Audit 3

Audit of Liabilities
Assignment due November 25, 2023

Problem 1 (part 2)

Issue price 5,000,000.00

Market value w/o conversion privilege
(PV at 6%, 12 periods)
PV of principal 2,484,846.80
PV of interest 2,095,961.00 4,580,807.80
Equity component (Share premium - conversion privilege) 419,192.20

07.01.2019 Carrying amount 4,580,807.80

07.01-12.31.2019 Discount amortization
Effective interest 274,848.47
Stated interest 250,000.00 24,848.47
12.31.2019 Carrying amount 4,605,656.27
01.01-06.30.2020 Discount amortization
Effective interest 276,339.38
Stated interest 250,000.00 26,339.38
06.20.2020 Carrying amount 4,631,995.65

Conversion on July 1, 2020:

Carrying amount of bonds converted (P4,631,995.65 x 1,500 / 5,000) 1,389,598.69
Par value (15,000.00)
Increase in share premium 1,374,598.69

Face amount of bonds converted 1,500,000.00

Carrying amount of bonds converted 1,389,598.69
Unamortized discount of bonds converted 110,401.31

Journal entries:
Upon issuance (07.01.2019):
Cash 5,000,000.00
Discount on bonds payable 419,192.20
Bonds payable 5,000,000.00
Share premium - conversion privilege 419,192.20

Upon conversion (07.01.2020):

Bonds payable 1,500,000.00
Share premium - issuance 1,374,598.69
Discount on bonds payable 110,401.31
Ordinary share capital 15,000.00

Share premium - conversion privilege 419,192.20

Share premium - issuance 419,192.20
Audit 3
Audit of Liabilities
Assignment due November 25, 2023

Problem 2

Journal Entries: Ashley, Inc.

1. Cash 3,500.00 Statement of Comprehensive Income
Sales 3,500.00 For the Year Ended December 31, 2017
To record cash sales
Sales 3,500.00
2. Purchases 2,000.00 Cost of goods sold (1,900.00)
Cash 2,000.00 Gross profit 1,600.00
To record purchases Salaries (700.00)
Depreciation (80.00)
3. Salaries 700.00 Interest expense (171.75)
Cash 700.00 Profit 648.25
To record salaries Other comprehensive income 0.00
Total comprehensive income 648.25
4. Depreciation expense 80.00
Accumulated depreciation 80.00
To record depreciation of PPE Ashley, Inc.
Statement of Financial Position
5. Inventory 1,900.00 December 31, 2017
Cost of goods sold 1,900.00
Inventory (beginning) 1,800.00 Cash 1,000.00
Purchases 2,000.00 Inventory 1,900.00
To set up ending inventory and cost of goods sold. Plant and equipment 2,000.00
Accumulated depreciation (240.00)
6. Retained earnings 100.00 Total assets 4,660.00
Cash 100.00
To record dividend declaration and payment Bonds payable 1,447.75
Ordinary share capital 1,500.00
7. Interest expense 85.56 Retained earnings 1,712.25
Cash 75.00 Total liabilities and equity 4,660.00
Bonds payable 10.56
To record amortization bond discount for the period 01.01-06.30.

8. Interest expense 86.19

Cash 75.00
Bonds payable 11.19
To record amortization bond discount for the period 01.01-06.30.
Audit 3
Audit of Liabilities
Assignment due November 25, 2023

Problem 3

1. Bonds were issued at a discount.

- initial carrying amount is less than face amount
- effective interest (12%) is greater than the stated interest (11%)

2. Stated interest (11,000 / 100,000) = 11.00%

Effective interest (11,322 / 94,349) = 12.00%

3. 01.01.2011 Cash 94,349.00

Discount on bonds payable 5,651.00
Bonds payable 100,000.00

4. 12.31.2011 Interest expense 11,322.00

Interest payable 11,000.00
Discount on bonds payable 322.00
Audit 3
Audit of Liabilities
Assignment due November 25, 2023

Problem 4

Excerpt from the amortization schedule

Discount Carrying
Date Stated Interest Effective Interest Amortization Amount
01.01.2018 11,000.00 11,712.00 712.00 98,309.00
Note 1 Note 2
10.01.2018 8,250.00 8,847.81 597.81 98,906.81 Carrying amounts of the bonds before redemption
(24,726.70) Carrying amounts of the bonds redeemed (1/4 of total)
74,180.11 Carrying amounts of remaining bonds at 10.01.2018
Note 3 Note 4
12.31.2018 2,062.50 2,211.95 149.45 74,329.56
Note 5 Note 6
12.31.2019 8,250.00 8,920.44 670.44 75,000.00

Note 1
P100,000 x 11% x 9 months / 12 months
Note 2
P98,309 x 12% x 9 months / 12 months
Note 3
P75,000 x 11% x 3 months / 12 months
Note 4
P98,309 x 3/4 x 12% x 3 months / 12 months
Note 5
P75,000 x 11%
Note 6
P74,329.56 x 12% (adjusted by 0.89 in order for carrying amount to zero out at end of term)

Redemption on 10.01.2018
Redemption price (P25,000 x .99) 24,750.00
Accrued interest (P25,000 x 11% x 9 / 12) 2,062.50
Total 26,812.50
Carrying amount
Principal 24,726.70
Interest 2,062.50 26,789.20
Loss on early redemption 23.30

Prior Year Charges to RE

Per Books Per Audit
Interest 2010-2017 88,000.00 91,960.00
Note 7
Interest 2018 8,250.00
see Note 2 above
Interest 01.01.2018-10.30.2018 8,847.81
see Note 4 above
Interest 10.01.2018-12.31.2018 2,211.95
Loss on early redemption 0.00 23.30
96,250.00 103,043.06

Note 7
P75,000 x 11%. The accrued interest on the bonds redeemed were charged to bonds
payable. Thus, we can assume that only the interest for the remaining 3/4 of the bonds
were recorded by the client as interest expense

Comparison of balances per audit and per books

Bonds payable Discount on B/P Interest Expense Interest Payable Retained Earnings
Per Audit 75,000.00 0.00 8,920.44 8,250.00 (103,043.06)
Note 8
Per Books 67,536.50 0.00 8,250.00 8,250.00 (96,250.00)
7,463.50 0.00 670.44 0.00 (6,793.06)

Proposed adjusting entry

Retained earnings 6,793.06
Interest expense 670.44
Bonds payable 7,463.50