The document provides information about Velvet Company's financial statements as of December 31, 2021 including various asset, liability and equity account balances. It also provides two word problems involving computation of current and non-current liabilities for a company.
The document provides information about Velvet Company's financial statements as of December 31, 2021 including various asset, liability and equity account balances. It also provides two word problems involving computation of current and non-current liabilities for a company.
The document provides information about Velvet Company's financial statements as of December 31, 2021 including various asset, liability and equity account balances. It also provides two word problems involving computation of current and non-current liabilities for a company.
The document provides information about Velvet Company's financial statements as of December 31, 2021 including various asset, liability and equity account balances. It also provides two word problems involving computation of current and non-current liabilities for a company.
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PROBLEM 1
You were provided the following information relative to your audit of the financial statements of Velvet Company as at December 31, 2021
Employee income tax withheld P 900
Cash balance at First Philippine Bank 2,500 Cash overdraft at Second Philippine Bank 1,350 Accounts receivable with credit balances 2,850 Estimated expenses of meeting warranties on merchandise sold 3,200 Estimated damages on unsatisfactory performance on a contract 1,250 Accounts payable 29,750 Dividends in arrears on preference shares 25,000 Deferred serial bonds of P 500,000, issued at par, payable in semi-annual installment of P 50,000, due April 1 and October 1 of each year; the last payment ? shall be in October 2027. These serial bonds bear a 10% interest that is paid semiannually Ordinary shares at par to be distributed as a result of share dividend declaration 40,000 Deferred tax liabilities expected to reverse next year 10,000 Reserve for contingencies 50,000
1. At year end, how much should be presented as current liabilities?
a. P 151,800 b. P 61,800 c. P 51,800 d. P 39,300
2. How much is the total of the non-current liabilities?
a. P 500,000 b. P 440,000 c. P 410,000 d. P 510,000
PROBLEM 2
Sunday Company’s liabilities on December 31, 2021 were as follows:
Accounts payable, net of P 240,000 debit balance in suppliers account P 5,440,000 6% note payable issued October 1, 2020 maturing September 30, 2022 500,000 8% note payable issued April 1, 2020 maturing April 1, 2022 800,000 12% note payable issued November 1, 2017 maturing July 1, 2022 2,000,000 10% debentures payable, issued April 1, 2021 next annual principal installment of P 500,000 due April 1, 2022 7,000,000
Additional Information: Interests are paid annually from the date issued.
The December 31, 2021 financial statements were issued on March 31, 2022. Unpaid voucher file included the following items that not had been recorded as of December 31, 2021: a. A Company- P 224,000 merchandise shipped on December 31, 2021, FOB destination; received on January 10, 2022. b. B Inc. – P 192,000 merchandise shipped on December 26, 2021, FOB shipping point; received on January 16, 2022 c. C Super Services- P 144,000 janitorial services for the three months period ending January 31, 2022 d. MERALCO- P 67,200 electric bill covering the period December 16, 2021 to January 15, 2022.
On December 28, 2021, a supplier authorized Sunday to return goods billed at P 160,000 and shipped on December 20, 2014. The goods were returned by Sunday on December 28, 2021, but the P 160,000 credit memo was not received until January 6, 2022.
On December 31, 2021, Sunday Company consummated a non-cancelable agreement with the lender to refinance the 12% note payable on a long-term basis.
On January 15, 2022, the entire P 800,000 balance of 8% note was refinance by issuance of a long-term obligation payable in a lump sum
In addition, on March 10, 2022, Sunday Company consummated a non-cancelable agreement with the lender to refinance the 6%, P 500,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of the agreement’s provisions.
Questions: Based on the above information, compute the following as December 31, 2021: 3. Total current liabilities a. P 6,962,100 c. P 8,262,100 b. 7,641,600 d. 9,723,200
4. Total non-current liabilities
a. P 9,000,000 c. P 9,800,000 b. 8,500,000 d. 8,300,000
PROBLEM 3 On January 1, 2020, Jon Company issued 5,000 of its 5 year, P 1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Jonas uses the effective interest method of amortization.
5. The issued price of the bonds on January 1, 2020 is (round off present value factors to four decimal places) a. P 5,388,835 c. P 5,282,135 b. 4,630,655 d. 5,000,000 6. The carrying amount of the bonds on December 31, 2020- a. P 4,755,930 c. P 5,323,830 b. 5,453,840 d. 5,000,000
PROBLEM 4 On January 1, 2019 Kitty Corp. Issued a 3 year, 4,000 convertible bonds at face value of P 1,000 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 40, P 10 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 common share was P 12. ( round off present value into 6 decimal places)
7. What is the equity component of the compound instrument?
a. P 110,091 b. P 211,093 c. P 303,755 d. P 388,766
8. What is the interest expense to be reported on Kitty Corp. ‘s income statement for the year ended December 31, 2021? a. P 303,113 b. P 332,662 c. P 341,002 d. P 350,092
9. What is the credit to share premium account assuming that 3,000 of the bonds were converted on Jan. 1, 2021? a. P 1,510,432 b. P 1,945,248 c. P 2,017,432 d. P 2,289,908
10. Assuming that on the issuance date, the company paid transactions costs totaling to P 151,469, and as a result the yield rate increased by 1.5%, what is the equity component of the compound instrument? a. P 292,253 b. P 303,755 c. P 443,722 d. P 315,257
11. Using the assumption item, and assuming all the 4,000 bonds were retired on January 1, 2021 when the prevailing yield rate on the bonds without the conversion of option was at 9%, at P 4,000,000, what is the loss to be reported in the income statement? a. P 0 b. P 52,804 c. P 162,895 d. P 330,275
Solution:
PV of 1 for 3 periods (9%) 0.772183
PV of ordinary annuity of 1 for 3 periods 2.531295
(7) PV of principal (4,000 x 1,000) x .772183 3,088,732 PV of interest (4,000,000 x 6%) x 2.531295 607,511 Total liability 3,696,243
Total FV of bonds (4,000 x 1,000) 4,000,000
Less: Total liability 3,696,243 Equity component 303,757
(8)
Date Interest paid Interest expense Amortization CV
Add: equity component 303,757 Total 4,193,664 Conversion % (¾) .75 Conversion value 3,145,248 Less: Shares at par (40 x 10) x 3,000 1,200,000 Share premium 1,945,248
Theory. Highlight your answer.
1. An auditor’s primary concern when performing test of controls over purchasing is to determine whether- a. Purchases are properly authorized b. Purchases are properly recorded c. Purchases orders agree to purchase requisitions d. Purchasing personnel are performing their assigned functions properly
2. A client erroneously recorded a large purchase twice. Which of the following control procedures would most likely detect this error in a timely and efficient manner? a. Footing the purchase journal b. Reconciling vendors’ monthly statements with subsidiary payable ledger accounts c. Tracing totals from the purchases journal to the ledger accounts d. Sending written quarterly confirmation to all vendors 3. The accounts payable department receives a purchase order form to accomplish all of the following except- a. Comparing invoice price to purchase order price b. Ensuring that the purchase had been properly authorized c. Ensuring that the goods had been received by the party requesting the goods d. Comparing quantity ordered to quantity purchased
4. Which of the following functions is not appropriate for the accounts payable department? a. Comparing purchase requisition, purchase orders, receiving reports, and vendors’ invoices b. Preparing purchase order c. Preparing voucher and daily summary d. Filing voucher package by due date
5. Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? a. Compare cash payments occurring after the end of the reporting period with the accounts payable trial balance b. Reconcile receiving reports with related cash payments made just prior to year end c. Contrast the ratio of accounts payable to purchases with the prior year’s ratio d. Vouch a sample of creditor balances to supporting invoices, receiving reports and purchase orders
6. During the course of an audit, an auditor observes that the recorded interest expense seems excessive in relation to the balance in long-term debt. This observation could lead the auditor to suspect that- a. Long-term debt I overstated c. premium on bonds payable is understated b. Long-term debt is understated d. discount on bonds payable in overstated
7. During its fiscal year, a company issued, at a discount, a substantial amount of first-mortgage bonds. When performing audit work, the independent auditor- a. Confirms the existence of the bondholders b. Reviews the minutes for authorization c. Traces the net cash received from the issuance to the bonds payable account d. Inspects the records maintained by the bond trustee
