COMPREHENSIVE PROBLEM
Liabilities
Problem 1
Your audit staff for the audit of Silver Bells Corporation turned over to you his working
papers containing information on the company’s liabilities. You noted the following:
Accounts Payable
The general ledger balance is Php10,000,000.
The balance is net of debit balances in a supplier’s account amounting
to Php400,000.
Unrecorded Vouchers include the following:
a. Mabuhay Company for Php600,000. The merchandise was
shipped December 31, 2016, FOB shipping point. The
goods were received on January 3, 2017.
b. Lively Company for Php240,000. The merchandise was
shipped on December 28, 2016, FOB Destination.
The goods were received on January 4, 2017.
The company, as consignee, held goods worth Php180,000. These
goods were not included in the physical inventory on December 31,
2016 but were included in the Accounts Payable.
Bonds Payable
Silver Bells Corporation issued 2,000 of its 5-year Php1,000 face
value 11% bonds on July 1, 2014. These bonds were sold for
Php2,155,800 a price that yields 9%. The bonds were dated January 1,
2014 and pay interest annually every December 31. On July 1, 2016,
1,000 of the bonds were retired , the company paying Php1,100,000
inclusive of accrued interest. This amount was charged by the
company to the Bonds Payable account. On December 31, 2016, the
company charged Interest Expense for the amount of Interest paid. No
entry was made by the company during 2016 for the amortization of
bond premium.
Other Obligations
In October 2016, an employee was injured on the parking lot in an
accident partially the result of his own negligence. The employee has
sued for Php2,000,000. The legal counsel believes it is probable that
the outcome of the action will be unfavorable and that the settlement
would cost the company from Php40,000 to Php400,000.
Silver Bells sells goods with a warranty under which customers are
covered for the cost of any manufacturing defects that become
apparent within the first year after the purchase. If minor defects were
detected in all products sold, repair costs of Php4,000,000 would
result. If major defects were detected in all products sold, repair costs
of Php10,000,000 would result. The enterprise’s past experience and
future expectations indicate that 65% of the goods sold have no
defects, 25% of the goods sold have minor defects and 10% of the
goods sold have major defects.
On September 30 2014, Silver Bells acquired special equipment from
Moms Company by paying Php2,000,000 down and signing a note
with a face value of Php4,000,000 due September 30, 2017. The note
is non-interest bearing. Market rate of interest for similar notes at the
date of its issuance was 10%. (round present value factor to five
decimal places).
, Accounts payable, per client P10,000,0
Debit balance in suppliers’ account 00 400,00
Shipments from cruise 0
600,00
Goods held on 0
consignment Accounts (180,000
payable, per audit )
2. The adjusted ledger balance of Premium on Bonds Payable at December
31, 2016 is
a. Php155,800 c. Php70,642
b. Php101,506 d. Php35,321.
Carrying Value, 1/1/14
Date Nominal Int(11%) Effective Int(9%) Amort CV
1/1/14 2,155,800
12/31/14 220,000 194,022 25,978 2,129,822
12/31/15 220,000 191,684 28,316 2,101,506
Sold bonds (1,050,753)
--------------
12/31/15 1,050,753
12/31//16 110,000 94,568 15,432 1,035,321
Premium on Bonds Payable = 1,035,321 – 1,000,000
= 35,321
3. The amount of gain or (loss) on retirement of bonds payable during 2016
is
a. Php(1,963) c. Php(5,753)
b. Php(56,963) d. Php1,963
Proceeds from retirement of bonds
inclusive of accrued interest Php 1,100,000
Less: Accrued interest
1,000,000 x 11% x 6/12 55,000
------------------------
Proceeds from retirement of bonds
exclusive of accrued interest 1,045,000
Less: Carrying value of bonds
CV, 12/31/15 Php 1,050,753
-----------------------
Amortization
(Jan 1 to July 1)
NI (1,000,000 x 11% x ½) 55,000
EI (1,050,753 x 9% x ½) 47,284
-------------------------
7,716
------------------------- 1,043,037
-----------------------
Gain on retirement of bonds 1,963
=============
4. The carrying amount of Notes Payable that will be shown on December
31, 2016 statement of financial position is
, P4,000,000 x .75131 = P3,005,240 (PV rate = 3 periods, 10%; .75131)
Date Interest Carrying
9/30/14 P
9/30/15 300,524 3,005,240
3,305,76
9/30/16 330,576 4
3,636,34
9/30/17 363,660 0
4,000,00
0
Carrying value as of 9/30/16 P3,636,340
Amortization 363,660 x 3/12 90,915
Carrying value 12/31/2016 P3,727,255
5. The provision for litigation expenses that should be shown on the
statement of financial position at December 31, 2016 is
a. Php300,000 c. Php340,000
b. Php0 d. Php350,000
6. The provision for warranties that should be shown on the statement of
financial position at December 31, 2016 is
a. Php0 c. Php2,000,000
b. Php4,000,000 d. Php7,500,000
10,000,000 (10%) + 4,000,000 (25%) = P2,000,000
Problem 2
In your initial audit of Pau Corporation, you find the following ledger account balances:
12% Bonds Payable, due March 31, 2019
------------------------------------------------------------
Debit Credit Balance
March 31, 2014 Php 10,000,000 Php10,000,000
October 1, 2016 Php 3,060,000 6,940,000
Premium on Bonds Payable
------------------------------------------
Debit Credit Balance
March 31, 2014 Php 772,144 Php 772,144
Bond Interest Expense
-----------------------------------
Debit Credit Balance
March 31, 2016 Php 600,000 Php 600,000
Sept 30, 2016 600,000 1,200,000
The bonds pay interest semiannually on March 31 and September 30. The bonds were
issued on March 31 at a price to yield 10%.
On October 1, 2016, Php3,000,000 of the bonds were redeemed for permanent
cancellation at 102.
, Yearly 12% 10%
Semi-monthly 6% 5%
Date Nominal Effective Amortization Carrying Value
3/31/2014 10,772,144
9/30/14 600,000 538,607 61,393 10,710,751
3/31/15 600,000 535,538 64,462 10,646,289
9/30/15 600,000 532,314 67,686 10,578,603
3/31/16 600,000 528,930 71,070 10,507,533
9/30/16 600,000 525,377 74,623 10,432,910
Sold 3,000,000/10,000,000 x 10,432,910 ( 3,129,873)
-----------------
9/30/16 after sale 7,303,037
3/31/17 420,000 365,152 54,848 7,248,189
9/30/17 420,000 362,409 57,591 7,190,598
September 2014 to September 2015
600,000 x 3 = 1,800,000
Entry Made
Interest Expense 1,800,000
Cash 1,800,000
Correct Entry
Interest Expense 1,606,459
Bond Premium 193,541
Cash 1,800,000
Interest expense : 538,607+535,538+532,314 = 1,606,459
Amortization : 61,393+64,462+67,686 = 193,541
Adjusting Entry (2016)
Bond Premium 193,541
Interest Expense 193,541
December 31, 2015 (Adjusting Entry)
Entry Made
None
Correct Entry
Interest expense (10,578,603 x 5% x 3/6) 264,465
Bond Premium 35,535
Interest payable (10,000,000 x 6% x 3/6) 300,000
2015 Exp(U) -------NI(O) ---------RE(O)
2016 Exp(O)--------NI (U)
Adjusting Entry(2016)
Retained Earnings 264,465
Bond premium 35,535
Interest Expense 264,465
Interest payable 35,535
December 2016
March 31, 2016
Entry made
Liabilities
Problem 1
Your audit staff for the audit of Silver Bells Corporation turned over to you his working
papers containing information on the company’s liabilities. You noted the following:
Accounts Payable
The general ledger balance is Php10,000,000.
The balance is net of debit balances in a supplier’s account amounting
to Php400,000.
Unrecorded Vouchers include the following:
a. Mabuhay Company for Php600,000. The merchandise was
shipped December 31, 2016, FOB shipping point. The
goods were received on January 3, 2017.
b. Lively Company for Php240,000. The merchandise was
shipped on December 28, 2016, FOB Destination.
The goods were received on January 4, 2017.
The company, as consignee, held goods worth Php180,000. These
goods were not included in the physical inventory on December 31,
2016 but were included in the Accounts Payable.
Bonds Payable
Silver Bells Corporation issued 2,000 of its 5-year Php1,000 face
value 11% bonds on July 1, 2014. These bonds were sold for
Php2,155,800 a price that yields 9%. The bonds were dated January 1,
2014 and pay interest annually every December 31. On July 1, 2016,
1,000 of the bonds were retired , the company paying Php1,100,000
inclusive of accrued interest. This amount was charged by the
company to the Bonds Payable account. On December 31, 2016, the
company charged Interest Expense for the amount of Interest paid. No
entry was made by the company during 2016 for the amortization of
bond premium.
Other Obligations
In October 2016, an employee was injured on the parking lot in an
accident partially the result of his own negligence. The employee has
sued for Php2,000,000. The legal counsel believes it is probable that
the outcome of the action will be unfavorable and that the settlement
would cost the company from Php40,000 to Php400,000.
Silver Bells sells goods with a warranty under which customers are
covered for the cost of any manufacturing defects that become
apparent within the first year after the purchase. If minor defects were
detected in all products sold, repair costs of Php4,000,000 would
result. If major defects were detected in all products sold, repair costs
of Php10,000,000 would result. The enterprise’s past experience and
future expectations indicate that 65% of the goods sold have no
defects, 25% of the goods sold have minor defects and 10% of the
goods sold have major defects.
On September 30 2014, Silver Bells acquired special equipment from
Moms Company by paying Php2,000,000 down and signing a note
with a face value of Php4,000,000 due September 30, 2017. The note
is non-interest bearing. Market rate of interest for similar notes at the
date of its issuance was 10%. (round present value factor to five
decimal places).
, Accounts payable, per client P10,000,0
Debit balance in suppliers’ account 00 400,00
Shipments from cruise 0
600,00
Goods held on 0
consignment Accounts (180,000
payable, per audit )
2. The adjusted ledger balance of Premium on Bonds Payable at December
31, 2016 is
a. Php155,800 c. Php70,642
b. Php101,506 d. Php35,321.
Carrying Value, 1/1/14
Date Nominal Int(11%) Effective Int(9%) Amort CV
1/1/14 2,155,800
12/31/14 220,000 194,022 25,978 2,129,822
12/31/15 220,000 191,684 28,316 2,101,506
Sold bonds (1,050,753)
--------------
12/31/15 1,050,753
12/31//16 110,000 94,568 15,432 1,035,321
Premium on Bonds Payable = 1,035,321 – 1,000,000
= 35,321
3. The amount of gain or (loss) on retirement of bonds payable during 2016
is
a. Php(1,963) c. Php(5,753)
b. Php(56,963) d. Php1,963
Proceeds from retirement of bonds
inclusive of accrued interest Php 1,100,000
Less: Accrued interest
1,000,000 x 11% x 6/12 55,000
------------------------
Proceeds from retirement of bonds
exclusive of accrued interest 1,045,000
Less: Carrying value of bonds
CV, 12/31/15 Php 1,050,753
-----------------------
Amortization
(Jan 1 to July 1)
NI (1,000,000 x 11% x ½) 55,000
EI (1,050,753 x 9% x ½) 47,284
-------------------------
7,716
------------------------- 1,043,037
-----------------------
Gain on retirement of bonds 1,963
=============
4. The carrying amount of Notes Payable that will be shown on December
31, 2016 statement of financial position is
, P4,000,000 x .75131 = P3,005,240 (PV rate = 3 periods, 10%; .75131)
Date Interest Carrying
9/30/14 P
9/30/15 300,524 3,005,240
3,305,76
9/30/16 330,576 4
3,636,34
9/30/17 363,660 0
4,000,00
0
Carrying value as of 9/30/16 P3,636,340
Amortization 363,660 x 3/12 90,915
Carrying value 12/31/2016 P3,727,255
5. The provision for litigation expenses that should be shown on the
statement of financial position at December 31, 2016 is
a. Php300,000 c. Php340,000
b. Php0 d. Php350,000
6. The provision for warranties that should be shown on the statement of
financial position at December 31, 2016 is
a. Php0 c. Php2,000,000
b. Php4,000,000 d. Php7,500,000
10,000,000 (10%) + 4,000,000 (25%) = P2,000,000
Problem 2
In your initial audit of Pau Corporation, you find the following ledger account balances:
12% Bonds Payable, due March 31, 2019
------------------------------------------------------------
Debit Credit Balance
March 31, 2014 Php 10,000,000 Php10,000,000
October 1, 2016 Php 3,060,000 6,940,000
Premium on Bonds Payable
------------------------------------------
Debit Credit Balance
March 31, 2014 Php 772,144 Php 772,144
Bond Interest Expense
-----------------------------------
Debit Credit Balance
March 31, 2016 Php 600,000 Php 600,000
Sept 30, 2016 600,000 1,200,000
The bonds pay interest semiannually on March 31 and September 30. The bonds were
issued on March 31 at a price to yield 10%.
On October 1, 2016, Php3,000,000 of the bonds were redeemed for permanent
cancellation at 102.
, Yearly 12% 10%
Semi-monthly 6% 5%
Date Nominal Effective Amortization Carrying Value
3/31/2014 10,772,144
9/30/14 600,000 538,607 61,393 10,710,751
3/31/15 600,000 535,538 64,462 10,646,289
9/30/15 600,000 532,314 67,686 10,578,603
3/31/16 600,000 528,930 71,070 10,507,533
9/30/16 600,000 525,377 74,623 10,432,910
Sold 3,000,000/10,000,000 x 10,432,910 ( 3,129,873)
-----------------
9/30/16 after sale 7,303,037
3/31/17 420,000 365,152 54,848 7,248,189
9/30/17 420,000 362,409 57,591 7,190,598
September 2014 to September 2015
600,000 x 3 = 1,800,000
Entry Made
Interest Expense 1,800,000
Cash 1,800,000
Correct Entry
Interest Expense 1,606,459
Bond Premium 193,541
Cash 1,800,000
Interest expense : 538,607+535,538+532,314 = 1,606,459
Amortization : 61,393+64,462+67,686 = 193,541
Adjusting Entry (2016)
Bond Premium 193,541
Interest Expense 193,541
December 31, 2015 (Adjusting Entry)
Entry Made
None
Correct Entry
Interest expense (10,578,603 x 5% x 3/6) 264,465
Bond Premium 35,535
Interest payable (10,000,000 x 6% x 3/6) 300,000
2015 Exp(U) -------NI(O) ---------RE(O)
2016 Exp(O)--------NI (U)
Adjusting Entry(2016)
Retained Earnings 264,465
Bond premium 35,535
Interest Expense 264,465
Interest payable 35,535
December 2016
March 31, 2016
Entry made
