CLASSIFICATION OF DEBT

At December 31, 2021, KISU COPANY’s liabilities include the following:

I. P10 million of 10% notes are due on March 31, 2026. The financing agreement contains
a covenant that requires Kisu to maintain current assets at least equal to 200% of its
current liabilities. As of December 31, 2021, Kisu has breached this loan covenant. On
February 10, 2022, before Kisu financial statements are authorized for issue, Kisu
obtained a period of grace from Mayumi bank until January 16, 2023, having convinced
the bank that the company’s normal 3 to 1 ratio of current assets to current liabilities
will be re-established during 2022.
II. P15 MILLION on noncancelable 12% bonds were issued at face value on September 30,
2000. The bonds mature on August 31, 2023. Kisu expects to have sufficient cash
available to redeem the bonds at maturity.
III. P20 million of 10% bonds were issued at face value on June 30, 2002. The bonds will
mature on June 30, 2031, but bondholders have the option to call (demand payment on)
the bonds on June 30, 2022. However, the call option is not expected to be exercised,
given prevailing market conditions.

Required:
1. What portion of Kisu Company’s debt should be reported as a noncurrent liability?

CONTINGENCIES, PROVISIONS, AND EVENTS AFTER THE REPORTING PERIOD

Your audit client, CHALA COMPANY, is involved in the situations described below. Chala’s
accounting year ends on December 31, 2021, and its financial statements are authorized for
issue on March 20, 2022.

I. Chala involved in a lawsuit resulting from a dispute with a customer. On January 28,
2022, the judgment was rendered against Chala in the amount of P20 million. Chala
plans to appeal the judgment and is unable to predict its outcome though management
believes that it will not a material adverse effect on the company.
II. On April 5, 2022, the Bureau of Internal Revenue (BIR) is in the process of examining
Chala’s tax returns for 2019 and 2020, but has not proposed a deficiency assessment.
Management feels an assessment is reasonably possible, and if an assessment is made,
an unfavourable settlement of up to P5 million is reasonably possible.
III. On January 5, 2023, inventory purchased FOB shipping point from a foreign country was
detained at the country’s border because of political unrest. The shipment is valued at
 P1 million. Chala’s lawyers have stated that it is probable that Chala will be able to
obtain the shipment.
IV. On November 1, 2021, a lawsuit was filed by a disgruntled customer who discovered a
safety hazard in one of Chala’s best-selling products. Chala’s lawyers feel it is probable
that the company will be liable for P500,000.
V. On December 5, 2021, Chala initiated a lawsuit seeking P1 million in damages from a
patent infringement.

Required:
2. Determine the appropriate means of reporting each situations. Prepare any necessary
journal entries on December 31, 2021.

ANALYSIS OF AMORTIZATION SCHEDULE

LARIO COMPANY issued 10-year bonds of January 11, 2021. The company’s year-end is
December 31, and financial statements are prepared annually. The amortization and interest
schedule below reflects the bond issuance and the subsequent interest payments and charges.

AMORTIZATION SCHEDULE
Date Interest Interest Amount Carrying Value
Paid Expense Unamortized
01/01/21 --- --- P 28,253 P 471,747
12/31/21 P 55,000 P 56,610 26,643 473,357
12/31/22 55,000 56,803 24,840 475,160
12/31/23 55,000 57,019 22,821 477,179
12/31/24 55,000 57,261 20,560 479,440
12/31/25 55,000 57,533 18,027 481,973
12/31/26 55,000 57,837 15,190 484,810
12/31/27 55,000 58,177 12,013 487,987
12/31/28 55,000 58,558 8,455 491,545
12/31/29 55,000 58,985 4,470 495,530
12/31/30 55,000 59,470* --- 500,000
*adjustment due to rounding

3. The bonds were issued at

4. What amortization method is used in the amortization schedule presented?
5. What is the nominal (stated) interest rate of the bonds issued on January 1, 2021?
6. What is the effective interest rate of the bonds issued on January 1, 2021?
7. On the basis of the schedule presented, what is the journal entry to record the issuance
of the bonds on January 1, 2021
CLASSIFYING LIABILITIES

ELEANOR CORP. has been producing quality disposable diapers 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 Eleanor as of March 31, 2021.

BONDS PAYABLE

Eleanor issued P10,000,000 of 10% bonds on July 1, 2019. The prevailing market rate of interest
for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2029. Interest is
paid semi-annually on July 1 and January 1. Eleanor uses the effective interest rate method to
amortize bond premium or discount.

The following present value factors are taken from the present value tables:

Present value of 1 at 12% for 10 periods 0.32917

Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12% for 10 periods 5.65022
Present value of an ordinary annuity of 1 at 6% for 20 periods 11.46992

NOTES PAYABLE

Eleanor 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 these notes amounts to
P600,000 on March 31, 2021.

Due Date Amount Due

April 1, 2021 P 400,000
July 1, 2021 600,000
October 1, 2021 300,000
January 1, 2022 300,000
April 1, 2022 – March 31, 2023 1,200,000
April 1, 2023 – March 31, 2024 1,000,000
April 1, 2024 – March 31, 2025 1,400,000
April 1, 2025 – March 31, 2026 800,000
April 1, 2026 – March 31, 2027 1,000,000
P 7,000,000
ESTIMATED WARRANTIES

Eleanor has a one-year product warranty on some items in its product line. The estimated
warranty liability on sales made during the 2019-202000 fiscal year and still outstanding as of
March 31, 2020 amounted to P180,000. The warranty costs on sales made from April 1, 2020,
through March 31, 2021, are estimated at P520,000. The actual warranty costs incurred during
the current 2020-2021 fiscal year are as follows:

Warranty claims honoured on 2019-2020 sales P 180,000

Warranty claims honoured on 2019-2020 sales 178,000
Total warranty claims honoured P 358,000

OTHER INFORMATION

I. TRADE PAYABLES
The payable for supplies, goods and services purchased on open account amount to
P740,000 as of March 31, 2021.

II. PAYROLL RELATED ITEMS

Accrued salaries and wages P 300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000
Total P 404,000

III. MISCELLANEOUS ACCRUALS

Other accruals not separately classified amount of P150,000 as of March 31, 2021.

IV. DIVIDENDS
On March 15, 2021, Eleanor’s board of directors declared a cash dividend of P0.20 per
ordinary share and a 10% share dividend. Both dividends were to be distributed on
April 12, 2021, to the shareholders of record at the close of business on March 31,
2021. Data regarding Eleanor ordinary share capital are as follows:

Par value P5.00 per share

Number of shares issued and outstanding 6,000,000 shares

Market values of ordinary shares:

March 15, 2021 P22.00 per share
March 31, 2021 21.50 per share
April 12, 2021 22.50 per share

Required:
8. How much was received by Eleanor from the sale of the bonds on July 1, 2019?
9. What is the current portion of Eleanor’s notes payable at March 31, 2021?
10. What is the balance of the estimated warranties payable at March 31, 2021?
11. On March 31, 2021, Eleanor’s statement of financial position would report total current
liabilities of
12. On March 31, 2021, Eleanor’s statement of financial position would report total
noncurrent liabilities of?

BONDS REDEMPTION PRIOR TO MATURITY DATE

The following data were obtained from the initial audit of HANSTEEN COMPANY:

15%, 10-YEAR, BONDS PAYABLE, DATED JANUARY 11, 2020

Debit Credit Balance
Cash proceeds from issue on January 1,
2019 of 1,000, P1,000 bonds. The
market rate of interest on the date of
issue was 12%. P 1,172,044 P 1,172,044

BONDS INTEREST EXPENSE

Cash paid, 1/2/21 P 75,000 P 75,000
Cash paid, 7/1/21 75,000 150,000
Accrual, 12/31/21 75,000 225,000

ACCRUED INTEREST ON BONDS

Balance, 1/1/21 P 75,000 P 75,000
Accrual, 12/31/14 75,000 150,000

TREASURY BONDS
Redemption price and interest to date
on 200 bonds permanently retired on
Dec. 31, 2021 P 265,000 P 265,000

Base on the preceding information, determine the following:

13. Carrying value of bonds payable at December 31, 2021?
14. Loss on bond redemption
15. Accrued interest on bonds at December 31, 2021
16. Bond interest expense for the year ended December 31, 2021

BOND REDEMPTION PRIOR TO MATURITY DATE

The long-term debt section of ELMO COMPANY’s statement of financial position as of

December 31, 2020, included 9% bonds payable of P400,000, less unamortized discount of
P32,000. Further examination revealed that these bonds were issued to yield 10%. The
amortization of the bond discount was recorded using the effective interest method. Interest
was paid on January 1 and July 1 of each year. On July 1, 2021, Elmo retired the bonds at 105
before maturity.

17. What is the amount of loss to be recognized on the retirement of bonds?

BOND REFUNDING

MALOMBE CORP. had outstanding P6,000,000 of 11% bonds (interest payable July 31 and
January 31)due in 10 years. On July 1, it issued P9,000,000 of 10%, 15-year bonds (interest
payable July 1 and January 1) at 97. A portion of the proceeds was used to call the 11% bonds at
103 on August 1. Unamortized bond discount and issue cost applicable to the 11% bonds were
P240,000 and P60,000, respectively.

Required:
Prepare the following entries to record the following:
18. Sale of the new issue
19. Retirement of the old issue

CONVERTIBLE DEBT ISSUE

On January 1, 2021, DIAS COMPANY issued 3-year, 4,000 convertible bonds at face value of
P1,0000 per bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%.
Each bond is convertible, at the holder’s option, into 200 P2 par value ordinary shares at any
time up to maturity. On the date of issuance, the prevailing market interest rate for similar debt
without the conversion privilege was 9%. On the same date, the market price of one ordinary
share was P3. The bonds were converted on December 31, 2022.

The following present value factors are obtained from the present value tables:
6% 9%
Present value of for 3 periods 0.83962 0.77218
Present value of an ordinary annuity of 1 for
3 periods 2.67301 2.53130
Present value of an annuity due of 1 for
3 periods 2.83339 2.75911
20. The liability component of the convertible debt is
21. The equity component of the convertible debt is
22. The interest expense to be reported on Dias Company’s income statement for the year
ended December 31, 2022, is
23. The entry to record the bond conversion on December 31, 2022, should include a credit
to share premium – issuance of

DEFERRED TAX LIABILITY

EYASI, INC. began operating on January 1, 2021. At the end of the first year of operations, EYASI
reported P7,500,000 income before income taxes on its income statement but only P700,000
taxable income on its tax return. Analysis of the P6,800,000 difference revealed that P6,200,000
was a permanent difference and P600,000 was a temporary difference related to a current
asset. At the end of 2022, the accumulated temporary tax liability difference related to future
years is P1,100,000. The enacted tax rate is 30% for 2021 and 2022.

24. The journal entry to adjust the deferred tax liability at the end of 2022 should include a
25. Assume that at the end of 2022, the accumulated temporary tax liability difference
related to future years is P550,000. What journal entry should be made to adjust the
deferred tax liability at the end of 2022?