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SUCCEED REVIEW CENTERAudit of Liabilities and ShePROBLEM 1You were able to obtain the following from the accountant for Royal Crown Corp. related to the company’s liabilities as of December 31,2012.Accounts payable P650, Notes payable – trade 190, Notes payable – bank 800, Wages and salaries payable...

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SUCCEED REVIEW CENTER Audit of Liabilities and She PROBLEM 1 You were able to obtain the following from the accountant for Royal Crown Corp. related to the company’s liabilities as of December 31,2012. Accounts payable Notes payable – trade Notes payable – bank Wages and salaries payable Interest payable Mortgage notes payable – 10% Mortgage notes payable – 12% Bonds payable

P650,000 190,000 800,000 15,000 ? 600,000 1,500,000 2,000,000

The following additional information pertains to these liabilities. a. All trade notes payable are due within six months from the end of the reporting period. b. Bank notes-payable include two separate notes payable to Allied Bank. (a)

A P300,000, 8% note issued March 1,2010, payable on demand. Interest is payable every six months.

(b)

A 1-year, P500,000, 11 ½% note issued January 2,2012.

On December 30, 2012, Royal Crown negotiated a written agreement with Allied Bank to replace the note with a two-year P500,000, which was issued January 2, 2013. Royal Crown paid the interest on this note on December 31, 2012. c.

The 10% mortgage note was issued October 1,2009, with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31,2012, Royal Crown is three months behind in playing its required interest payment.

d. The 12% mortgage note was issued May 1,2006, with a term of 20 years. The current principal amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due April 30,2013. The payment includes interest of P180,000. e. The bonds payable is 10-year, 8% bonds, issued June 30,2003. Interest is payable semi-annually every June 30 and December 31. QUESTIONS: 1. Interest payable as of December 31,2012 is a. P155,000 b. P203,000 c. P143,000 d. P215,000 2. The portion of the Note Payable-bank to be reported under current liabilities as of December 31,2012 is a. P300,000 b. P800,000 c. P500,000 d. P0 3. Total current liabilities as of December 31,2012 is a. P3,950,000 b. P3,938,000 c. P4,138,000 d. P3,998,000 4. Total noncurrent liabilities as of December 31, 2012 is a. P1,760,000 b. P3,960,000 c. P2,560,000 d. P1,960,000 P ROBL E M 2 MUSIC AND ME COMPANY is selling audio and video appliances. The company’s fiscal year ends on March 31. The following information relates to the obligations of the company as of March 31,2013: Notes payable Dallas has signed several long-term notes with financial institutions. The maturities of those notes are given below. The total unpaid interest for all of these notes amounts to P340,000 on March 31,2013. Due date April 31,2013 July 31,2013

Amount P600,000 900,000

September 1,2013

450,000

February 1,2014 April 1,2013 – March 31,2015 .

450,000 2,700,000 P 5,100,000

Estimated warranties MUSIC AND ME has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2011 – 2012 fiscal year and still outstanding as of March 31,2012, amounted to P252,000. The warranty costs on sales made from April 1,2012 to March 31,2013, are estimated at P630,000. The actual warranty costs incurred during 2012 – 2013 fiscal year are as follows: Warranty claims honored on 2011 – 2012 sales Warranty claims honored on 2012 – 2013 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 31,2013. Dividends On March 10,2013, Music and Me’s board of directors declared a cash dividend of P0.30 per ordinary share and a 10% ordinary share dividend. Both dividends were to be distributed on April 5,2013 to ordinary shareholders on record at the close of business on March 31,2013. As of March 31,2013, Music and Me has 5,000,000 P2 par value, ordinary shares issued and outstanding. Bonds payable Music and Me issued P5,000,000, 12% bonds on October 1,2010 at a price that yields 10%. . The bonds will mature on October 1,2020. Interest is paid semi-annually on October 1 and April 1. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of the following as of March 31,2013: 1. 2. 3. 4. 5. 6.

Estimated warranty liability Total interest payable Interest expense relating to the bonds for the year ended March 31, 2013. The unamortized bond premium or discount on March 31, 2013 Total current liabilities at March 31, 2013 Total non-current liabilities at March 31, 2013.

PROBLEM 3 NOW AND THEN carries a wide variety of music promotion techniques – warranties and premiums – to attract customers. Musical instrument and sound equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. The premium is offered on the recorded and sheet music. Customers receive a coupon for each P20 spent on recorded music or sheet music. Customers may exchange 200 coupons and P140 for a radio. Now and Then pays P340 for each radio and estimates that 60% of the coupons given to customers will be redeemed. Now and Then’s total sales for 2012 were P58,000,000, of which P45,000,000 were from sales of musical instrument and sound reproduction equipment. Replacement parts and labor for warranty work totaled P1,300,000 during 2012. A total of 3,000 units of radio used in the premium program were purchased during the year and there were 700,000 coupons redeemed in 2012. The accrual method is used by Dolores to account for the warranty and premium costs for financial reporting purposes. The balance in the accounts related to warranties and premiums o January 1,2012, were as shown below: Inventory of Premium - radio Estimated Premium Claims Outstanding Estimated Liability for Warranties

P340,000 160,000 1,088,000

QUESTIONS: Based on the above and the result of your audit, determine the amounts that will be shown on the 2012

financial statements for the following:

2. 3. 4. 5. 6.

1. Warranty expense Estimated liability for warranties Estimated liability for warranties Premium expense Inventory of premium - radio Estimated liability for premiums

PROBLEM 4 On January 1,2011, Thunder 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. Thunder uses the effective interest method of amortization. On December 31,2012, the 2,000 bonds were extinguished early through acquisition in the open market by Thunder for P1,980,000 plus accrued interest. On July 1,2011, Thunder 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 the conversion option is 12%. On July 1,2012, an investor in Thunder’s convertible bonds tendered 1,500 bonds for conversion into 15,000 ordinary shares of Thunder, which had a fair value of P105 and a par value of P1 at the date of conversion. QUESTIONS: Based on the above and the result of your audit, determine the following: (Round off present value factors to 4 decimal places). 1. The process from issuance of convertible bonds to be allocated to the equity component is a. P235,520 b.P239,120 c. P136,760 d. P0 2. The carrying amount of the bonds on December 31,2011 is a. P3,849,120 b. P3,885,940 c. P3,113,180 d. P4,000,000 3. The amount to be recognized in profit or loss as a result of the repurchase of the bonds on January 1,2012 is a. P200,000 b. P203,880 c. P180,400 d. P237,730 4. The repurchase of the bonds on January 1,2012 decreased equity by a. P439,530 b. P37,710 c. P76,630 d.P0 5. The amount to be recognized in profit or loss as a result of the amendment of the terms on December 31,2012 is a. P640,000 b. P10,000 c. P64,000 d. P0

Problem 5 In your initial audit of National Finance Company, you find the following ledger account balances. 12% Bonds Payable – Due 10 years from 01-01-2009 : 10/01/12 CD

01.02.09

CRP

01.01.12 CD 07.01.12 CD

01.02.09 CR

P 5,000,000

1,110,000

529,697

P

Bond Discount :

Bond Interest Expense 300,000 : 300,000 :

The bonds were redeemed for permanent cancellation on October 1, 2012 at 108 plus accrued interest. Based on your computation, the bonds were originally issued to yield 14%. REQUIRED: (a)

Compute the following:

A

B

(b)

1. 2. 3. 4. 5.

The adjusted balance of bonds payable as of December 31, 2012 The adjusted balance of the bond discount on December 31, 2012. The bond interest expense for the year 2012 The loss on bond redemption. The balance of interest payable on December 31, 2012

Prepare audit adjusting entry as of December 31, 2012.

PROBLEM 6 The following information relates to the obligations of Lakers Corporation as of December 31,2012. ● Accounts payable for goods and services purchased ao open account amounted to P35,000 at December 31,2012. ● On December 15,2012, Lakers declared a cash dividend of P.05 per share, payable on January 12,2013, to shareholders of record as of December 31,2012. Lakers had 1 million ordinary shares issued and outstanding. ● On December 31,2012, Lakers entered into a six-year finance lease on a warehouse and made the first annual lease payment of P100,000. The incremental borrowing rate was 12%, and the interest rate implicit in the lease, which was known to Lakers, was 10%. The rounded present value factors for an annuity due for six years are 4.6 at 12% and 4.8 at 10%. ● On July 1,2012, Lakers issued P500,000, 8% bonds for P440,000 to yield 10%. The bonds pay interest annually every June 30. At December 31,2012, the bonds were trading on the open market at 86 to yield 12%. Lakers uses the effective interest method. ● Lakers’ 2012 accounting profit was P850,000 and its taxable profit was P600,000. The difference is due to P100,000 permanent differences and P150,000 of temporary differences related to noncurrent assets. At December 31,2012, Lakers had cumulative taxable differences of P300,000 related to noncurrent assets. Lakers’ effective tax rate is 30%. Lakers made no estimated tax payments during the year. QUESTIONS: Based on the above and the result of your audit, determine the following as of and for the year ended December 31,2012: 1. Carrying amount of finance lease liability a. P480,000 b. P428,000 c. P380,000 2. Carrying amount of bonds payable a. P446,400 b. P444,000 c. P442,000 3. Current liabilities a. P342,200 b. P327,000 c. P367,000 4. Noncurrent liabilities a. P850,000 b. P854,400 c. P895,000 5. Interest expense a. P92,000 b. P70,000 c. P44,000 PROBLEM 7

d. P360,000 d. P430,000 d. P347,000 d. P902,800 d. P22,000

The capital structure of Red Ribbon Corporation on December 31, 2011 follows:

Preference 12% Share Capital, P200 par, 30,000 shares issued and outstanding Ordinary Share Capital, P50 par, 100,000 shares Issued and outstanding Share Premium-Preference Share Premium-Ordinary Retained Earnings

P 6,000,000 5,000,000 1,800,000 1,500,000 2,200,000

During 2012, the following selected transactions occurred: a. b. c.

Purchased and retired 4,000 preference shares at P280 per share. Purchased 8,000 shares of its own ordinary share at P75 per share when each share is selling in the market at P78 each. A 2-for-1 share split on the ordinary share was approved by the shareholders, thereby reducing the par value to P25.

d.

Reissued 6,000 treasury shares at P45 each.

e. f. g.

Shareholders donated 4,000 ordinary shares when the market price was P46 per share. Two thousand of the donated shares were issued for P48 per share. The profit for 2012 was P2,000,000. No dividends were declared.

REQUIRED: Determine the following at December 31, 2012 – (a) (b) (c) (d)

Total shareholders’ equity Number of preference shares issued; number of preference shares outstanding Number of ordinary shares issued; number of ordinary shares outstanding Cost of remaining treasury shares (acquired by purchase)

PROBLEM 8 Red Heart Corporation was organized at the beginning of 2010 with 300,000 authorized shares of P100 par value ordinary share capital. At December 31, 2010, the shareholders’ equity section of Red Heart was as follows:

Ordinary Share Capital , P100 par, 30,000 shares issued Share Premium Retained Earnings Total Shareholders’ Equity

P3,000,000 300,000 450,000 P3,750,000

On June 15, 2011, Red Heart issued 50,000 ordinary shares for P6,000,000. A 5% bonus issue was declared on September 30, 2011 and issued on November 10, 2011 to shareholders of record on October 31, 2011. The market value of the ordinary share was P110 each on the declaration date. The profit of Red Heart for the year ended December 31, 2011 was P1,175,000.

During 2012, Red Heart had the following transactions:

March 1

Red Heart acquired 3,000 of its own ordinary share for P95 each.

May 1

Red Heart sold 1,500 shares of its treasury for P120 per share.

August 10

Issued shareholders one stock right for each share held to purchase two additional ordinary shares for P125 per share. The rights expire on December 31, 2012.

September 15 15,000 stock rights were exercised when the market value of ordinary share was P130 each. October 31

40,000 stock rights were exercised when the market value of ordinary share was P140 each.

December 10

Red Heart declared cash dividends of P5 per share payable on January 5, 2013.

December 20

Red Heart retired 1,000 shares of its treasury and reverted them to an unissued basis. On this date, the market value of the ordinary share was P150 each.

Profit for 2012 was P1,200,000. REQUIRED: (a) (b)

3.25.

Journal entries for years 2011 and 2012. Shareholders’ equity section of the statement of financial position at December 31, 2012.

The Red Santa Company began 2012 with P13,000,000 retained earnings account, of which P4,000,000 is appropriated for plant expansion. During the year 2012, the following events occurred:

1. 2.

A material error was discovered in the financial statements for the year 2011, which caused depreciation of 2011 to be understated by P200,000. The company’s income tax rate is 30%. Cash dividends of P5 per share on the 300,000 P100 par ordinary shares outstanding were declared and distributed, after paying the required annual dividend on its 200,000 shares of 8% P100 par preference share....