Quiz in AACA 2 - Audit of Non-Current Liabilities With Ans

PROBLEM NO.
I
The following data were obtained from the initial audit of LAOTEL COMPANY:
15% 10-year, Bonds Payable, dated January 1, 2020
DEBIT CREDIT BALANCE
Cash proceeds from issue on January 1, 2020
Of 1,000, P1, 000 bonds. The market rate of
Interest on the date of issue 12%. P1, 172, 044 P1, 172, 044
Bonds Interest Expense
Cash paid, 1/2/21 P75, 000 P75, 000

Cash paid, 7/1/21 75,000 150,000
Accrual, 12/31/21 75,000 225,000
Accrued Interest on Bonds
Balance, 1/1/21 P75, 000 P75, 000

Accrual, 12/31/21 75,000 150,000
Treasury Bonds
Redemption price and interest to date on

200 bonds permanently retired on 12/31/21 P265,000 P265,000
Based on the preceding information, determine the following:
1. Carrying value of bonds payable at December 31, 2021

A. P831,110 B. P800,000 C. P1,151,583 D. P921,266
2. Loss on Bond Redemption

A. P4,683 B. P19,683 C. P15,000 D. P34,683
3. Accrued Interest on Bonds at December 31, 2021

A. P75,000 B. P135,000 C. P60,000 D. 52,500
4. Bonds Interests Expense for the year ended December 31, 2021
A. P150,000 B. P139,174 C. P69,745 D. P160,826
PROBLEM NO. II
On January 1, 2013 , WIZARDS CORPORATION issued 2,000 of its 5-year , P1,000 face value, 11%
bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each
December 31. Wizards uses the effective interest method of amortization. On December 31, 2014, The
2,000 bonds were extinguished early through acquisition in the open market by Wizard for 1,980,000 plus
accrued interest. The PV of 1 at 9% for 5 periods is 0.6499 while the PV of ordinary annuity of 1 for 5
periods is 3.8896.
On July 1, 2013, Wizards issued 5,000 of its 6-year, P1, 000 face value, 10% convertible bonds at par.
Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest
rate for similar debt without conversion option 12%. On July 1, 2014, an investor in wizard’s convertible
bonds tendered 1,500 bonds conversion into 15,000 shares of Wizards’ ordinary shares, which had a fair
value of P105 a par value of P1 at the date of conversion. The PV of 1 at 6% for 12 periods is 0.4969
while the PV of ordinary annuity of 1 for 12 periods is 8.3833.
Based on the above and the result of your audit, determine the following:
1. The issue price of the 2,000 5-year, P1,000 face value bonds on January 1, 2013, is
A. P2,155, 500 B. P2, 000,000 C. P1,844,400 D. P2,147,800
2. The carrying value of the 2,000 5-year , P1,000 face value bonds on December 31, 2013, is
A. P1, 898,400 B. P2,129,500 C. P2,000,000 D. P2,121,100
3. The gain of early retirement of bonds on December 31, 2014, is

A. P20, 000 B. P112,000 C. P121,200 D. P 0
4. The carrying value of the 5,000 6-year , P 1,000 face value bonds on December 31, 2013, is
A. P4,605,000 B. 5,000,000 C. P4,732,875 D. P4,615,400
PROBLEM NO. III

On January 1, 2007 KUNG FU KIDS CORP. issued 3-year, 4,000 convertible bonds at face value of
P1,000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%. Each bond is
convertible, at the holder’s option, into 40 P10 par value ordinary shares at any time up to maturity. On
the date of issuance, the prevailing market interest rate for similar debt without the conversion privilege
was 9%. On the same date, the market price of one common share was P12.
1. What is the equity component of the compound instrument?

a. 110,091 b. 211,093 c. 303,755 d. 388,766
2. What is the interest expense to be reported on Kung Fu Kids Corp.’s income statement for the
year ended December 31, 2008?
a. 303,113 b. 332,662 c. 341,002 d. 350,092
3. What is the credit to share premium account assuming that 3,000 of the bonds were converted on
January 1, 2009?
a. 1,717,432 b. 1,928,525 c. 2,017,432 d. 2,289,908
4. Assuming that on the issuance date, the company paid transactions costs totaling to P151,469,
and as a result the yield rate increased by 1.5%, what is the equity component of the compound
instrument?
a. 292,253 b. 303,755 c. 443,722 d. 315,257
5. Using the assumption in number 34, and assuming all the 4,000 bonds were retired on January 1,
2009 when the prevailing yield rate on the bonds was at 9%, at P4,000,000, what is the loss to be
reported in the income statement?
a. 0 b. 52,804 c. 162,895 d. 330,275
PROBLEM NO. 1.
On January 2, 2004, the Suns, Inc. issued P2,000,000 of 8% convertible bonds at par.
The bonds will mature on January 1, 2008 and interest is payable annually every January
1. The bond contract entitles the bondholders to receive 6 shares of P100 par value
common stock 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 December 31, 2005, the holders of the bonds with total face value of P1,000,000
exercised their conversion privilege. In addition, the company reacquired at 110, bonds
with a face value of P500,000.
The balances in the capital accounts as of December 31, 2004 were:
Common stock, P100 par, authorized 50,000 shares, issued

and outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000
Market value of the common stock and bonds were as follows:
Date Bonds Common stock

December 31, 2004 118 40
December 31, 2005 110 42
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. How much of the proceeds from the issuance of convertible bonds should be allocated
to equity?
a. P634,000 b. P126,816 c. P221,664 d. P0
2. How much is the carrying value of the bonds payable as of December 31, 2004?
a. P2,000,000 b. P1,389,400 c. P1,796,170 d. P1,900,502
3. How much is the interest expense for the year 2005?
a. P160,000 b. P138,940 c. P179,617 d. P190,050
4. The entry to record the conversion on December 31, 2005 will include a credit to APIC
of
a. P365,276 b. P400,000 c. P307,893 d. P0
5. How much is the loss on bond reacquisition on December 31, 2005?
a. P50,000 b. P96,053 c. P67,362 d. P0
PROBLEM NO. 2.
In connection with your audit of Ginebra Corporation’s financial statements for the year
2005, you noted the following liability account balances as of December 31, 2004:
Note payable, bank P 5,600,000

Liability under finance lease 430,000
Deferred income taxes 700,000
Transactions during 2005 and other information relating to Ginebra’s liabilities were as
follows:
a.
The principal amount of the note payable is P5,600,000 and bears interest at 12%.
The note is dated April 1, 2004 and is payable in four equal annual installments of
P1,400,000 beginning April 1, 2005. The first principal and interest payment was
made on April 1, 2005.
b.
The capitalized lease is for a ten-year period beginning December 31, 2002. Equal
annual payments of P100,000 are due on December 31 of each year, and the 14%
interest rate implicit in the lease known by Ginebra. The present value at December
31, 2004 of the seven remaining lease payments (due December 31, 2005 through
December 31, 2011) discounted at 14% was P430,000.
c.
Deferred income taxes are provided in recognition of timing differences between
financial and income tax reporting of depreciation. For the year ended December 31,
2005, depreciation per tax return exceeded book depreciation by P312,500.
Ginebra’s effective income tax rate for 2004 was 32%.
d.
On July 1, 2005, Ginebra issued for P1,774,000, P2,000,000 face amount of its 10%,
P1,000 bonds. The Bonds were issued to yield 12%. The bonds are dated July 1,
2004 and will mature on July 1, 2014. Interest is payable annually on July 1. Ginebra
uses the interest method to amortize bond discount.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
6.Liability under finance lease as of December 31, 2005

a. P381,600 b. P390,200 c. P344,828 d. P330,000
7.Total noncurrent liabilities as of December 31, 2005
a. P5,610,440 b. P5,770,640 c. P5,931,328 d. P5,725,268 .
8.Current portion of long-term liabilities as of December 31, 2005
a. P1,445,372 b. P1,400,000 c. P1,500,000 d. P1,446,576
Accrued interest payable as of December 31, 2005
9.a. P484,440 b. P432,628 c. P532,628 d. P478,000
10.Total interest expense for the year 2005
a. P652,440 b. P707,068 c. P712,640 d. P699,760
PROBLEM 7
Pikachu Corp. issued P10,000,000 of 10% bonds on January 1, 2016. The
prevailing market rate of interest for similar type of securities was at 12% on the
date of issue. The bonds will mature on January 1, 2026. Interests are being paid
semi-annually every July 1 and January 1.
REQUIRED: Compute for the following items:
26. Total proceeds from the bond issuance
a. 10,000,000 c. 8,852,960
b. 8,917,186 d. 8,884,138
27. Correct interest expense in 2016

a. 1,743,068 c. 1,064,226
b. 1,200,000 d. 1,000,000
28. Adjusted balance of the bonds payable as of December 31, 2016

a. 8,989,350 c. 8,852,960
b. 8,917,186 d. 8,884,138

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PROBLEM NO.

Bonds Interest Expense

Cash paid, 1/2/21 P75, 000 P75, 000

Accrued Interest on Bonds

Balance, 1/1/21 P75, 000 P75, 000

Redemption price and interest to date on

Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2021

2. Loss on Bond Redemption

3. Accrued Interest on Bonds at December 31, 2021

3. The gain of early retirement of bonds on December 31, 2014, is

PROBLEM NO. III

1. What is the equity component of the compound instrument?

The balances in the capital accounts as of December 31, 2004 were:

Common stock, P100 par, authorized 50,000 shares, issued

Market value of the common stock and bonds were as follows:

Date Bonds Common stock

Note payable, bank P 5,600,000

6.Liability under finance lease as of December 31, 2005

27. Correct interest expense in 2016

28. Adjusted balance of the bonds payable as of December 31, 2016

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