,500
1,232,500
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 7,381
b. P 6,710
c. P 6,500
2.
d. P 6,100
What is the carrying value of the bonds payable on December 31, 2007?
a. P 2,689,000
b. P 2,682,900
c. P 2,676,190
d. P 2,668,809
3.
How much is the 2007 interest expense on bonds payable?

a. P 275,000
b. P 268,900
c. P 268,290
d. P 267,619
4.
What is the treasury stock balance on December 31, 2007?

a. P 165,200
b. P 163,500
c. P 162,500
d. P 162,000
5.
What is the long-term portion of the note payable to bank as of December 31, 2007?
a. P 2,000,000
b. P 1,600,000
c. P 1,400,000
d. P 1,000,000
6.
What is the 2007 total interest expense?

a. P 305,000
b. P 298,900
Solution
c. P 298,290
Interest Interest
Paid
Expense
Dec. 31, 2005

2006
275,000
2007
275,000
2008
275,000
Answer:
1. B
2. C
3. C
6. Notes Payable P2,000,000 x 9% x 2/12
Bonds payable
Total
Carrying
Value
2,689,000
2,682,900
2,676,190
2,668,809
Amort.
268,900
268,290
267,619
6,100
6,710
7,381
4. C
= P 30,000
268,290
298,290
d. P 297,619
5. B
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.
227
The following transactions occur in connection with the bonds:

2005
July 1
P2,000,000 of bonds were converted into stock.
2006
Dec 31 P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued
interest. These were immediately retired.
2007
July 1 The 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 5,747,280
b. P 6,000,000
c. P 5,753,760
d. P 5,749,440
2. What is the total interest expense for 1999?

a. P 128,520
b. P 47,160
d. P 135,000
c. P 141,480
3. In recording the bond conversion on July 1, 2005, how much should be credited to the additional
paid-in capital account?
a. P 1,796,320
b. P 1,965,440
c. P 1,845,440
d. P 1,865,440
4. What is the gain or loss on bond conversion on July 1, 2005?
a. P 0
b. P 1,796,320
c. P 1,865,440
d. P 34,560
5. What is the carrying value of the bonds reacquired on December 31, 2006?
a. P 989,200
b. P 957,880
c. P 1,010,800
d. P
981,700
6. What is the gain (loss) on bond reacquisition on December 31, 2006?

a. P 3,300
b. (P 3,300)
c. P 34,620
d. (P 34,620)
7. What is the carrying value of the bonds retired on July 1, 2007?

a. P 3,000,000
b. P 2,974,080
c. P 2,873,640
d. P 3,025,920
8. What is the gain (loss) on bond retirement on July 1, 2007?

a. (P 25,920)
b.
P 25,920
c. (P 12,960)
d. P 0
Solution
October 1, 1999 Cash
Dec. 31, 1999
July 1, 2005
Dec. 31, 2005
July 1, 2007
Answer:
1. C
6. B
2. C
7. B
5,882,280
Discount on Bond payable
252,720
Bonds payable
Interest expense
Interest expense
6,480
Discount on Bond Payable
P 252,720/117 x 3 = P6,480
Interest expense
270,000
Interest payable
Bond payable
2,000,000
Common stock
Bonds payable
1,000,000
Interest expense
45,000
Loss on retirement
3,300
Cash
Bonds payable
3,000,000
Interest expense
135,000
Loss on retirement
25,920
Cash
3. D
8. A
4. A
228
5. A
6,000,000
135,000
6,480
270,000
34,560
100,000
1,865,440
10,800
1,037,500
25,920
3,135,000
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
DR
January 1, 2002
CR
DR
January 1, 2002
Bond Premium
CR
October 1, 2007
CD
CR
P500,000.00
Balance
P500,000.00
CR
P 25,000.00 P
Balance
25,000.00
Treasury Bonds
DR
P104,500.00
CR
Balance
P104,500.00
CR
Balance
P 15,000.00
30,000.00

January 1, 2007
July 1, 2007
CD
DR
CDP 15,000.00
15,000.00
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 500,000
b. P 450,000
2.
3.
4.
c. P 400,000
d. P 395,500
c. P 15,000
d. P 14,750
The December 31, 2007 Accrued Interest Payable is

a. P 30,000
b. P 26,050
c. P 15,000
d. P 12,000
The December 31, 2007 Bond Interest Expense is

a. P 27,550
b. P 26,050
c. P 25,000
d. P 24,050
The December 31, 2007 Bond Premium is

a. P 20,050
b. P 16,000
Solution
Bond premium
4,000
Retained earnings
Bonds payable
100,000
Bonds premium
4,050
Interest expense
1,500
Treasury bonds
Gain on bond redemption/retirement
Retained earnings
15,000
Interest expense
Interest expense
12,000
Interest payable
Bonds premium
950
Interest expense
P25,000 x 4/5 = P 20,000/25 = P 800
P 5,000 x 9/12
= 150
P 950
Answer:
1. C
2. B
3. D
4,000
104,500
1,050
15,000
12,000
950
4. 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:
229
12% 25-year Bonds Payable, 2006 issue

01/01/2006
BalanceTreasury Bonds
10/01/2007
Balance-
P 4,000,000 Cr
P 540,000 Dr
Bond Premium
01/01/2006
Balance-
P 200,000 Cr

01/01/2007
07/01/2007
BalanceBalance-
P 240,000 Dr
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 4,000,000
b. P 3,500,000
c. P 3,460,000
d. P 3,360,000
2.
The adjusted balance of the treasury bonds account as of December 31, 2007 is:
a. P 540,000
b. P 525,000
c. P 500,000
d. P 0
3.
The unadjusted balance of the bond premium account as of December 31, 2007 should be
a. P 200,000
b. P 160,000
c. P 140,000
d. P 0
4.
The total bond interest expense that should be reported by the company for the year 2007 is
a. P 480,000
b. P 472,750
c. P 465,000
d. P 457,250
5.
The loss on the acquisition of treasury bonds is

a. P 19,750
b. P 15,000
6.
The carrying value of the bonds payable as of December 31, 2007 should be
a. P 4,000,000
b. P 3,860,000
c. P 3,640,000
d. P 3,360,000
c. P 4,750
Solution
OE: Treasury bonds
540,000
Cash
540,000
CE: Bonds payable
500,000
Bonds premium
20,250
Interest expense
15,000
Loss on retirement
4,750
Cash
540,000
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 payable
500,000
Bonds premium
20,250
Interest expense
15,000
Loss on retirement
4,750
Treasury Bonds
540,000
To record the amortization:
Bond premium
Interest expense
Retained earnings
39,750
7,750 *
32,000 (200,000/300 x 48)
3,500,000/4,000,000 x 200,000 = 175,000/300 x 12

500/4,000,000 x 200,000 = 25,000/300 x 9
To record accrual of interest
Interest expense
Interest payable
Answer:
210,000
210,000
230
= 7,000
= 750
7,750
d. P 0
1.
2. D
3. C
4. D
5. C
6. 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
01/01/1997
P 6,000,000
value bonds purchased at
90 and retired
P 2,700,000
Discount on Bonds Payable
P 300,000
01/01/1997
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 90,000
b. P 45,000
c. P 30,000
d. P 15,000
2.
How much is the carrying amount of bonds payable as of December 31, 2004?
a. P 3,000,000
b. P 3,030,000
c. P 2,970,000
d. P 2,955,000
3.
How much is the total interest expense for the year ended December 31, 2004?
a. P 390,000
b. P 375,000
c. P 360,000
d. P 345,000
4.
How much is the gain on early retirement of bonds?

a. P 345,000
b. P 270,000
c. P 255,000
d. P 0
Solution
Entry retirement of bonds
OE: Bonds payable
2,700,000
Cash
2,700,000
CE: Bonds payable
3,000,000
Gain on retirement
255,000
45,000
Cash
2,700,000
(3M/6M x 300,000 = 150,000/10 x 3 = P45,000 unamortized)
Adj: Bonds payable
300,000
Gain on retirement
255,000
45,000
Retained earnings
210,000 (300,000/10 x 7 = 210,000)
Interest expense
15,000 (3M/6M x 300,000/10)
225,000
Interest expense
Interest payable
3,000,000 x 12% = 360,000
Answer:
1. C
2. C
360,000
3. B
360,000
4. 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
Present
Present
Present
Present
Present
Present
Present
value
value
value
value
value
value
value
value
of
of
of
of
of
of
of
of
1 for 8 periods at 6%
annuity of 1 for 8 periods at 6%
Questions
1. The present value of the principal is
231
00.627
00.540
00.623
00.534
6.210
5.747
12.561
11.652
a.
2.
3.
P 1,068,000
b. P 1,080,000
The present value of the interest is

a. P 689,640
b. P 699,120
The issue price of the bonds is
a. P 1,767,120
b. P 1,769,640
c. P 1,246,000
d. P 1,254,000
c. P 745,200
d. P 753,660
c. P 1,779,120
d. P 1,999,200
Solution
1.
B
2.
B
P2,000,000 x .54 = P1,080,000

P2M x 6% x 6/12 = P60,000; P60,000 x 11.652 = P699,120
3.
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 dates
12/31/07
12/31/08
12/31/09
12/31/10
12/31/11
Principal
P400,000
400,000
400,000
400,000
400,000
Interest
P160,000
128,000
96,000
64,000
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 19,440
b. P 30,326
c. P 47,770
2.
a.
d. P 97,200
How much is the carrying value of the bonds payable as of December 31, 2007?
P 1,933,080
b. P 1,665,920
c. P 1,633,080
d. P 1,533,586
Solution
Total
PV
factors
Principal
Interest
Payment
Payment
2007
400,000
160,000
560,000
0.90909
2008
400,000
128,000
528,000
0.82645
2009
400,000
96,000
496,000
0.75131
2010
400,000
64,000
464,000
0.68301
2011
400,000
32,000
432,000
0.62092
Payment
Total Present Value

Face value
Discount on BP
Int. paid
Int.
exp.
2007
160,000
190,326
2008
128,000
153,359
2009
96,000
115,894
Total PV
Amort
30,32
6
25,35
9
19,89
4
232
Principal
Paymen
t
400,000
400,000
400,000
509,09
1
436,36
6
372,65
0
316,91
7
268,23
7
1,903,26
0
2,000,00
0
96,74
0
Book
Value
1,903,26
0
1,533,58
6
1,158,94
5
778,83
9
2010
64,000
77,884
2011
32,000
39,272
13,88
4
7,27
2
400,000
392,72
3
400,000
Note: Ignore the present value given in the problem.

Answer:
1. P 30,326
2. 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 1
P2,000,000 of bonds were converted into stock.
2006
Dec 31 P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued
interest. These were immediately retired.
2007
July 1 The 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
July 1, 2007, and are due in 20 years.
are dated
Questions
1. What is the carrying value of bonds payable at December 31, 1999?
a. P 5,747,280
b. P 6,000,000
c. P 5,753,760
d. P 5,749,440
2. What is the total interest expense for 1999?

a. P 128,520
b. P 47,160
d. P 135,000
c. P 141,480
3. In recording the bond conversion on July 1, 2005, how much should be credited to the additional
paid-in capital account?
a. P 1,796,320
b. P 1,965,440
c. P 1,845,440
d. P 1,865,440
4. What is the gain or loss on bond conversion on July 1, 2005?
a. P 0
b. P 1,796,320
c. P 1,865,440
d. P 34,560
5. What is the carrying value of the bonds reacquired on December 31, 2006?
a. P 989,200
b. P 957,880
c. P 1,010,800
d. P
981,700
6. What is the gain (loss) on bond reacquisition on December 31, 2006?

a. P 3,300
b. (P 3,300)
c. P 34,620
d. (P 34,620)
7. What is the carrying value of the bonds retired on July 1, 2007?

a. P 3,000,000
b. P 2,974,080
c. P 2,873,640
d. P 3,025,920
8. What is the gain (loss) on bond retirement on July 1, 2007?

a. (P 25,920)
b.
P 25,920
c. (P 12,960)
d. P 0
Solution
October 1, 1999 Cash
5,882,280
252,720
Discount on Bond payable

Bonds payable
Interest expense
233
6,000,000
135,000
Dec. 31, 1999
Interest expense
6,480
Discount on Bond Payable
P 252,720/117 x 3 = P6,480
Interest expense
270,000
Interest payable
July 1, 2005
Bond payable
2,000,000
Common stock
Bonds payable
1,000,000
Interest expense
45,000
Loss on retirement
3,300
Cash
Bonds payable
3,000,000
Interest expense
135,000
Loss on retirement
25,920
Cash
Dec. 31, 2005
July 1, 2007
Answer:
1. C
6.
B
2. C
7. B
3. D
8. A
4. A
6,480
270,000
34,560
100,000
1,865,440
10,800
1,037,500
25,920
3,135,000
5. 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.
Sales
Cost of Sales
Gross profit
Interest expense
Depreciation expense
Other expenses
Net income
Accounts receivable
Inventory
Accounts payable
P300,000
180,000
120,000
?
(14,500)
(82,000)
?
December 31, 2005
P55,000
87,000
60,000
Jan. 1, 2005
P48,000
93,000
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:
PV of 1
PV of an ordinary annuity of 1
4%
0.4564
13.5903
5%
0.3769
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 113,592
b. P 100,000
c. P 86,408
2.
a.
How much was paid to bondholders for interest during 2005?

P 8,000
b. P 11,087
c. P 10,000
d. P 9,087
a.
What is the carrying value of the bonds on December 31, 2005?

P 98,641
b. P 113,592
c. P 100,000
d. P 112,223
a.
What is the interest expense for 2005?

P 8,641
b. P 10,000
c. P 5,000
d. P 6,359
a.
How much was paid for inventory purchases?

P 172,000
b. P 186,000
c. P 184,000
d. P 174,000
3.
4.
d. P 112,223
5.
234
6.
a.
What is Geoffreys net income for 2005?

P 13,500
b. P 17,141
a.
How much was received from customers in 2003?

P 283,000
b. P 245,000
c. P 293,000
7.
c. P 23,000
d. P 14,859
d. P 307,000
Solution
1. A
Present value / carrying value of bonds on January 1, 2003:
P100,000 x 0.4564
P100,000 x 5% = P5,000 x 13.5903
Total
2. C
Cash paid for interest (P100,000 x 10%)
3. D
Face Value
Premium on bonds (P13,592 P1,359)
Carrying value, December 31, 2005
4. A
Nominal Interest (P100,000 x 10%)
Premium amortization (P13,592 / 10 years)
Interest expense
5. A
Inventory
Jan. 1
93,000
Purchases 174,000
Dec. 31
6. D
7. C
P45,640
67,592
P113,592
P 10,000
P100,000
12,333
P112,233
P 10,000
(1,359)
P 8,641
Accounts Payable
180,000
CDJ
58,000
Jan.1
174,000 Purchases
Payments 172,000
87,000
Gross Profit
Interest expense
Depreciation expense
Other expense
Net Income
Jan. 1
Sales
60,000 Dec. 31
Accounts Receivable
48,000
300,000
Dec.31
P120,000
(8,641)
(14,500)
(82,000)
P 14,859
293,000
collections
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 value
P2, 000,000
Date of bond
March 1, 2001
Total proceeds
P2, 742,400
Interest rate
12% per annum
Interest payment date
March 1
Maturity dates and amount
Date of maturity
March 1, 2004
March 1, 2005
March 1, 2006
March 1, 2007
March 1, 2008
March 1, 2009
Amount
400,000
400,000
400,000
400,000
200,000
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%.
3/1/04
4/1/04
VR
VR
Serial Bonds Payable

P 400,000
4/1/01
396,000
Accrued Interest Payable
1/2/04
235
CR
P 2,742,400
GJ
P 200,000
3/1/04
Interest Expense
P 240,000
VR
Questions:
Based on the information presented above and the result of your audit, answer the following.
1.
a.
The adjusted balance of the bonds payable accounts as of December 31, 2004 is
P 2,000,000
b. P 1,600,000 c. P 1,942,400 d. P 1,200,000
a.
The unamortized bond premium as of December 31, 2004 should be

P 192,800
b. P 172,800
c. P 169,976
d. P 174,682
a.
The accrued interest payable as of December 31, 2004 is

P 200,000
b. P 120,000
c. P 144,000
2.
3.
4.
d. P 320,000
The bond interest expense that should be reported by the corporation for the year 2004
is
a.
P 67,208
a.
The gain on early retirement of bonds is

P 63,200
b. P 62,298
5.
b. P 63,801
c. P 65,600
d. P 45,960
c. P 63,801
d. P 0
Solution Computation of amortization rate

Dates
2001
2002
2003
2004
2005
2006
2007
2008
2009
Period covered
From
To
Apr 1
Jan 1
Jan 1
Jan 1
Mar 1
Jan 1
Mar 1
Jan 1
Mar 1
Jan 1
Mar 1
Jan 1
Mar 1
Jan 1
Mar 1
Amortization rate
Dec.
Dec.
Dec.
FEB.
Dec.
FEB.
Dec.
FEB.
Dec.
FEB.
Dec.
FEB.
Dec.
FEB.
Dec.
31
31
31
28
31
28
31
28
31
28
31
28
31
28
31
Bond Months
Peso
Outstanding Outstanding
2,000,000
2,000,000
2,000,000
2,000,000
1,600,000
1,600,000
1,200,000
1,200,000
800,000
800,000
400,000
400,000
200,000
200,000
=
=
=
9
12
12
2
10
2
10
2
10
2
10
2
10
2
-
Premium
Months
Amortization
18,000,000
24,000,000
24,000,000
4,000,000
16,000,000
3,200,000
12,000,000
2,400,000
8,000,000
1,600,000
4,000,000
800,000
2,000,000
400,000
-
95**
120,400,000
108,000
144,000
144,000
24,000
96,000
19,200
72,000
14,400
48,000
9,600
24,000
4,800
12,000
2,400
.
722,400
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)

2. B
Total proceeds
Less accrued interest payable (P2,000,000 x 12% x 1/12)
Issue price
Less face value
Total bond premium
Less:
Amortization:
Prior years (2001 and 2003)
396,000
Current year (2004)
Bonds retired on maturity
4,800
(P400,000 x 0.006 x 2 mos.)
Bonds retired prior to maturity
7,200
(P400,000 x 0.006 x 3 mos.)
Remaining bonds
86,400
98,400
236
1,200,000
2,742,400
20,000
2,722,400
2,000,000
722,400
494,400
(P1,200,000 x 0.006 x 12 mos.)

Unamortized premium cancelled on bonds retired prior to maturity
(P400,000 x 0.006 x 23 mos.)
Unamortized bond premium, 12/31/04
Alternative computation:
Maturity date
March 1, 2005
March 1, 2006
March 1, 2007
March 1, 2008
March 1, 2009
3. B
4. C
Amount
400,000
400,000
200,000
200,000
1,200,000
Remaining
months
2
26
38
50
Amortization
rate
0.006
0.006
0.006
0.006
0.006
Accrued interest (P1,200,000 x 12% x 10/12)
237
Unamortized
premium
4,800
62,400
45,600
60,000
172,800
120,000
Interest expense
Remaining bonds (P1,200,000 x 12%)
Bonds retired on maturity
(P400,000 x 12% x 2/12)
Bonds retired prior to maturity
(P400,000 x 12% x 2/12)
Bond premium amortization for 2004
(see computation in no. 2)
5. A
Retirement price (P400,000 x 98%)
Less carrying value of bonds retired:
Face value
Add unamortized bond premium, 4/1/04 to 2/28/06
(P400,000 x .006 x 23mos.)
Gain on early retirement of bonds
55,200
.
172,800
144,000
8,000
12,000
(98,400)
65,600
392,000
400,000
655,200
455,200
63,200

CHAPTER 8 Caselette - Audit of Liabilities

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CHAPTER 8 Caselette - Audit of Liabilities

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CHAPTER 8 Audit of Liabilities

Voucher 775, containing a credit to Accounts Payable in the amount of P65,480.

The entry to adjust Voucher # 778 is

The entry to adjust Voucher # 741 is

The current liability of the company at year-end is

Supplies, purchased FOB

Repairs and Main.

Merchandise shipped FOB

Sal. and wages

Auto insurance, 12/15/07

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

Subscription to Tax Journals

Dues & subs

Utilities for December 2007

Merchandise shipped FOB

Merchandise shipped FOB

Payroll 12/21/07 1/05/08

Sal. and wages

Interest on bank loan,

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

The entry to adjust item #2 is

The entry to adjust item #10 is

The entry to adjust item #12 is

c. Insurance expense 1,000

The entry to adjust item #13

The entry to adjust item #14

Problem 3 - ADJUSTMENT FOR LOSS CONTINGENCIES

On January 5, 2008, a warehouse containing a substantial portion of Altagracias inventory was

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

Problem 4 - BONUS COMPUTATION

The appropriate provision for income tax for the year is

Total payments to retailers as of 12/31/07

Coupons expense at year-end is

Estimated liability for unredeemed coupons is

400,000 squeezed figure

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

NALOOY Bank agrees to take an equity interest in Mariana by accepting common

Gain on debt restructuring

Problem 7 - CURRENT LIABILITY

The long-term debt at year-end is

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

Unamortized bond discount

Bond interest payable

Total current liabilities

Total noncurrent liabilities

The bonds were issued on January 1, 2007 at

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

15%, 10-year Bonds Payable, dated

Accrued Interest on Bonds

The reversing entry related to accrual on bond interest expense at January

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

The correct entry to record

retirement of 100 bonds on October 1, 2008?

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

Interest expense at December 31, 2008 is:

Carrying value of the bonds converted is:

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

Carrying value of retired bonds is:

Loss on early retirement of bonds is:

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

The company should record gain or loss on conversion of:

Unamortized Bond Discount, 2007 Bond Issue

Bond Interest Expense, 2007 Bond Issue

Amortization of bond discount is: