PROBLEM NO. 1
During your regular annual audit of Rockets Company for the year ended December 31,
2005, you obtain the following evidence and data relative to your examination of the bonds
payable and related accounts.
From your permanent file working papers:
Client is authorized to issue 20,000 bonds with par value of P1,000 each. Bonds are dated
May 1, 2002 and are due May 1, 2012. Interest at 12% per annum is due semiannually every
May 1 and November 1.
The December 31, 2004 balance of P9,500,000 represents proceeds from issuance of 10,000
bonds on November 2, 2003.
From the client’s ledger:
12%, 10-year Bonds Payable
12/31/2004 Balance
07/01/2005 CR
05/01/2005
11/01/2005
CV-120
CV-531
P600,000
720,000
Interest Expense
07/01/2005 CR
P9,500,000
2,100,000
P40,000
From supporting documents:
CR Cash receipts entry for issuance of 2,000 bonds for a total of P2,100,000 on July 1, 2005.
Trustee’s remittance statement attached.
Entry recorded
Cash
P2, 140,000
Bonds Payable
P2, 100,000
Interest expense
40,000
CV-120 Cash payment to trustee for November 1, 2004 through April 30, 2005 interest. Paid
check to trustee attached.
CV-531 Cash payment to trustee for May 1, 2005 through October 31, 2005 interest. Paid
check to trustee attached.
REQUIRED:
Use the straight line method to amortized bond discount and premium, if any.
1. Compute for the adjusted balances of the following as of December 31, 2005:
a. Bonds payable
P12, 000,000
b. Bond discount
372,549
c. Bond premium
92,683
d. Accrued interest
240,000
e. Interest expense
1,371,506
PROBLEM NO. 2
Wizards Company presented to you their records in connection with the audit of the
company’s financial statements for the year ended December 31, 2005. This is the first time
the company has been audited. The company floated a serial bond issue in 2003.
Your audit showed the following details of the issue and the accounts as of December 31,
2005:
Total amount
P5, 000,000
Date of issue
October 2, 2003
Proceeds from issue
P4, 900,000
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Interest rate
Interest payment date
Maturity date
10/02/2005 VR
5% per annum
October 1
P1, 000,000 annually, starting October 1, 2005
5% Serial Bonds Payable
P1,000,000
10/02/2003
CR
Accrued Interest Payable
01/02/05
P4,900,000
P62,500
REQUIRED:
Use the bond outstanding method to amortize bond discount and premium, if any.
1. Compute for the adjusted balances of the following as of December 31, 2005:
a. Bonds payable
P4, 000,000
b. Bond discount
45,000
c. Accrued interest payable
50,000
d. Bond interest expense
261,250
PROBLEM NO. 3
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 bonds. 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
1. How much of the proceeds from the issuance of convertible bonds should be allocated to
equity?
P126, 816
2. How much is the carrying value of the bonds payable as of December 31, 2004?
P1, 900,502
3. How much is the interest expense for the year 2005?
P190, 050
4. The entry to record the conversion on December 31, 2005 will include a credit to APIC of
P365, 276
5. How much is the loss on bond reacquisition on December 31, 2005?
P67,362
PROBLEM NO. 4
In your initial audit of Bulls Finance Co., you find the following ledger account balances.
12%, 25-year Bonds Payable, 2001 issue
01/01/2001 CR
P 1,600,000
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10/01/2005
CD
Treasury Bonds
P 216,000
Bond Premium
01/01/2001
01/01/2005
07/01/2005
CD
CD
CR
P 80,000
Bond Interest Expense
P 96,000
96,000
The bonds were redeemed for permanent cancellation on October 1, 2005 at 105 plus
accrued interest.
Based on the above and the result of your audit, determine the following:
1. The adjusted balance of bonds payable as of December 31, 2005 is
P1, 400,000
2. The unamortized bond premium on December 31, 2005 is
P56, 000
3. The total bond interest expense for the year 2005 is
P182, 900
4. The gain or loss on partial bond redemption is
P1, 900 loss
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