Scribd Logo
Upload

Welcome to Scribd!

  • Audit Fot Liability Problem #10

    Uploaded by

    Ma Teresa B. Cerezo
    538 views2 pages
    The Luayon Manufacturing Company issued $5 million bonds at 96% of par value to finance an expansion of its metal window division. The bonds had an 8% coupon rate, paid semiannually, and were callable at 104% of par value. Each $1,000 bond was also convertible to 30 shares of the company's $10 par value common stock. The company recorded the bond discount using the effective interest method. In July 2009, half the bonds were called at 104% and the other half were converted to common stock, with the company providing an additional $100,000 incentive to converters.

    Original Description:

    Original Title

    Audit fot Liability Problem #10

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    The Luayon Manufacturing Company issued $5 million bonds at 96% of par value to finance an expansion of its metal window division. The bonds had an 8% coupon rate, paid semiannually, and were callable at 104% of par value. Each $1,000 bond was also convertible to 30 shares of the company's $10 par value common stock. The company recorded the bond discount using the effective interest method. In July 2009, half the bonds were called at 104% and the other half were converted to common stock, with the company providing an additional $100,000 incentive to converters.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    538 views2 pages

    Audit Fot Liability Problem #10

    Uploaded by

    Ma Teresa B. Cerezo
    The Luayon Manufacturing Company issued $5 million bonds at 96% of par value to finance an expansion of its metal window division. The bonds had an 8% coupon rate, paid semiannually, and were callable at 104% of par value. Each $1,000 bond was also convertible to 30 shares of the company's $10 par value common stock. The company recorded the bond discount using the effective interest method. In July 2009, half the bonds were called at 104% and the other half were converted to common stock, with the company providing an additional $100,000 incentive to converters.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    of 2

    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

    2. Carrying value of the bonds at December 31, 2008 is:


    a. P 4,880,000 b. P 4,868,451 c. P 4,866,880 d. P
    4,850,000

    3. Interest expense at December 31, 2008 is:


    a. P 432,000 b. P 432,720 c. P 435,731 d. P 437,339

    4. Carrying value of the bonds converted is:


    a. P 2,500,000 b. P 2,456,235 c. P 2,450,000 d. P
    2,443,765

    5. Additional paid-in capital in the conversion of bonds is:


    a. P 1,706,234 b. P 1,793,766 c. P 1,693,766 d. P
    1,684,225

    6. Carrying value of retired bonds is:


    a. P 2,500,000 b. P 2,456,235 c. P 2,450,000 d. P
    2,443,765

    7. Loss on early retirement of bonds is:


    a. P 156,235 b. P 150,000 c. P 143,765 d. P 100,000

    8. Interest expense on the bonds at December 31, 2009 is:


    a. P 438,161 b. P 400,000 c. P 219,080 d. P 200,000
    9. The company should record gain or loss on conversion of:
    a. Loss of P100,000 c. Loss of P50,000
    b. Gain of P100,000 d. No gain or loss on conversion

    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

    You might also like