MIDTERM EXAMINATION – PART III
LIABILITIES
The Beautiful Corporation issued P800,000 of 12% face value bonds for P851,705.70.
The bonds were dated and issued on April 1, 2021, are due March 31, 2025, and pay
interest semi-annually on September 30 and March 31. The company sold the bonds
to yield 10%.
Required:
1.
2.
3.
4.
Prepare a bond interest expense and premium amortization schedule using the
straight-line method.
Prepare a bond interest expense and premium amortization schedule using the
effective interest method.
Prepare any adjusting entries for the end of the fiscal year, December 31, 2021,
using:
a. The straight-line method of amortization
b. The effective interest method of amortization
Assume the company retires the bonds on June 30, 2022, at 102 plus accrued
interest. Prepare the journal entries to record the bond retirement using:
a.
The straight-line method of amortization
b.
The effective interest method of amortization
SHAREHOLDERS’ EQUITY
Harry Corporation was organized on January 1, 2020, and began operations
immediately. Unfortunately, the company hired an incompetent bookkeeper. For the
years 2020 through 2022, the bookkeeper presented an annual balance sheet that
reported only one amount for shareholders’ equity: 2020, P137,700; 2054, P156,600
and 2055, P185,000. Also, the condensed income statement reported as follows:
2020, net loss, P17,500; 2021, net profit, P12,000; and 2023, net profit, P40,930
(cumulative earnings of P35,430). Based on the P35,430, the president has
recommended to the board of directors that a cash dividend of P35,000 be declared
and paid during January 2013. The outside director on the board has objected on the
basis that the company’s financial statements contain major errors (there has never
been an audit). You have been engaged to clarify the situation. The single
shareholders’ equity account, provided by the bookkeeper, appeared as follows:
SHAREHOLDERS’ EQUITY
2020
2020
2021
Share issue costs
Net loss
Bought 100 shares of
company share from
unhappy shareholder Tan
Depreciation expense*
(2016, P1,500; 2017,
P1,700; 2018, P2,300)
Cash shortages*
(2016, P2,000; 2017,
P2,500; 2018, P500)
2022 Cash loan to the company
president
P 1,300
17,500
700
2020 Ordinary shares, par P5
20,000 shares issued
2021 Net profit (including
P10,000 land write-up
to appraisal)
2021 Ordinary shares, 200
shares issued
P160,000
22,000
1,800
5,500
2022 Sold 30 of the Tan shares
270
5,000
10,000
P40,000
2022 Net Profit
40,930
P225,000
Required:
Based on the concerns of the outside director, you must address three major
questions:
1.
What amount of retained earnings would be available to support a cash
dividend? (Assume that the above figures have been found to be arithmetically
accurate and that there is no change in income tax.)
2.
Based on your calculations in requirement 1, what journal entries should be
made for declaration and later payment of the full amount available as a cash
dividend?
3.
What entry, prior to the dividend entries in requirement 2, is necessary (a) to
close the above single shareholders’ equity account and (b) to record the
various components of shareholders’ equity in separate accounts? Use the cost
method for treasury share and the offset method for share issue costs.