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CHAPTER 8 – Audit of Liabilities
Problem 1 In conjunction with your December 31, 2007, annual audit of the financial statements of SweetHeart Company, you have obtained and examined the December 31, 2007, accounts payable trial balance. Your examination of this trial balance disclosed the following open vouchers:
a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher covered a cash transfer to the factory payroll bank account for the pay period ended December 28,
- The payroll cash transfer was made January 3, 2008, and payroll checks covering this pay period were distributed to factory employees on January 4, 2008.
b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000 credit covered the principal and interest due on a ten-year installment loan. The loan was granted to SweetHeart Company on January 1, 2007. Terms of the loan agreement call for ten equal annual installment payments of P100,000, each plus interest at 8 percent. Principal and interest payments are due January 5, 2008 – 2017. The voucher indicated that the Loan Payable and Interest Expense accounts had been properly charged.
c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher covered on invoice from AC Company for a new computer machine. The computer machine was installed December 10, 2007, and the Office Equipment account was properly charged.
d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480. This voucher covered income taxes withheld from employees during December 2007.
e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit covered the total interest and principal due on a 180-day P40,000 note payable to the CJ Company. Charges to the Note Payable and Interest Expense had been properly handled.
f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher represented a P200,000 advance payment to SS Company for a special order of ten boxes. The P200,000 check was mailed to SS Company on January 2, 2008.
Questions
- Accounts payable at year-end is a. Overstated by P716,940 c. Overstated by P516, b. Overstated by P666,940 d. Overstated by P466,
- The entry to adjust Voucher # 778 is a. Accounts payable 180,000 c. Loans payable 100, Loans payable 100,000 Interest expense 80, Interest payable 80,000 Accounts payable 180, b. Accounts payable 180,000 d. Loans payable 100, Loans payable 100,000 Interest payable 80, Interest expense 80,000 Accounts payable 180,
- The entry to adjust Voucher # 741 is a. Accounts payable – others 50, Accounts payable 50,
b. Accounts payable 50, Accounts payable – others 50, c. Accounts payable – others 50, Machinery 50, d. No adjustment
- The current liability of the company at year-end is a. Overstated by P340,000 c. Understated by P200, b. Overstated by P140,000 d. Understated by P 60,
Solution
1. Accounts payable 380, _Salaries payable 380,
- Accounts payable 180,_ Loans payable 100, _Interest payable 80,
- Accounts payable 50,_ _AP – others 50,
- Accounts payable 65,_ _Income tax payable 65,
- Accounts payable 41,_ Notes payable 40, _Interest payable 1,
- Cash 200,_ _Accounts payable 200, Answer:
- C 2. A 3. B 4. C_
Problem 2 In conjunction with your firm’s examination of the financial statements of Ronryan Company as of December 31, 2007, you obtained from the voucher register the information shown in the work paper below.
Item Entry Date Description Amount Account Charged
- 12/18/07 Supplies, purchased FOB destination, 12/15/07; received, 12/17/07 15,000 Supplies on hand
- 12/18/07 Auto insurance, 12/15/ to 12/15/08 24,000 Prepaid insurance
- 12/21/07 Repair services; received 12/20/07 19,000 Repairs and Main.
- 12/21//07 Merchandise shipped FOB shipping point, 12/20/07; received, 12/24/07 12,300 Inventory
- 12/21/07 Payroll, 12/07/07 – 12/21/ (12 working days) 69,000 Sal. and wages
- 12/26/07 Subscription to Tax Journals for 2008 5,000 Dues & subs
- 12/28/07 Utilities for December 2007 24,000 Utilities expense
- The entry to adjust item #12 is a. Interest expense 26,667 c. Interest expense 26, Interest payable 26,667 Interest payable 3, b. Interest expense 30,000 Cash 30, Interest payable 30,000 d. No adjustment
- The entry to adjust item # a. Machinery 254,000 c. No adjustment AP – others 254, b. AP – others 254,000 d. No adjustment since payment Machinery 254,000 was made on Jan. 15, 2008
- The entry to adjust item # a. Dividends declared 160,000 c. No adjustment Dividends payable 160, b. Dividends payable 160,000 d. No adjustment since payment Dividends declared 160,000 was made on Jan. 15, 2008.
Solution
_1. No Adjustment
- Insurance expense 1,_ _Prepaid insurance 1,
- No Adjustment
- No Adjustment
- No Adjustment
- Prepaid subscription 5,_ _Dues and subscription 5,
- No adjustment
- Accounts payable 111,_ _Inventory 111,
- No adjustment
- No adjustment
- No adjustment
- No adjustment
- Machinery 254,_ _AP – others 254,
- No adjustment Answer:
- B 2. D 3. D 4. A 5. C_
Problem 3 - ADJUSTMENT FOR LOSS CONTINGENCIES The following items have not been reflected in the financial statements of ALTAGRACIA CORP. for the year ended December 31, 2007. You are asked if the information should be adjusted and disclosed in the financial statements, disclosed only in the financial statement, or no adjustment or disclosure.
- Altagracia owns a small warehouse located on the banks of a river in which it stores inventory worth approximately P250,000. Altagracia is not insured against flood losses. The river last overflowed its banks 200 years ago. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- Altagracia offers an unconditional warranty on its toys. Based on past experience, Altagracia estimates its warranty expense to be 1% of sales. Sales during 2007 were P5,000,000.
a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On October 30, 2007, a safety hazard related to one of Altagracia’s toy products was discovered. It is considered probable that Altagracia will be liable for an amount in the range of P50,000 to P250,000. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On November 29, 2007, Altagracia initiated a lawsuit seeking P125,000 in damages from a patent infringement. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On December 15, 2007, a former employee filed a lawsuit seeding P50,000 for unlawful dismissal. Altagracia’s attorneys believe the suit is without merit. No court date has been set. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On December 12, 2007, Conchita guaranteed a bank loan of P500,000 for its president’s personal use. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On January 5, 2008 , a warehouse containing a substantial portion of Altagracia’s inventory was destroyed by fire. Altagracia expects to recover the entire loss, except for a P125,000 deductible from insurance. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On January 5, 2008, inventory purchased FOB shipping point from a foreign country was detained at that coutnry’s border because of political unrest. The shipment is valued at P750,000. Altagracia’s attorneys have stated that it is probable that Altagracia will be able to obtain the shipment. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On January 30, 2008, Altagracia issued P5,000,000 bonds at a premium of P250,000. a. Adjusted and disclosed in the financial statements. b. Only disclosure is required in the financial statements. c. No adjustment or disclosure required in the financial statements.
- On February 14, 2008, the BIR assessed Altagracia an additional P200,000 for the 2001 tax year. Altagracia’s attorneys and tax accountants have stated that it is likely that the BIR will agree to a P150,000 settlement.
Problem 5 - PREMIUMS In the packages of its products, ALONDRA, INC. includes coupons that may be presented at retail stores to obtain discounts on other Alondra products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Alondra honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Alondra estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Alondra during 2007 is as follows:
Consumer expiration date 12/31/ Total payments to retailers as of 12/31/07 165, Liability for unredeemed coupons as of 12/31/07 99,
Questions
- The total face amount of coupons issued in 2007 is a. P 600,000 b. P 440,000 c. P 400,000 d. P 240,
- Coupons expense at year-end is a. P 440,000 b. P 400,000 c. P 264,000 d. P 240,
- Estimated liability for unredeemed coupons is a. P 219,000 b. P 123,000 c. P 99,000 d. P 3,
Solution Coupons issued 400,000 – squeezed figure X 60% Coupons to be redeemed 240,000 Answer: Plus: Handling cost (10%) 24,000 1. C 2. C 3. C Total Cost 264, Less: payment 165, Estimated liability 99,
Problem 6 - DEBT RESTRUCTURING: ASSET SWAP, EQUITY SWAP AND MODIFICATION OF TERMS
MARIANA CORPORATION is having financial difficulty and therefore has asked NALOOY Bank to restructure its P3 million note outstanding. The presented note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.
Presented below are four independent situations. Determine the journal entry that Mariana would make for each of the following types of debt restructuring.
- NALOOY Bank agrees to take an equity interest in Mariana by accepting common stock valued at 2,400 in exchange for relinquishing its claim on this note. The common stock has a par value of P1,200,000. a. Notes payable 3,000, Common stock 3,000, b. Notes payable 3,000, Common stock 1,200, APIC 1,800, c. Notes payable 3,000, Common stock 1,200, Interest expense 300, APIC 1,500,
d. No adjustment
- NALOOY Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of P2,000,000 and a fair value of P2,500,000. a. Notes payable 3,000, Land 2,500, Gain on debt restructuring 500, b. Notes payable 3,000, Land 2,000, Interest expense 300, Gain on exchange 200, Gain on debt restructuring 500, c. Notes payable 3,000, Land 2,000, Gain on exchange 500, Gain on debt restructuring 500, d. No adjustment
- NALOOY Bank agrees to modify the terms of the note, indicating that Dolores does not have to pay any interest on the note over the 3-year period. a. Interest payable 300, Gain on debt restructuring 300, b. Loss on debt restructuring 300, Interest expense 300, c. Interest expense 900, Gain on debt restructuring 900, d. No adjustment
- NALOOY Bank agrees to reduce the principal balance due to P2,000,000 and require interest only in the second and third year at a rate of 10%. a. Notes payable – old 3,000, Notes payable – new 2,400, Gain on debt restructuring 600, b. Notes payable - old 3,000, Notes payable – new 3,000, c. Notes payable – old 3,000, Notes payable – new 2,600, Gain on debt restructuring 400, d. No adjustment
Solution
1. B Notes payable 3,000, Common stock 1,200, _APIC 1,800,
- C_ Notes payable 3,000, Land 2,000, Gain on exchange 500, _Gain on debt restructuring 500,
- D No Adjustment
- A_ Notes payable – old 3,000, Notes payable – new 2,400, Gain on debt restructuring 600,
Due date Amount April 31, 2007 P 600, July 31, 2007 900, September 1, 2007 450, February 1, 2008 450, April 1, 2008- March 31, 2011 2,700, P5,100, Estimated warranties: Abam has one year product warranty on some selected items. The estimated warranty liability on sales made during the 2005-2006 fiscal year and still outstanding as of March 31, 2006, amounted to P252,000. The warranty costs on sales made from April 1, 2006 to March 31, 2007 are estimated at P630,000. The actual warranty costs incurred during 2006- 2007 fiscal year as follows:
Warranty claims honored on 2005- 2006 P252, Warranty claims honored on 2006- 2007 sales 285, Total P537,
Trade payables Accounts payable for supplies, goods and services purchases on open account amount to P560,000 as of March 31, 2007.
Dividends On march 10, 2007 , Abam’s board of directors declared a cash dividend of P0.30 per common share and a 10% common stock dividend. Both dividends were to be distributed on Aptil 5, 2007 to common stockholders on record at the close of business on March 31, 2007. As of March 31, 2007, Abams has 5 million, P2 par value common stock shares issued and outstanding.
Bonds payable Abams issued P5,000,000, 12% bonds, on October 1, 2001 at 96. The bonds will mature on October 1, 2011. Interest is paid semi- annually on October 1 and April 1. Abams uses straight line method to amortize bond discount.
Based on the forgoing information, determine the adjusted balances of the following as of March 31, 2007:
Questions
- Estimated warranty payable a. P252,000 b. P345,000 c. P630,000 d. P882,
- Unamortized bond discount a. P110,000 b. P200,000 c. P100,000 d. P90,
- Bond interest payable a. P0 b. P300,000 c. P150,000 d. P250,
- Total current liabilities a. P6,445,000 b. P5,105,000 c. P5,445,000 d. P3,945,
- Total noncurrent liabilities a. P7,700,000 b. P7,590,000 c. P7,500,000 d. P7,610,
Solution
1. B Total Warranty Expense 882, Less: Paid warranty 537, _Est. liability 345,
- D_ Discount on BP (P5M x 4%) 200, Amortization (200,000/120 x 66) 110, _(Oct. 1, 1998 – March 31, 2004) _______ _Unamortized discount on BP 90,
- D P5M x 12% x 6/12 = P300,
- C_ Notes payable 2,400, Interest payable 640,000 (340,000 + 300,000) Est. liability 345, Trade payable 560, Dividends payable 1,500, _Total Current Liability 5,445,
- D_ Notes payable 2,700, Bonds payable 4,910, Total 7,610,
BONDS PAYABLE
Problem 9 On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of P1,000,000 due January 1, 2015. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest of 6%.
Questions
- The bonds were issued on January 1, 2007 at a. A premium c. Book value b. An amortized value d. A discount
- Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective interest amortization method, LACEA COMPANY recorded interest expense for the 6 months ended June 30, 2007, in the amount of a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,
- Same information in number 2. LACEA COMPANY recorded interest expense for the 6 months ended December 31, 2007, in the amount of a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,
- The carrying value of the bonds on July 1, 2008 is: a. P 1,056,578 b. P 1,056,484 c. P 1,053,276 d. P 1,053,
- A bond issue sold at a premium is valued on the statement of financial position at the a. Maturity value. b. Maturity value plus the unamortized portion of the premium. c. Cost at the date of investment. d. Maturity value less the unamortized portion of the premium.
Solution
1. B If nominal rate is less than the yield rate, there is discount
- The reversing entry related to accrual on bond interest expense at January 1, 2008? DEBIT CREDIT a. Interest income 37,500 Cash 37, b. Interest payable 37,500 Interest expense 37, c. Interest payable 37,500 Retained earnings 37, d. Retained earnings 37,500 Interest expense 37,
- The journal entry to record payment of interest due on July 1, 2008? DEBIT CREDIT a. Cash 37,500 Interest payable 37, b. Interest payable 37,500 Cash 37, c. Interest receivable 37,500 Cash 37, d. Interest expense 37,500 Cash 37,
- The reversing entry related to accrual on bond interest expense at January 1, 2009? DEBIT CREDIT a. Interest income 37,500 Cash 37, b. Interest payable 30,000 Interest expense 30, c. Interest payable 15,000 Interest expense 15, d. Interest income 37,500 Interest expense 37,
- The adjusting entry that should have been made to amortize on bond premium at December 31, 2007? DEBIT CREDIT a. Premium on BP 2,500 Interest expense 2, b. Premium on BP 2,500 Retained earnings 2, c. Premium on BP 2,250 Interest expense 2, d. Premium on BP 2,250 Retained earnings 2,
- The correcting entry to adjust for the error related to amortization on bond premium in 2008 is? DEBIT CREDIT a. Premium on BP 2,500 Retained earnings 2, b. Premium on BP 2,500 Interest expense 2, c. Premium on BP 4,875 Interest expense 2, Retained earnings 2, d. Premium on BP 4,875 Retained earnings 4,
- The correct entry to record retirement of 100 bonds on October 1, 2008? a. Interest expense 3,750 Cash 109, Bonds payable 100, Premium on BP 3, Loss on retirement 1, b. Interest expense 3,750 Cash 109, Bonds payable 100, Premium on BP 3, Retained earnings 1, c. Interest expense 3,750 Cash 109, Bonds payable 100, Premium on BP 3, Loss on retirement 1, d. Interest expense 3,750 Cash 109, Bonds payable 100,
Premium on BP 3, Retained earnings 1,
Solution
1. C Cash 522, Bonds payable 500, _Bond premium 22,
- B Interest expense 37,_ _Interest payable 37,
- B Interest payable 37,_ _Interest expense 37,
- D Interest expense 37,_ _Cash 37,
- B Interest payable 30,_ _Interest expense 30,
- A Bond premium 2,_ _Interest expense 2,500 (P22,500/108 x 12 = P2,500)
- C Bond premium 4,_ Retained earnings 2,500 (P22,500/108 x 12 = P 2,500) Interest expense 2,375 (P22,500/108 x 9 = P 1, _4/5 x P22,500/108 x 3 = 500)
- A OE: Treasury Bonds 109,_ Cash 109, CE: Bonds payable 100, Bond premium 3, Interest expense 3, Loss on retirement 1, Cash 109, Adj: Bonds payable 100, Bond premium 3, Interest expense 3, Loss on retirement 1, Treasury Bodns 109,
Problem 10 When the LUAYON MANUFACTURING COMPANY was expanding its metal window division, it did not have enough capital to finance the expansion. So, management sought and received approval from the board of directors to issue bonds. The company planned to issue P5,000,000 of 8 percent, five-year bonds in 2007. Interest would be paid on June 30 and December 31 of each year. The bonds would be callable at 104, and each P1,000 bond would be convertible into 30 shares of P10 par value common stock.
On January 1, 2007, the bonds were sold at 96 because the market rate of interest for similar investment was 9 percent. The company decided to amortize the bond discount by using the effective interest method.
On July 1, 2009, management called and retired half the bonds, and investors converted the other half into common stock. As inducement, the company agrees to pay additional P100,000 to the holders of the convertible bonds.
Questions
- Carrying value of the bonds at December 31, 2007 is: a. P 4,840,000 b. P 4,832,720 c. P 4,832,000 d. P 4,816,
- Carrying value of the bonds at December 31, 2008 is: a. P 4,880,000 b. P 4,868,451 c. P 4,866,880 d. P 4,850,
- Interest expense at December 31, 2008 is: a. P 432,000 b. P 432,720 c. P 435,731 d. P 437,
- NUNEZA paid P12,000 cash for printing, legal, and other fees in connection with the issuance of the bonds.
- The NUNEZA CORPORATION accounts related to this new bond reflect these bond transactions as follows: Bond Payable, 2007 Issue CR 7/1/07 P 800,
Unamortized Bond Discount, 2007 Bond Issue CD 7/1/07 P110, CD 7/1/07 12,000 JV 12/31/07 P 4,070.
Bond Interest Expense, 2007 Bond Issue JV 12/31/07 P 4,070. VR 12/30/07 40,000.
Legend: CD – Cash Disbursement CR – Cash Receipts JV – Journal Vouchers VR – Voucher Register Questions
- Amortization of bond issue cost is: a. P 800.00 b. P 400.00 c. P 240.00 d. P 120.
- Amortization of bond discount is: a. P 1,392 b. P 2,679 c. P 3,671 d. P 4,
- Carrying value of the bonds at year-end is: a. P 693,943 b. P 693,543 c. P 692,551 d. P 691,
4 The accrued interest expense at year-end is: a. P 40,000 b. P 41,392 c. P 80,000 d. P 82,
- The recorded amortization of bond discount is overstated by: a. P 400 b. P 1,392 c. P 2,679 d. P 0
- The carrying value of the bond issue cost at year-end is: a. P 11,880 b. P 11,760 c. P 11,600 d. P 11,
Solution
_1. B P12,000/15 x 6/12 = P
- A 3. D 4. A_ Date Interest expense Interest paid Amortization Carrying Value _689, December 2007 41,392 40,000 1,392 691, July 2008 41,476 40,000 1,476 692, December 2008 41,564 40,000 1,564 694,
- C Per record - P 4,_ Per audit - 1, _Adj. - P 2,
- C (P12,000 – P400)_
Problem 12 On July 1, 2007 Salem Corporation issued P2,000,000 of 7% bonds payable in 10 years. The bonds pay interest semiannually. Each P1,000 bond includes a detachable stock purchase right. Each right gives the bondholder the option to purchase for P30, one share of P1 par value common stock at any time during the next 10 years. The bonds were sold for P2,000,000. The value of the stock purchase rights at the time of issuance was P100,000.
Questions
- How many warrants were issued? a. 2,000,000 b. P 66,667 c. 20,000 d. 2,
- If the bondholder will exercise all his rights, the additional paid-in capital will be a. P 158,000 b. P 150,000 c. P 58,000 d. P 0
Solution Cash 2,000, Discount on bonds payable 100, Bonds payable 2,000, Common stock warrants outstanding 100,
Proceeds 2,000, Less: Cost of Warrants 100, Cost of the bonds 1,900,
If warrant will exercise: Cash 60, CSWO 100, Common stock 2, APIC 158, Answer: 1. D 2. A
Problem 13 Friendly Corporation issued P500,000, 6%, nonconvertible bonds with detachable stock purchase warrants. Each P1,000 bond carried 20 detachable stock purchase warrants, each of which called for one share of friendly common stock, par P50, at the specified option price of P60 per share. The bonds sold at 106, and the detachable stock purchase warrants were immediately quoted at P1 each on the market.
Questions
- The entry to record the issuance of the bonds is a. Cash 500, Bonds payable 500, b. Cash 530, Bonds payable 500, Premium on bonds payable 20, CS warrants outstanding 10, c. Cash 530, Bonds payable 500, Premium on bonds payable 30, d. Cash 530, Bonds payable 500, CS warrants outstanding 30,
d. Investment in bonds 5, Investment in stock 300, Cash 305,
Solution
1. B Cash 530, Bonds payable 500, Premium on bonds payable 20, _Common stock warrants outstanding 10,
- D Cash 600,_ CS warrants outstanding 10, Common stock 500, _APIC 110,
- C Investment in bonds 530,_ _Cash 530,
- D Cash 7,_ Investment in bonds 5, (P1 x 10,000 x ½) _Gain on sale 2,
- A Investment in stock 305,_ Cash 300, (10,000 warrants x ½ x P60) Investment in bonds 5,
Problem 14 In your initial audit of EMILIA CORP., you find the following ledger account balances.
12% Bonds Payable – maturity date, 1/1/ 1/2/05 CR P5,000,
Treasury Bonds 10/1/07 CD P1,100,
Bond Discount 1/2/05 CD P 500,
Bond Interest Expense 1/1/07 CD P 300, 7/1/07 CD 300,
The bonds were redeemed for permanent cancellation on October 1, 2007, at 107 plus accrued interest.
Questions
- Adjusted balance of bonds payable on December 31, 2007. a. P 5,000,000 b. P 4,000,000 c. P 3,900,000 d. P 3,000,
- Adjusted balance of bond discount on December 31, 2007. a. P 360,000 b. P 352,500 c. P 327,500 d. P 280,
- Bond interest expense for 2007. a. P 917,500 b. P 870,000 c. P 680,000 d. P 617,
- Gain or loss on bond redemption. a. P 170,000 b. P 142,500 c. P 127,500 d. P 97,
Solution _Retained earnings 100, Bond discount 100, Retained earnings 300, Interest expense 300,
OE: Treasury bonds 1,100, Cash 1,100, CE: Bonds payable 1,000,000 * 1/5 x P500,000 = P100, Interest expense 30,000 100,000/120 x 33 (27,500) Loss on early extinguishment Unamortized disc. of debt 142,500 for the P100, Bonds discount 72,500 * bond P 72, Cash 1,100, Adj: Loss on early extinguishment of debt 142, Interest expense 30, Bonds payable 1,000, Bonds discount 72, Treasury bonds 1,100,
Interest expense 240, Interest payable 240,
Interest expense 47, Bonds discount 47, P100,000 bond / 10 years x 9/12 = P 7, P400,000 bond / 10 years = 40, P47, Answer:_
1. B 2. D 3. D 4. B
Problem 15 At December 31, 2006, the Core Corporation had the following liability and equity account balances:
11% Bonds payable, at face value P2,500, Premium on bonds payable 176, Common stock 4,000, Additional paid in capital 1,147, Retained earnings 1,232, Treasury stock, at cost 162,
Transactions during 2007 and other information relating to the Corporation’s liability and equity accounts were as follows:
The bonds were issued on December 31, 2005, for P2,689,000 to yield 10%. The bonds mature on December 31, 2012. Interest is payable annually on December 31. The Corporation uses the effective interest method to amortize bond premium.
At December 31, 2006, the corporation had 1,000,000 authorized shares of P10 par common stock.
