AUD.2023-5.

Auditing and Assurance: Concepts and Applications

Topic: Substantive Tests of the Financing Cycle
Instructor(s): Leenuel M. Bernarte, CPA & Andrew John V. Dalisay, CPA

AUDIT CASE 5-1: AUDIT OF THE BONDS PAYABLE, BOND DISCOUNT/PREMIUM, AND BOND INTEREST
In your initial audit of KABAW Finance Co., you find the following ledger account balances.

12%, 25-year Bonds Payable, 2018 issue

01/01/2018 CR P 1,600,000

Treasury Bonds
10/01/2022 CD P 216,000

Bond Premium
01/01/2011 CR P 80,000

Bond Interest Expense

01/01/2022 CD P 96,000
07/01/2022 CD 96,000

The bonds were redeemed for permanent cancellation on October 1, 2022 at 105 plus accrued interest.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. The adjusted balance of bonds payable as of December 31, 2022 is
2. The unamortized bond premium on December 31, 2022 is
3. The total bond interest expense for the year 2022 is
4. The gain or loss on partial bond redemption is

AUDIT CASE 5-2: AUDIT OF COMPOUND FINANCIAL INSTRUMENTS

On January 1, 2022, LS Corporation issued 2,000 of its 5-year, P1,000 face value, 11% bonds dated January 1 at an
effective annual interest rate (yield) of 9%. Interest is payable each December 31. LS uses the effective interest method
of amortization. On December 31, 2023, the 2,000 bonds were extinguished early through acquisition in the open
market by LS for P1,980,000 plus accrued interest.

On July 1, 2022, LS issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par. Interest is payable
every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without the
conversion option is 12%. On July 1, 2023, an investor in LS’ convertible bonds tendered 1,500 bonds for conversion
into 15,000 shares of LS’ common stock, which had a fair value of P105 and a par value of P1 at the date of conversion.

QUESTIONS:
Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal
places.)
1. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2022 is
2. The gain on early retirement of bonds on December 31, 2023 is
3. The carrying value of the 5,000 6-year, P1,000 face value bonds on December 31, 2022 is
4. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2023 will increase equity by

AUDIT CASE 5-3: AUDIT OF SHAREHOLDERS’ EQUITY ACCOUNTS – PART 1

BLACKPINK Corporation was authorized at the beginning of 2018 with 300,000 authorized shares of P100, par value
common stock. At December 31, 2018, the stockholders’ equity section of Blackpink was as follows:
Common stock, par value P100 per share; authorized 300,000 shares;
issued 30,000 shares P3,000,000
Additional paid-in capital 300,000
Retained earnings 450,000
Total stockholders’ equity P3,750,000

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On June 15, 2019, Blackpink issued 50,000 shares of its common stock for P6,000,000. A 5% stock dividend was
declared on September 30, 2019 and issued on November 10, 2019 to stockholders of record on October 31, 2019.
Market value of common stock was P110 per share on declaration date. The net income of Blackpink for the year ended
December 31, 2019 was P475,000.

During 2020, Blackpink had the following transactions;

March 1 Blackpink reacquired 3,000 shares of its common stock for P95 per share.
May 31 Blackpink sold 1,500 shares of its treasury stock for P120 per share.
August 10 Issued to stockholders one stock right for each share held to purchase two
additional shares of common stock for P125 per share. The rights expire on
December 31, 2020.
September 15 25,000 stock rights were exercised when the market value of common stock was
P130 per share.
October 31 40,000 stock rights were exercised when the market value of the common stock
was P140 per share.
December 10 Blackpink declared a cash dividend of P2 per share payable on January 5, 2021
to stockholders of record on December 31, 2020.
December 20 Blackpink retired 1,000 shares of its treasury stock and reverted them to an
unused basis. On this date, the market value of the common stock was P150 per
share.
December 31 Net income for 2020 was P500,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2020:
1. Common stock
2. Additional paid-in capital
3. Retained earnings
4. Treasury stock

AUDIT CASE 5-4: AUDIT OF SHAREHOLDERS’ EQUITY ACCOUNTS – PART 2

TWICE Inc. was organized on January 2, 2019, with authorized capital stock of 50,000 shares of 10%, P200 par value
preferred, and 200,000 shares of no-par, no stated value common. During the first 2 years of the company's existence,
the following selected transactions took place:
2019
Jan. 2 Sold 10,000 shares of common stock at P16.
2 Sold 3,000 shares of preferred stock at P216.
Mar. 2 Sold common stock as follows: 10,800 shares at P22; 2,700 shares at P25.
Jul. 10 Acquired a nearby piece of land, appraised at P400,000, for 600 shares of preferred stock and 27,000
shares of common. (Preferred stock was recorded at P216, the balance being assigned to common.)
Dec. 16 Declared the regular preferred dividend and a P1.50 common dividend.
28 Paid dividends declared on December 16.
31 The Income Summary account showed a credit balance of P450,000.
2020
Feb. 27 Reacquired 12,000 shares of common stock at P19.
Jun. 17 Resold 10,000 shares of the treasury stock at P23.
Jul. 31 Resold all of the remaining treasury stock at P18.
Sep. 30 Sold 11,000 additional shares of common stock at P21.
Dec. 16 Declared the regular preferred dividend and a P0.80 common dividend.
28 Dividends declared on December 16 were paid.
31 The income summary account showed a credit balance of P425,000.

QUESTIONS:
Based on the above and the result of your audit, determine the balances of the following as of December 31, 2020:
1. Preferred stock
2. Common stock
3. Additional paid in capital
4. Total stockholders’ equity

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