AUDIT BONDS PAYABLE
Gumaca Corporation authorized the sale of P2,000,000 of 12%, 10-year debentures on January 1, 2005. Interest is payable
on January 1 and July 1. The entire issue was sold on April 1, 2005, at 102 plus accrued interest. On April 1, 2010,
P1,000,000 of the bond issue was reacquired and retired at 99 plus accrued interest. On June 30, 2010, the remaining
bonds were reacquired at 97 plus accrued interest and refunded with an issue of P1,600,000 of 9% bonds which were sold
at 100.
QUESTIONS:
Based on the above and the result of your audit. Determine the following: (Use straight line method to amortize premium
or discount)
1. Total cash receive from the sale of P2 million bonds on April 1, 2005
a. P2,100,000
c. P2,040,000
b. P2,000,000
d. P2,120,000
Solution:
2. Interest expense for 2005
a. P180,000
b. P183, 077
c. P 157,241
d. P176,923
Solution:
3. Carrying amount of bonds payable as of December 31, 2005
a. P2,037,241
c. P2,036,923
b. P2,042,759
d. P2,043,077
Solution:
4. Gain or loss on retirement of P1 million bonds on April 1, 2010
a. P19,744 gain
c. P 256 gain
b. P19,744 loss
d. P19, 828 gain
Solution:
5. Gain or loss on retirement of remaining bonds on June 30, 2010
a. P39,231 loss
c. P 20,679 gain
b. P39,231 gain
d. P39,310 gain
Solution:
In your initial audit of Infanta Finance Co., you find the following ledger account balances.
Debit
Credit
12%,25-year Bonds Payable, 2006 issue
01/01/2006
P6,400,000
Treasury Bonds
10/01/2010
P864,000
Bond Premium
01/01/2006
320,000
Bond Interest Expense
01/01/2010
384,000
07/01/2010
384,000
The bonds were redeemed for permanent cancellation on October 1, 2010 at 105 plus accrued interest.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Use straight line method to amortize premium
or discount)
1. The adjusted balance of bonds payable as of December 31, 2010 is
a. P5,536,000
c. P5,600,000
b. P6,400,000
d. P4,000,000
Solution:
2. The unamortized bond premium on December 31, 2010 is
a. P320,000
c. P256,000
b. P224,000
d. P235,200
Solution:
3. The total bond interest expense for the year 2010 is
a. P756,400
c. P731,600
b. P755,200
d. P731,200
Solution:
4. The gain or loss on partial bond redemption is
a. P7,600 loss
c. P7,600 gain
b. P72,400 loss
d. P72,400 gain
Solution:
In connection with the audit of the company’s financial statements for the year ended December 31, 2010, the Lucban
Corporation presented to you, their records. This is the first time the company has been audited. The company issued
serial bonds on April 1, 2007. Your audit showed the following details of the issue and the accounts as of December 31,
2010:
Total face value
P2,000,000
Date of bond
March 1, 2007
Total proceeds
P2,676,000
Interest rate
12% per annum
Interest payment date
March 1
Maturity dates and amount:
Date of maturity
Amount
March 1, 2010
P 500,000
March 1, 2011
P 500,000
March 1, 2012
P 500,000
March 1, 2013
P 500,000
P2,000,000
Since the corporation had excess cash, bonds of P500,000 schedule to be retired on March 1, 2012 were retired on April 1,
2010. The total amount paid was charged to serial bonds payable amount.
Serial Bonds Payable
3/01/2010
VR
P500,000
4/01/2010
VR
P495,000
4/01/2007
CR
P2,656,000
01/01/2010
GJ
P200,000
Accrued Interest Payable
Interest Expense
3/01/2010
VR
P240,000
QUESTIONS:
Based on the information presented above and the result of your audit, answer the following: (Use bond outstanding
method to amortize premium or discount)
1. The adjusted balance of the bonds payable account as of December 31, 2010 is
a. P2,000,000
c. P1,500,000
b. P1,084,000
d. P1,000,000
Solution:
2. The unamortized bond premium as of December 31, 2010 should be
a. P66,642
c. P84,000
b. P82,444
d. P104,000
Solution:
3. The accrued interest payable as of December 31, 2010 is
a. P150,000
c. P100,000
b. P120,000
d. P200,000
Solution:
Question
No. 3
Accrued interest payable, 12/31/10
(P1,000,000 x 12% x 10/12)
P100,000
QuestionQuestion
No. 4.4 TheNo.
bond
3 interest expenses that should be reported by the corporation for the year 2010 is
Nominal interest:Accrued
interest payable, 12/31/10
a. P55,264
c. P63, 801
Remaining
bonds
(P1,000,000x x12%
12%)
(P1,000,000
x 10/12)
P100,000
b. P58,000
d. P59,611 P120,000
Bonds retired on maturity (P500,000 x 12% x 2/12
10,000
Question
No.
3
Solution:
Bonds
retired
15,000
Question
No. 4prior to maturity (P500,000 x 12% x 3/12)
Accrued
interest
payable,
12/31/10
145,000
Nominal interest:
(P1,000,000
x
12%
x
10/12)
P100,000
Less premium
amortization
for 2010 (see
no. 2)
87,000P120,000
Remaining
bonds (P1,000,000
x 12%)
Interest expense
for 2010
P 58,000 10,000
Bonds retired
on maturity (P500,000 x 12% x 2/12
Question No. 4 Bonds retired prior to maturity (P500,000 x 12% x 3/12)
15,000
Nominal
Questioninterest:
No. 5
145,000
Remaining
bonds
(P1,000,000
x
12%)
P120,000
Face value
P500,000
Less premium amortization for 2010 (see no. 2)
87,000
Bonds
retired
on
maturity
(P500,000
x
12%
x
2/12
10,000
Add unamortized
bond
premium,
(P500,000
x
.006
x
23
mos.)
69,000
Interest expense for 2010
P 58,000
Bonds
retired
prioroftobonds
maturity
(P500,000 x 12% x 3/12)
15,000 569,000
Carrying
amount
retired
145,000 490,000
Less
retirement
(P500,000
.98)
Question
No.gain
5 price
5. The
on early
retirementx of
bonds is
Less
amortization
2010 (see no. 2)
87,000P 79,000P500,000
Gainpremium
on Face
early
retirement
of for
bonds
a. P79,000
c. P81,170
value
Interest expense
for 2010 bond premium, (P500,000 x d.
P 58,000
b. P77,722
P x 23
0 mos.)
Add
unamortized
.006
69,000
Carrying amount of bonds retired
569,000
Solution:
Question
No. 5 Less retirement price (P500,000 x .98)
490,000
Face value
P500,000
Gain on early retirement of bonds
P 79,000
Add unamortized bond premium, (P500,000 x .006 x 23 mos.)
69,000
Carrying amount of bonds retired
569,000
Less retirement price (P500,000 x .98)
490,000
Gain on early retirement of bonds
P 79,000
On January 1, 2009, Perez Corporation issued 5,000 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. Perez uses the effective interest method
of amortization. On December 31, 2010, the 3,000 bonds were extinguished early through acquisition in the open market
by Perez for P2,970,000 plus accrued interest.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal
places.)
1. The issue price of the bonds on January 1, 2009 is
a. P5,388,835
b. P4,630,655
c. P5,282,135
d. P5,000,000
Solution:
2. The carrying amount of the bonds on December 31, 2009 is
a. P4,755,930
c. P5,323,835
b. P5,453,840
d. P5,000,000
Solution:
3. The gain on early retirement of bonds on December 31, 2010 is
a. P116,442
c. P181,785
b. P266,811
d. P
0
Solution:
On January 2, 2009, the Mauban Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will mature on
January 1, 2013 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive 6,
P100 par value, ordinary shares 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 January 1, 2013, the holders of the bonds with total face value of P1,000,000 exercised their conversion privilege. On
that date, the bonds were selling at 110 and the ordinary share at P42.
QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off present value factors to 4 decimal
places)
1. The proceeds from issuance of convertible bonds to be allocated to the liability component is
a. P1,366,000
c. P1,873,184
b. P1,778,336
d. P2,000,000
Solution:
2. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. P634,000
c. P126,816
b. P221,664
d. P
0
Solution:
3. The carrying amount of the bonds payable on December 31, 2009 is
a. P2,000,000
c. P1,389,400
b. P1,796,170
d. P1,900,502
Solution:
4. The interest expense for the year 2010 is
a. P160,000
b. P179,617
c. P138,940
d. P190,050
Solution:
5. The gain to be recognized on conversion of the bonds is
a. P126,816
c. P463,408
b. P400,000
d. P
0
Solution:
On January 1, 2005, Calauag Corporation issued a 10 per cent convertible bonds with a face value of P4,000,000 maturing
on December 31, 2014. Each P1,000 bond is convertible into ordinary shares of Calauag at a conversion price of P25 per
share. Interest is payable half-yearly in cash. At the date of issue, Calauag could have issued nonconvertible debt with a
ten-year term bearing a coupon interest rate of 11 per cent.
On January 1, 2010, the convertible bond has a fair value of P4,400,000. Calauag makes a tender offer to the holders to
repurchase the bonds for P4,400,00. The holders of the P2,000,000 bonds accepted the offer. At the fate of repurchase,
Calauag could have issued non-convertible debt with a five-year term bearing a coupon interest rate of 8 per cent.
On December 31, 2010, to induce the holders of the remaining bonds to convert the bonds promptly, Calauag reduces the
conversion price to P20 if the bonds are converted before March 1, 2011 (ie within 2 months). The market price of
Calauag’s ordinary shares on the date the terms are amended is P32 per share.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
(Round off present value factors to 4 decimal places)
1. The proceeds from issuance of convertible bonds to be allocated to the equity component is
a. P235,520
c. P136,760
b. P239,120
d. P
0
Solution:
2. The carrying amount of the bonds on December 31, 2009 is
a. P3,849,120
c. P3,113,180
b. P3,885,940
d. P4,000,000
Solution:
3. The amount to be recognized in profit or loss as a result of the repurchase of the bonds on January 1, 2010 is
a. P200,000
c. P180,400
b. P203,880
d. P237,730
Solution:
4. The repurchase of the bonds on January 1, 2010 decreased equity by
a. P439,530
c. P76,630
b. P 37,710
d. P
0
Solution:
5. The amount to be recognized in profit or loss as a result of the amendment of the terms on December 31, 2010
is
a. P640,000
c. P64,000
b. P 10,000
d. P
0
Solution: