You are on page 1of 1

College of Business Administration

ACTG 109A – APPLIED AUDITING


Audit of Liabilities

NAME:___________________________________________COURSE & YEAR: __________SCORE:______

Problem 1
On January 2, 2014, the Mauban, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will
mature on January 1, 2018 and interest is payable annually every January 1. The bond contract entitles
the bondholders to receive 6, P100 par value, ordinary shares in exchange for each P1,000 bond. On the
date of issue, the prevailing market interest rate for similar debt without the conversion option is 10%.
On January 1, 2018, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. On that date, the bonds were selling at 110 and the ordinary share at P42.

Based on the result of your audit, answer the following: (Round off present value factors to 4 decimal
places)

1. The proceeds from issuance of convertible bonds to be allocated to the liability component is
a. P1,366,000 b. P1,778,336 c. P1,873,184 d. P2,000,000

2. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. P634,000 b. P221,664 c. P126,816 d. P0

3. The carrying amount of the bonds payable on December 31, 2014 is


a. P2,000,000 b. P1,796,170 c. P1,389,400 d. P1,900,502

4. The interest expense for the year 2015 is


a. P160,000 b. P179,617 c. P138,940 d. P190,050

5. The gain to be recognized on conversion of the bonds is


a. P126,816 b. P400,000 c. P463,408 d. P0

Problem 2
On January 1 2012, Wizards Corporation issued 2,000 of its 5-year P1,000 face value, 11% bonds dated
bonds dated January 1 at an effective annual interest rate (yield) 9%. Interest is payable each Dec. 31.
Wizards uses the effective interest method of amortization. On Dec. 31 2013 the 2,000 bonds were
extinguished early through acquisition in the open market by Wizards for P1,980,000 plus accrued
interest.
On July, 1 2012, Wizard issued 5,000 of its 6-year, 1,000 face value, 10% convertible bonds at par.
Interest is payable every June 30 and Dec 31. On the date of issue, the prevailing market interest rate to
similar debt without the conversion option is 12%. On July 1, 2013 an investor in Wizards convertible
bonds tendered 1,500 bonds for conversion into 15,000 shares of wizards ordinary shares, which had a
fair value of 105 and a par value of 1 at the date of conversion.
1. The issue price of 2,000 5-year, P1,000 face value bonds on Jan. 1, 2012 is
a. 2,155,560 b. 2,000,000 c. 1,844,400 d. 2,147,800

2. Carrying value of the 2,000 5-year, P1,000 face value bonds on Dec 31 2012 is.
a. 1,898,400 b. 2,129,500 c.2,000,000 d. 2,121,100

3. The gain on early retirement of bonds on Dec 31 2013 is


a. 20,000 b.112,000 c.121,200 d. -0-

4. The carrying value of the 5,000 6-year,P1,000 face value bonds on Dec 31 2012 is
a. 4,605,800 b.5,000,000 c. 4,732,875 d. 4,615,400

5. The conversion of the 1,500 6-year, 1,000 face value bonds on July 1 2013 will increase share premium
by
a. 1,485,000 b. 1,374,600 c.1,415,054 d. 1,377,697

You might also like