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Audit Fot Liability Problem #10
Audit Fot Liability Problem #10
When the LUAYON MANUFACTURING COMPANY was expanding its metal window division,
it did not have enough capital to finance the expansion. So, management sought and
received approval from the board of directors to issue bonds. The company planned to
issue P5,000,000 of 8 percent, five-year bonds in 2007. Interest would be paid on June 30
and December 31 of each year. The bonds would be callable at 104, and each P1,000 bond
would be convertible into 30 shares of P10 par value common stock.
On January 1, 2007, the bonds were sold at 96 because the market rate of interest for
similar investment was 9 percent. The company decided to amortize the bond discount by
using the effective interest method.
On July 1, 2009, management called and retired half the bonds, and investors converted the
other half into common stock. As inducement, the company agrees to pay additional
P100,000 to the holders of the convertible bonds.
Questions
1. Carrying value of the bonds at December 31, 2007 is:
a. P 4,840,000 b. P 4,832,720 c. P 4,832,000 d. P
4,816,000
Solution
July 1, 2009 Bonds payable 2,500,000
Loss on bond retirement 156,235
Discount on BP 56,235
Cash 2,600,000
Bonds payable 2,500,000
Debt conversion expense 100,000
Discount on BP 56,235
Common stock 750,000
APIC 1,693,765
Cash 100,000
Date Interest Interest paid Amortization Carrying
expense Value
4,800,000
June 2007 215,000 200,000 16,000 4,816,000
December 2007 216,720 200,000 16,720 4,832,720
June 2008 217,472 200,000 17,472 4,850,192
December 2008 218,259 200,000 18,259 4,868,451
June 2009 219,080 200,000 19,080 4,887,531
Answer: 1. b 2. b 3. c 4. d 5. c
6. d 7. a 8. c 9. d