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COMPREHENSIVE PROBLEMLiabilitiesProblem 1Your audit staff for the audit of Silver Bells Corporation turned over to you his working papers containing information on the company’s liabilities. You noted the following: Accounts Payable  The general ledger balance is Php10,000,000.  The balance is net...

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COMPREHENSIVE PROBLEM Liabilities Problem 1 Your audit staff for the audit of Silver Bells Corporation turned over to you his working papers containing information on the company’s liabilities. You noted the following: Accounts Payable  The general ledger balance is Php10,000,000.  The balance is net of debit balances in a supplier’s account amounting to Php400,000.  Unrecorded Vouchers include the following: a. Mabuhay Company for Php600,000. The merchandise was shipped December 31, 2016, FOB shipping point. The goods were received on January 3, 2017. b. Lively Company for Php240,000. The merchandise was shipped on December 28, 2016, FOB Destination. The goods were received on January 4, 2017.  The company, as consignee, held goods worth Php180,000. These goods were not included in the physical inventory on December 31, 2016 but were included in the Accounts Payable. Bonds Payable  Silver Bells Corporation issued 2,000 of its 5-year Php1,000 face value 11% bonds on July 1, 2014. These bonds were sold for Php2,155,800 a price that yields 9%. The bonds were dated January 1, 2014 and pay interest annually every December 31. On July 1, 2016, 1,000 of the bonds were retired , the company paying Php1,100,000 inclusive of accrued interest. This amount was charged by the company to the Bonds Payable account. On December 31, 2016, the company charged Interest Expense for the amount of Interest paid. No entry was made by the company during 2016 for the amortization of bond premium. Other Obligations  In October 2016, an employee was injured on the parking lot in an accident partially the result of his own negligence. The employee has sued for Php2,000,000. The legal counsel believes it is probable that the outcome of the action will be unfavorable and that the settlement would cost the company from Php40,000 to Php400,000.  Silver Bells sells goods with a warranty under which customers are covered for the cost of any manufacturing defects that become apparent within the first year after the purchase. If minor defects were detected in all products sold, repair costs of Php4,000,000 would result. If major defects were detected in all products sold, repair costs of Php10,000,000 would result. The enterprise’s past experience and future expectations indicate that 65% of the goods sold have no defects, 25% of the goods sold have minor defects and 10% of the goods sold have major defects.  On September 30 2014, Silver Bells acquired special equipment from Moms Company by paying Php2,000,000 down and signing a note with a face value of Php4,000,000 due September 30, 2017. The note is non-interest bearing. Market rate of interest for similar notes at the date of its issuance was 10%. (round present value factor to five decimal places). 1.

The adjusted balance of Accounts Payable at December 31, 2016 is a. Php10,020,000 c. Php11,060,000

b.

Php10,820,000

d.

Php11,000,000

Accounts payable, per client Debit balance in suppliers’ account Shipments from cruise Goods held on consignment Accounts bl dit

2.

P10,000,0 400,00 600,00 (180,000)

The adjusted ledger balance of Premium on Bonds Payable at December 31, 2016 is a. Php155,800 c. Php70,642 b. Php101,506 d. Php35,321. Carrying Value, 1/1/14 Date Nominal Int(11%) Effective Int(9%) 1/1/14 12/31/14 220,000 194,022 12/31/15 220,000 191,684 Sold bonds 12/31/15 12/31//16

110,000

94,568

Amort

CV 2,155,800 2,129,822 2,101,506 (1,050,753) -------------1,050,753 1,035,321

25,978 28,316

15,432

Premium on Bonds Payable = 1,035,321 – 1,000,000 = 35,321 3.

The amount of gain or (loss) on retirement of bonds payable during 2016 is a. Php(1,963) c. Php(5,753) b. Php(56,963) d. Php1,963 Proceeds from retirement of bonds inclusive of accrued interest Less: Accrued interest 1,000,000 x 11% x 6/12

Php

55,000 ------------------------

Proceeds from retirement of bonds exclusive of accrued interest Less: Carrying value of bonds CV, 12/31/15 Php 1,050,753 ----------------------Amortization (Jan 1 to July 1) NI (1,000,000 x 11% x ½) 55,000 EI (1,050,753 x 9% x ½) 47,284 ------------------------7,716 ------------------------Gain on retirement of bonds

4.

1,100,000

1,045,000

1,043,037 ----------------------1,963 =============

The carrying amount of Notes Payable that will be shown on December 31, 2016 statement of financial position is a. Php4,000,000 c. Php3,636,240 b. Php3,727,255 d. Php3,388,408

P4,000,000 x .75131 = P3,005,240 (PV rate = 3 periods, 10%; .75131) Date 9/30/14 9/30/15 9/30/16 9/30/17

Interest

Carrying P 3,305,76 3,636,34 4,000,00 0

300,524 330,576 363,660

Carrying value as of 9/30/16 Amortization 363,660 x 3/12 Carrying value 12/31/2016

P3,636,340 90,915 P3,727,255

5.

The provision for litigation expenses that should be shown on the statement of financial position at December 31, 2016 is a. Php300,000 c. Php340,000 b. Php0 d. Php350,000

6.

The provision for warranties that should be shown on the statement of financial position at December 31, 2016 is a. Php0 c. Php2,000,000 b. Php4,000,000 d. Php7,500,000 10,000,000 (10%) + 4,000,000 (25%) = P2,000,000

Problem 2 In your initial audit of Pau Corporation, you find the following ledger account balances: 12% Bonds Payable, due March 31, 2019 -----------------------------------------------------------Debit March 31, 2014 October 1, 2016 Php 3,060,000

Php

Credit 10,000,000

Balance Php10,000,000 6,940,000

Php

Credit Balance 772,144 Php 772,144

Premium on Bonds Payable -----------------------------------------Debit March 31, 2014

Bond Interest Expense ----------------------------------March 31, 2016 Sept 30, 2016

Php

Debit 600,000 600,000

Credit Php

Balance 600,000 1,200,000

The bonds pay interest semiannually on March 31 and September 30. The bonds were issued on March 31 at a price to yield 10%. On October 1, 2016, Php3,000,000 of the bonds were redeemed for permanent cancellation at 102. Requirements : Prepare any necessary audit adjusting entries at the end of 2016.

Yearly 12% 10% Semi-monthly 6% 5% Date Nominal Effective Amortization 3/31/2014 9/30/14 600,000 538,607 61,393 3/31/15 600,000 535,538 64,462 9/30/15 600,000 532,314 67,686 3/31/16 600,000 528,930 71,070 9/30/16 600,000 525,377 74,623 Sold 3,000,000/10,000,000 x 10,432,910 9/30/16 after sale 3/31/17 420,000 9/30/17 420,000

365,152 362,409

September 2014 to September 2015 600,000 x 3 = 1,800,000 Entry Made Interest Expense Cash Correct Entry Interest Expense Bond Premium Cash

54,848 57,591

Carrying Value 10,772,144 10,710,751 10,646,289 10,578,603 10,507,533 10,432,910 ( 3,129,873) ----------------7,303,037 7,248,189 7,190,598

1,800,000 1,800,000

1,606,459 193,541 1,800,000

Interest expense : 538,607+535,538+532,314 = 1,606,459 Amortization : 61,393+64,462+67,686 = 193,541 Adjusting Entry (2016) Bond Premium Interest Expense

193,541 193,541

December 31, 2015 (Adjusting Entry) Entry Made None Correct Entry Interest expense (10,578,603 x 5% x 3/6) 264,465 Bond Premium 35,535 Interest payable (10,000,000 x 6% x 3/6) 2015 Exp(U) -------NI(O) ---------RE(O) 2016 Exp(O)--------NI (U) Adjusting Entry(2016) Retained Earnings Bond premium Interest Expense Interest payable

264,465 35,535 264,465 35,535

December 2016 March 31, 2016 Entry made Interest expense Cash

600,000 600,000

300,000

Correct Entry Interest expense Bond premium Interest payable Cash

528,930 35,535 35,535 600,000

Adjusting Entry Bond premium Interest payable Interest expense September 30, 2016 Entry Made Interest Expense Cash Correct Entry Interest Expense Bond Premium Cash Adjusting Entry Bond Premium Interest Expense October 1, 2016 Entry Made Bond Payable Cash

35,535 35,535 71,070

600,000 600,000

525,377 74,623 600,000

74,623 74,623

3,060,000 3,060,000

Correct Entry Bonds Payable 3,000,000 Bond premium (3,129,873-3,000,000) 129,873 Cash Gain from bond Redemption Cash Payment from redemption of Bonds Carrying Value Gain from bond redemption

3,060,000 69,873 3,060,000 3,129,873 --------------69,873 ========

Adjusting Entry Bond Premium 129,873 Bonds Payable Gain from Bond Redemption Accrual end of 2016 Interest Expense Bond Premium Interest Payable

60,000 69,873

182,576 27,424 210,000

Problem 3 Your company has been engaged to examine the financial statements of Pau Company for the years ended December 31, 2017 and December 31, 2016. You have been assigned to review the liabilities and shareholders equity balances. You have learned that on January 1, 2015, Pau Company issued a five year, 8% bonds Php5,000,000 bonds for Php5,500,000. Each Php1,000 bond is convertible into 8 shares of Php100 par ordinary share of Pau Company, at the option of the bondholder. Interest on the bonds is payable annually on December 31. Without the conversion feature, the bonds would have sold to yield 10% to the holders. (Round present value factors to four decimal places.) 1. The issue price that was attributable to the debt is a. Php5,420,000 c. Php5,000,000 b. Php5,399,350 d. Php4,620,820 Total issue price Issue price attributable to the debt FV:(P5,000,000 x 0.6209 ) Interest:400,000 x 3.7908

Issue price attributable to the conversion privilege Cash 5,500,000 Bond discount ( 5,000,000 -4,620,820) 379,180 Bonds payable Paid in capital from bond conversion privilege

P5,500,000 ----------------P3,104,500 1,516,320 ----------------4,620,820 ----------------P 879,180 ==========

5,000,000 879,180

2. What is the correct carrying value of the bonds on December 31, 2015 a. Php4,682,902 c. Php5,000,000 b. Php4,744,984 d. Php5,467,402 Date Nominal Interest(8%) Effective Interest(10%) Amortization Carrying Value 01/01/2015 4,620,820 12/31/2015 400,000 462,082 62,082 4,682,902 12/31/2016 400,000 468,290 68,290 4,751,192 Conversion/Retirement (2,000,000/5,000,000 x 4,751,192) (1,900,477) --------------Balance after conversion 2,850,715 12/31/2017 240,000 285,072 45,072 2,895,787 Conversion (1,000,000/3,000,000 x 2,895,787) ( 965,262) ---------------Balance after conversion 1,930,525 12/31/2018 160,000 193,052 33,052 1,963,577 12/31/2019 160,000 196,358 36,358 2,000,000 196,423 36,423 3. What is the interest expense on these bonds for the year ending December 31, 2016? a. Php400,000 c. Php468,290 b. Php437,392 d. Php500,000 4. Php2,000,000 of the bonds were converted into ordinary shares on January 1, 2017. What amount should have been credited to share premium, upon conversion? a. Php652,149 c. Php400,000

b. Php520,000

d.

Carrying Value of Bonds Converted

Php300,477 1,900,477

Par Value of Shares Issued (2,000,000/1,000 x 8 = 16,000) x Php100

1,600,000 --------------300,477 =========

Share Premium

Bonds payable Paid in capital from bond conversion privilege (879,180 x 2/5) Bond discount (2,000,000-1,900,477) Share capital Share premium (351,672 + 300,477)

2,000,000 351,672 99,523 1,600,000 652,149

5. Disregard the information given in No. 4. Assume, instead, that on January 1,2017, Php2,000,000 of the bonds were retired. The bonds without the conversion feature would have sold @105 on this date. What amount of gain or (loss) should be recognized on the retirement of the bonds? a. Php40,000 c. Php(59,523) b. Php160,000 d. Php(199,523) Retirement of bonds without conversion privilege (2,000,000 x 105) Carrying value of bonds converted Loss on retirement of bonds Bonds payable 2,000,000 Loss on early retirement of bonds 199,523 Paid in capital from bond conversion privilege (879,180 x 2/5) 351,672 Bond discount Cash Share premium from unexercised conversion privilege

Php

2,100,000 1,900,477 ----------------------Php 199,523 =============

99,523 2,100,000 351,672

6. Disregard the assumption in item No. 4. Assume that on January 1, 2017, Php2,000,000 of the bonds were retired. The bonds without the conversion feature would have sold @ 105 on this date. What should be the interest expense for the year ended December 31, 2017? a. Php252,374 c. Php300,000 b. Php285,072 d. Php475,119 7. Php1,000,000 bonds were converted into ordinary shares on January 1, 2018. What amount of Paid in capital from bond conversion will be canceled? Carrying value of bonds converted Value of Share issued ( Php1,000,000/1,000 x 8= 8,000 shares) x P100 Share premium + Value of conversion privilege converted (879,180 – 351,672) x 1/3 Total Share Premium

Php

965,262

800,000 --------------------165,262 175,836 --------------------Php 341,098 ============

Bonds payable Paid in capital from bond conversion Share capital Share premium Bond discount (1,000,000-965,262)

1,000,000 175,836 800,000 341,098 34,738

8. Refer to No. 7. What is the carrying value of the bonds to be converted on January 1, 2018? Php965,262 9. What is the interest expense on these bonds for the year ending December 31, 2017? Php 285, 072 (refer to amortization table) Interest expense Cash Bond discount

285,072 240,000 45,072

10.What is the interest expense on these bonds for the year ending December 31, 2018 and 2019? Php193,052 and Php196,423 (refer to amortization table) 2018:

2019:

Interest expense Cash Bond discount

193,052

Interest expense Cash Bond discount

196,423

160,000 33,052 160,000 36,423

Bonds payable 2,000,000 Paid in capital from bond conversion (879,180 – 351, 672 – 175,836) 351,672 Cash Share premium arising from unexercised conversion privilege

2,000,000 351,672

Problem 4 Camil Company inaugurated a new sales promotional program. For every 10 cereal box tops returned to Camil Company, customers will receive an attractive prize. Camil Company estimates that only 30% of the cereal box tops reaching the customer will be redeemed. Sale of cereal boxes Purchase of prizes Prizes distributed to customer

Units 2,000,000 36,000 28,000

P

Amount 24,000,000 180,000

The accountant of Camil Company journalized the purchase of prizes as a debit to premium expense and a credit to cash. He just prepared a memo entry for prizes distributed. Required: Prepare any necessary audit adjusting entries. Premium Expense

(2,000,000 x 30%)/10 x P5 = P300,000 Inventory of Premiums ( 36,000 – 28,000) x P5 = P 40,000

Estimated Premium Claims Outstanding Expected distribution (2,000,0000 x 30%)/10 60,000 Actual distribution

(28,000) ---------32,000 x P5 ---------P160,000 ========

Still to be distributed Cost of each premium Premium Claims Outstanding

Audit Adjustment: Inventory of Premiums 40,000 Premium Expense ( 300,000 – 180,000) 120,000 Estimated Premium Claims Outstanding

160,000

Problem 5 In your initial audit of Mari Company, you find the following ledger account balances: 12% Bond Payable – Due 10 years from 01/01/2014 Debit Credit 01/02/2014-CR P 5,000,000 Bonds Payable Redeemed 10/01/17-CD

Debit P 1,110,000

Credit

Debit 529,697

Credit

Discount on Bonds Payable 01/02/2014-CR

P

Bond Interest Expense 01/01/2017-CD 07/01/2017-CD

Debit P 300,000 300,000

Credit

The bonds were redeemed for permanent cancellation on October 1, 2017 at 108 plus accrued interest. Based on your computation, the bonds were originally issued to yield 14%. Compute the following: 1. The adjusted balance of bonds payable as of December 31, 2017. 2. The adjusted balance of the bond discount on December 31, 2017. 3. The bond interest expense for the year 2015 to 2017. 4. The loss on bond redemption. 5. The balance of interest payable on December 31, 2017. 6. Adjusting entry as of December 31, 2017. 1.

Bonds Payable per client Bonds Payable redeemed Bonds Payable, per audit

P 5,000,000 1,000,000* ----------------------P 4,000,000 ==============

*Cash payments = Redemption price + Accrued interest 1,110,000 = 1.08Face + ( Face x 12% x 3/12) 1,110,000 = 1.08Face + (.03Face) Face = 1,110,000/1.10 Face of bonds redeemed = P1,000,000 2.

Carrying value of P4M bonds on December 31, 2017 Face Value, 12/31/2017 (1/01/2018 4,000,000 Less: Carrying value, 12/31/2017 3,682,760 --------------Bond discount 317,240 ========

3. Date 1/12/2014 7/1/2014 1/1/2015 7/01/2015 1/01/2016 7/01/2016 1/01/2017 7/01/2017 Sale

Nominal interest (6%)

Effective interest (7%)

Amortization of Bonds 12,921 13,826 14,794 15,829 16,937 18,123 19,931

Carrying Value 4,470,303 4,483,224 4,497,050 4,511,844 4,527,673 4,544,610 4,562,733 4,582,664

300,000 300,000 300,000 300,000 300,000 300,000 300,000 4,582,664x 1,000/5,000

312,921 313,826 314,794 315,829 316,937 318,123 319,391

7/012017 after sale 1/01/2018

240,000

256,629

16,629

3,666,131 3,682,760

7/01/17 10/01/17

30,000

32,079

2,079

916,533 918,612

(916,533)

6 months nominal rate = 300,000/5,000,000 = 6% Yearly nominal rate

= 6% x 2 = 12%

Carrying value, 01/2/2014 = 5,000,000 – 529,697 Interest Expense 2015 = 314,794 + 315,829 = 6630,623 2016 = 316,937 + 318,123 = 635,066

4.

2017 = 319,391 + 256,629 + 32,079 = 608,099 Total cash received Less : Accrued Interest (1,000,000 x 6% x 3/6) Issue Price of bond redeemed Less: CV of bonds redeemed, 10/01/17

P 1,110,000 30,000 ------------------P 1,080,000 918,612

Loss on bond redemption

------------------P 161,388 ============

Problem 8 The Accountant for Mari Company prepared the following schedule of liabilities as of December 31, 2017: Accounts payable and accrued expenses P 3,300,000 Notes payable-trade 2,400,000 Notes payable-bank 16,000,000 Wages and salaries payable 700,000 Interest payable ? 10% mortgage note payable 12,000,000 12% mortgage note payable 9,000,000 Bonds payable 20,000,000 The following additional information pertains to these liabilities; (1)

The bank notes payable include two separate notes payable to BBO Bank: a. A P4,000,000, 8% note issued March 1, 2017, payable on demand. Interest is payable each six months. Mari Company already made the first semi-annual interest payments on August 31, 2017. b. A 2-year, P12,000,000, 11 % note issued January 2, 2016. On December 31, 2017, after paying the accrued interest, Mari Company negotiated a written agreement with BBO Bank to replace this note with a 2-year, P12,000,000, 10% note. The new note was issued January 2, 2018.

2, 2018. (2) The 10% mortgage note was issued November 1, 2012, with a term of 10 years. The terms of the note give the holder the right to demand immediate payment if the company fails to make a quarterly interest payment within 10 days of the date the payment is due. As of December 31, 2017, Mari Company is two months behind paying its required interest payment. Penalty for non-payment of interest charged by the bank was P320,000. (3) The 12% mortgage note was issued...