AUDIT OF LONG-TERM LIABILITIES

Problem 1
Tayabas Corp. purchases an equipment on July 1, 2020. The equipment cash price is P79,000.
Tayabas signs a deferred payment contract that provides for a downpayment of P10,000 and an 8-
year note for P103,472. The note is to be paid in eight equal annual payments of P12,934. The
payment includes 10% interest and are made on June 30 of each year, beginning June 30, 2021.

Required:
1. What is the cost of the equipment? Give the journal entry on July 1, 2020
2. Give the journal entry for December 31, 2020, June 30, 2021, and Dec. 31, 2021
3. What is the carrying amount of the notes payable on December 31, 2021?
4. What is the total interest expense for the year ended Dec. 31, 2021?
SOLUTION:
1. Cost of equipment PAS 23- equivalent cash price P79,000
July 1, 2020 –
Equipment 79,000
Discount on Notes Payable
(103,472-69,000) 34,472
Notes payable 103,472
Cash 10,000

2. Dec.31, 2020
Interest expense 3,450
Discount on Notes payable 3,450
(69,000 x 10% x 6/12)

Jan. 1, 2021 reversing entry – reverse entry made on Dec.31, 2020

June 30, 2021

Notes payable 12,934
Interest expense 6,900
Cash 12,934
Discount on Notes payable 6,900
Partial Amortization table:
Date Discount amortization Payment Applied to Note Present value(Amortized Cost
7/01/2020 69,000
06/30/2021 6,900 12,934 6,034 62,966
06/30/2022 6,297 12,934 6,095 56,871

Problem 2
On December 31, 2021, Maja Company was indebted to Leon Company on a P2,000,000 10% note.
Only interest had been paid to date. Due to its financial difficulties, Maja Company has negotiated a
restructuring of its note payable. The parties agreed that Maja Company would settle the debt on
the following terms:

a. Settle one-half of the note by transferring land with a recorded value of P800,000 and a fair
value of P900,000
b. Settle one-fourth of the note by transferring 200,000 shares of P1 par ordinary shares with a
fair value of P1.80 per share
 c. Modify the terms of the remaining one-fourth of the note by reducing the interest rate to
5%, extend the due date three years from the date of restructuring and reducing the
principal to P300,000.

Based on the above and the result of your audit, determine the following:
1. Gain on extinguishment of debt on P1,000,000 note to be recognized in profit or loss
statement.
2. Gain on settlement of P500,000 note by issuing ordinary shares to be recognized in profit or
loss.
3. Total gains on extinguishment of debt to be recognized in profit or loss
4. Interest expense in 2022
SOLUTION:
1. Carrying amount of liability 1,000,000
Less: Carrying amountof the land 800,000
Gain on extinguishment of debt 200,000

Entry: Notes payable 1,000,000

Land 800,000
Gain on extinguishment of debt 1,000,000
2. Carrying value of liability 500,000
Less: FV of equity (1.80x200,000) 360,000
Gain on extinguishment 140,000

Entry: Notes payable 500,000

Share Capital 200,000
Share premium (.80x200000) 160,000
Gain on extinguishment of debt 140,000

3. Carrying value of liability 500,000

Less: PV value of restructured debt
(300,000 x 0.7513) 225,390
Interest (300,000 x5% x2.4869) 37,304
Difference 237,306

Entry: Notes payable 500,000

Discount on N/P (300,000-262,694) 37,306
Notes payable-new 300,000
Gain on extinguishment 237,306

Asset swap 200,000

Equity swap 140,000
Modification of Terms 237,306
Total Gain 577,306

4. Interest expense = 262,694 x 10% = 26,269

Problem 3
Gumila Corporation authorized the issuance of P2,000,000 of 12% 10-year bonds on January 1, 2016.
Interest is payable on January 1 and July 1. The entire issue was sold on April 1, 2016 at 102 plus
accrued interest. On April 1, 2021, P1,000,000 of the bond issue was reacquired and retired at 99
plus accrued interest. On June 30, 2021, 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.

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 received from the sale of the P2 million bonds
2. Interest expense for 2016
3. Carrying amount of the bonds as of December 31, 2016
4. Gain or loss on retirement of P1 million bonds on April 2021
5. Gain or loss on retirement of remaining bonds on June 30, 2021
SOLUTION:
1. Issue price 2M X 1.02 2,040,000
Accrued interest (2M x 12% x 3/12) 60,000
Total cash received 2,100,000

2. Nominal interest 2M x 12% x 9/12 180,000

Less: Amortizatuon of bond premium
(40,000/117months) x 9 mos 3,077
Interest expense 176,923

Entry: July 1– Interest expense (60,000-1,026) 58,974

Bond premium 1,026
Cash 60,000

3. Carrying amount April 1 2,040,000

Less: premium amortization for 2016 3,077
CV as of 12/31/2016 2,036,923

4. Face value of bonds retired 1,000,000

Add: Unamortized bond premium
(40,000 x ½ x 57/117) 9,744
CV of Bonds, 04/01/2021 1,009,744
Less retirement (1M x .99) 990,000
Gain on retirement of bonds 19,744

5. FV of bonds 1,000,000
Add: Unamortized bond premium
(40,000 x ½ x 54/117) 9,231
CV of bonds retired 1,009,231
Less: retirement price 1M x 97 970,000
Gain on retirement 39,231

Problem 4
In your initial audit of Impala Finance Co., you find the following ledger balances.

Debit Credit
 12%, 25-year Bonds payable, 2017 issue

01/01/2017 6,400,000

Treasury bonds

10/01/2021 864,000

Bond Premium

01/01/2017

Bond Interest Expense

01/01/2021 384,000

07/01/2021 384,000

The bonds were redeemed for permanent cancellation on October 1, 2021 at 105 plus accrued
interest.

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, 2021
2. The unamortized bond premium on December 31, 2021
3. The total bond interest expense for the year 2021
4. The gain or loss on partial bond redemption

SOLUTION;
1. Total bonds issued 6,400,000
Face value of bonds retired
(864,000/[1.05 + (.12 x 3/12)] 800,000
Adjusted bal of B/P 12/31/2021 5,600,000

2. Unamortized bond premium, 12/31/2021 (320,000 x 5.6M/6.4M x 20/25) 224,000

3. Nominal interes
Remaining bonds (5,600,000 x 12% 672,000
Bonds retired 800,000 x.12% x9/12 72,000
Less: Premium Amort:
Remaining bonds 320,000/25 x 5.6/6.4 (11,200)
Bond retired –
320,000/25 x 800/6400 x 9/12 ( 1,200)
Interest expense 731,600

4. Face value of bonds redeemed 800,000

Unamortized bond discount
(320,000 x 800/6400 x 20.25 /25) 32,400
CV of bond redeemed 832,400
Redemption price 800kx 1.05 840,000
Loss on redemption 7,600