Audit of Liabilities – Set B

(1 to 2) San Pedro Co. issued a 4-year 2,500,000 face value of 12% convertible bonds at 105 on January 1, 2020, maturing
on January 1, 2024 and paying interest annually on December 31. It is reliably ascertained that the bonds would sell at
2,350,000 without the conversion feature with an effective yield of 14%. Each 1,000 bond is convertible into 10 shares of
100 par value share capital. On December 31, 2020, the entire bond issue was converted into share capital and on this
date, the share has a market value of 150 and the bonds are quoted at 101.

1. What is the equity component of the issuance of the convertible bonds on January 1, 2020?
a. 275,000 c. 125,000
b. 150,000 d. P0

2. What amount of share premium should be recognized on conversion of bonds payable into share capital?
a. P0 c. 121,000
b. 275,000 d. 154,000

(3 to 5) On January 1, 2020, San Pablo Co. issued 4,000,000 of 12% bonds payable maturing in 5 years. The bonds pay
interest semi-annually on June 30 and December 31. The bonds include share warrants giving the bondholder the right to
purchase 8,000 P100 par value shares for 150 per share within the next three years. The bonds and warrants were issued at
120. The value of the warrants at the time of issuance was 750,000. The market rate of interest for similar bonds without
the warrants is 10%. All share warrants were exercised on December 31, 2020.

The following were extracted from the present value tables:

5% for 10 periods 6% for 10 periods
Present value of 1 0.61 0.55
Present value of an ordinary annuity of 1 7.72 7.36

3. On January 1, 2020, what amount should be recognized as increase in shareholder’s equity as a result of the bond
issuance?
a. 833,600 c. 507,200
b. 750,000 d. 292,800

4. What is the total bond premium amortization for the year ended December 31, 2020?
a. 49,452 c. 54,487
b. 51,988 d. 97,600

5. What amount of share premium should be recognized as a result of the exercise of share warrants?
a. 907,200 c. 855,212
b. 400,000 d. 750,000

(6 to 9) The following data were obtained from the initial audit of Bibi Company:
15%, 10-year, Bonds Payable, dated January 1, 2019
Debit Credit Balance
Cash proceeds from issue on January 1, 2019 of 1,000
1,000 bonds. The market rate of interest on the date
of issue was 12%. 1,172,044 1,172,044
Bond Interest Expense
Cash paid, 1/2/20 75,000 75,000
Cash paid, 7/1/20 75,000 150,000
Accrual, 12/31/20 75,000 225,000
Accrued Interest on Bonds
Balance, 1/1/20 75,000
Accrual, 12/31/20 75,000
Treasury Bonds
Redemption price and interest to date on 200 bonds
permanently retired on 12/31/20 265,000 265,000
Based on the preceding information, determine the following:
6. Carrying value of bonds payable at December 31, 2020
a. 831,110 c. 1,151,583
b. 800,000 d. 921,266

7. Loss on Bond Redemption

a. 4,683 c. 15,000
b. 19,683 d. 34,683

8. Accrued Interest on Bonds at December 31, 2020

a. 75,000 c. 60,000
b. 135,000 d. 52,500

9. Bond Interest Expense for the year ended December 31, 2020
a. 150,000 c. 69,745
b. 139,174 d. 160,826

(10 to 14) Feel Company has been producing quality appliances for more than two decades. The company’s fiscal year
runs from April 1 to March 31. The following information relates to the obligations of Feel as of March 31, 2020.

Bonds Payable
Feel issued 10,000,000 of 10% bonds on July 1, 2018. The prevailing market rate of interest for these bonds was 12% on
the date of issue. The bonds will mature on July 1, 2028. Interest is paid semi-annually on July 1 and January 1. Feel uses
the effective interest rate method to amortize bond premium or discount.

Notes Payable
Feel has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule
below. The total unpaid interest for all of these notes amounts to 600,000 on March 31, 2020.
Due Date Amount Due
April 1, 2020 400,000
July 1, 2020 600,000
October 1, 2020 300,000
January 1, 2021 300,000
April 1, 2021 - March 31, 2022 1,200,000
April 1, 2022 - March 31, 2023 1,000,000
April 1, 2023 - March 31, 2024 1,400,000
April 1, 2024 - March 31, 2025 800,000
April 1, 2025 - March 31, 2026 1,000,000
7,000,000
Estimated Warranties
Feel has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales
made during the 2018-2019 fiscal year and still outstanding as of March 31, 2019 amounted to 180,000. The warranty
costs on sales made from April 1, 2019 through March 31, 2020 are estimated at 520,000. The actual warranty costs
incurred during the current 2019-2020 fiscal year are as follows:
Warranty claims honoured on 2017-2019 sales 180,000
Warranty claims honoured on 2019-2020 sales 178,000
Total warranty claims honored 358,000

Other Information:
1. Trade Payable
Accounts payable for supplies, goods and services purchased on open account amount to 740,000 as of March 31, 2020.

2. Payroll Related Items

Accrued salaries and wages 300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000

3. Miscellaneous Accruals
Other accruals not separately classified amount to 150,000 as of March 31, 2020.
4. Dividends
On March 15, 2020, Feel’s board of directors declared a cash dividend of 0.20 per common share and a 10% ordinary
stock dividend. Both dividends were to be distributed on April 12, 2020, to the ordinary shareholders of record at the close
of business on March 31, 2020. Data regarding Feel ordinary share are as follows:
Par value 5.00 per share
Number of shares issued and outstanding 6,000,000
Market values of ordinary shares
March 15, 2020 22.00 per share
March 31, 2020 21.50 per share
April 12, 2020 22.50 per share

10. How much was received by Feel from the sale of the bonds on July 1, 2018
a. 8,852,960 b. 10,000,000 c. 10,500,000 d. 10,647,040

11. What is the current portion of Feel’s notes payable at March 31, 2020?
a. 2,800,000 b. 1,600,000 c. 1,300,000 d. 3,800,000

12. The balance of the estimated warranties payable at March 31, 2020
a. 342,000 b. 18,000 c. 520,000 d. 180,000

13. On March 31, 2020 Feel’s statement of financial position would report total current liabilities of
a. 5,286,000 b. 4,386,000 c. 5,336,000 d. 5,642,000

14. On March 31, 2020 Feel’s statement of financial position would report total noncurrent liabilities of
a. 14,389,350 b. 14,352,217 c. 14,370,783 d. 14,252,960

(15 to 19) JR Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded
music and sheet music. JR uses two sales promotion techniques - warranties and premiums - to attract customers.
Musical instruments and sound equipment are sold with one-year warranty by replacement of parts and labor. The
estimated warranty cost, based on past experience, is 2% of sales.

The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded
music or sheet music. Customers may exchange 200 coupons and 20 for a CD player. JR pays 34 for each CD player and
estimates that 60% of the coupons given to customers will be redeemed.

JR total sales for 2020 were 14,400,000 - 10,800,000 from musical instruments and sound reproduction and 3,600,000
from recorded music and sheet music. Replacement parts and labor for warranty work totaled 328,000 during 2020. A
total of 13,000 CD players used in the premium program were purchased during the year and there were 2,400,000
coupons redeemed in 2020.

The accrual method is used by JR to account for the warranty and premium costs for financial reporting purposes. The
balances in the accounts related to warranties and premiums on January 1, 2020 were as shown below:
Inventory of Premium CD Players 79,900
Estimated Premium Claims Outstanding 89,600
Estimated Liability from Warranties 272,000

JR Music Emporium is preparing its financial statements for the year ended December 31, 2020. Determine the amount
that will be shown on the 2020 financial statements for the following:
15. Warranty expense
a. 488,000 b. 216,000 c. 328,000 d. 160,000

16. Estimated liability from warranties

a. 160,000 b. 272,000 c. 48,000 d. 488,000

17. Premium expense

a. 168,000 b. 113,900 c. 367,200 d. 151,200

18. Inventory of premium CD players

a. 168,000 b. 147,900 c. 151,200 d. 113,900

19. Estimated premium claims outstanding

a. 106,400 b. 151,200 c. 56,000 d. 72,800