AUDIT OF LIABILITIES

PROBLEM NO. 1 - CURRENT AND NONCURRENT LIABILITIES

You were able to obtain the following from the accountant for Agdangan Corp. related to the company's
liabilities as of December 31, 2020.

Accounts payable P 650,000

Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable - 10% 600,000
Mortgage notes payable - 12% 1,500,000
Bonds payable 2,500,000

The following additional information pertains to these liabilities.

a. All trade notes payable are due within six months from the end of the reporting period.
b. Bank notes-payable include two separate notes payable to Allied Bank.
(1) A P300,000, 8% note issued March 1, 2018, payable on demand. Interest is payable
every six months.
(2) A 1-year, P500,000, 11 1/2% note issued January 2, 2020. On December 31, 2020
Agdangan negotiated a written agreement with Allied Bank to replace the note with a 2-
year, P500,000, 10% note to be issued January 2, 2021. The interest was paid on
December 31, 2020.
c. The 10% mortgage note was issued October 1, 2017, with a term of 10 years. Terms of the note
give the holder the right to demand immediate payment if the company fails to make a monthly
interest payment within 10 days of the date the payment is due. As of December 31, 2020,
Agdangan is three months behind in paying its required interest payment.
d. The 12% mortgage note was issued May 1, 2014, with a term of 20 required interest payment.
The current principal amount due is P1,500,000. Principal and interest payable annually on April
30. A payment of P220,000 is due April 30, 2021. The payment include interest of P180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 2011. Interest is payable semi-annually
every June 30 and December 31.

QUESTIONS:
Based on the above and the result of your audit, answer the following
1. Interest payable as of December 31, 2020, is
2. The portion of the Note Payable bank to be reported under current liabilities as of
December 31, 2020 is
3. Total current liabilities as of December 31, 2020 is a
4. Total noncurrent liabilities as of December 31, 2020 is

SOLUTIONS:
 1. 300,000 note payable to bank (P300k x 8% x 4/12) P 8,000
Mortgage note payable-10% (P600k x 10% x 3/12) 15,000
Mortgage note payable-12% (P1,500,000 x 12% x 8/12) 120,000
Total Interest Payable P143,000

2. Note payable to bank – payable on demand P300,000

The P500,000 note payable to bank will be classified as noncurrent because it was
refinanced on a long-term basis as of December 31, 2020.

3. Accounts Payable P650,000

Notes payable – trade 190,000
Notes payable – bank 300,000
Wages and salaries payable 15,000
Interest payable 143,000
Mortgage note payable – 10% with breach of loan 600,000
Mortgage note payable – 12% (220k-180k) 40,000
Bonds payable, due 7/1/2021 2,000,000
Total Current Liabilities P3,938,000

4. Notes payable – bank P500,000

Mortgage notes payable – 12% (1500,000-40k) 1,460,000
Total Non-Current Liabilities P1,960,000

PROBLEM NO. 2- CURRENT AND NONCURRENT LIABILITIES

Atimonan Corporation is selling audio and video appliances. The company's fiscal year ends on March
31. The following information relates to the obligations of the company as of March 31, 2020

Notes payable
Atimonan has signed several long-term notes with financial institutions. The maturities of these notes
are given below. The total unpaid interest for all these notes amounts to P408,000 on March 31, 2020.

Amount
Due date
April 31, 2020 720,000
July 31, 2020 1,080,000
September 1, 2020, 540,000
February 1, 2021, 540,000
April 1, 2021 - March 31, 2022, 3,240,000
6,120,000
Estimated warranties
Antimonan has one year product warranty on some selected items. The estimated warranty liability on
sales during the 2018-2019 fiscal year and still outstanding as of March 31, 2019, amounted to P302,400.
The warranty costs on sales made from April 1, 2019 to March 31, 2020 are estimated at P756,000. The
actual warranty costs incurred during 2019-2020 fiscal year as follows:

Warranty claims honored on 2018-2019 sales P302,400

Warranty claims honored on 2019 – 2020 sales 342,000
Total P644,400

Trade Payables
Accounts payable for supplies, goods and services purchases on open account amount to P672,000 as of
March 31, 2020.

Dividends
On March 10, 2020, Atimonan's board of directors declared a cash dividend of P0.30 per ordinary share
and a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2010 to shareholders
on record at the close of business on March 31, 2020. As of March 31, 2020, Atimonan has 6 million, P2
par value, ordinary shares issued and outstanding.

Bonds payable
Atimonan issued P6,000,000, 12% bonds, on October 1, 2014, at 96. The bonds will mature on October 1,
2024. Interest is paid semiannually on October 1 and April 1. Atimonan uses the straight-line method to
amortize bond discount.

QUESTIONS:
Based on the foregoing information, determine the adjusted balances of the following as of March 31,
2020:
1. Estimated warranty payable
2. Unamortized bond discount
3. Bond interest payable
4. Total current liabilities
5. Total noncurrent liabilities

SOLUTIONS:
1. Warranty Payable, 3/31/19 P302,400
Add: Warranty expense accrued during 2019-2020 756,000
Total 1,058,400
Less: Payments during 2019-2020 644,400
Warranty Payable, 3/31/2020 P414,000

2. Bond Discount 10/1/14 (6M x .04) P240,000

Discount Amortization 10/1/14 to 3/31/20
(P240k x 5.5/10) 132,000
Unamortized Bond Discount 108,000
 3. Bond Interest Payable 10/1/2019 to 3/31/2020
(P6M x 12% x 6/12) P360,000

4. Notes Payable – current (maturing up to 3/31/2021) P2,880,000

Accrued Interest Payable – Notes Payable 408,000
Estimated warranty payable 414,000
Accounts Payable 672,000
Cash Dividend payable (6M x 0.30) 1,800,000
Accrued interest payable – bonds payable 360,000
Total Current Liabilities P6,354,000

5. Notes Payable – non current P3,240,000

Bonds payable, net of discount (6M-108k) 5,892,000
Total Non Current liabilities P9,132,000

PROBLEM 3 - Accounting for Noninterest-bearing Note (Payable in Installments)

OHRID COMPANY purchased machinery on December 31, 2018, paying P80,000 down and agreeing to
pay the balance in four equal installments of P60,000 payable each December 31. Implicit in the
purchase price is an assumed interest of 12%.

The following data are abstracted from the present value tables:
Present value of 1 at 12% for 4 periods 0.63552
Present value of an ordinary annuity of 1 at 12%
for 4 periods 3.03735

QUESTIONS:
1. What is the cost of the machinery purchased on December 31, 2018?
2. How much interest expense should be reported in Ohrid's income statement for the year ended
December 31, 2019?
3. What is the carrying value of the note at December 31, 2020?

SOLUTIONS:
1. Down Payment P80,000
PV of Installment Payments (P60,000 x 3.03735) 182,241
Cost of Machinery P262,241

2. Interest Expense for 2019 P21,869

 3. Carrying Value of Note Dec 31, 2020 P101,403

PROBLEM 4- Analysis of Amortization Schedule

LARIO COMPANY issued 10-year bonds on January 1, 2018. The company's year-end is December 31,
and financial statements are prepared annually. The amortization and interest schedule below reflects
the bond issuance and the subsequent interest payments and charges.

AMORTIZATION SCHEDULE
Date Interest Paid Interest Expense Amount Unamortized Carrying value
01/01/18 28,253 471,747
12/31/18 55,000 56,610 26,643 473,357
12/31/19 55,000 56,803 24,840 475, 160
12/31/20 55,000 57,019 22,821 477,179
12/31/21 55,000 57,261 20,560 479,440
12/31/22 55,000 57,533 18,027 481,973
12/31/23 55,000 57,837 15,190 484,810
12/31/24 55,000 58,177 12,013 487,987
12/31/25 55,000 58,558 8,455 491,545
12/31/26 55,000 58,985 4,470 495,530
12/31/27 55,000 59,470 500,000

Adjustment due to rounding.

QUESTIONS:
1. The bonds were issued at
a. A premium
b. A discount
c. Face Value
d. Par Value
2. What amortization method is used in the amortization schedule presented? Effective interest
method
3. What is the nominal (stated) interest rate of the bonds issued on January 1, 2018?
4. What is the effective interest rate of the bonds issued on January 1, 2018?
5. Based on the schedule presented, what is the journal entry to record the issuance of the bonds
on January 1, 2018?

SOLUTIONS:
 1. The bonds were sold at a discount of P28,253. The issue price (P471,747) is less than the
maturity value (or face value) of P500,000 on December 31, 2027.
2. The amortization schedule represents an increasing interest charge which characterize the
effective interest method of amortizing bond premium or discount.

If straight line method, the annual interest would have been P57,825.30.
Interest Payment P55,000
Amortization of discount (28,253/10) 2,825.30
Total P57,285.30

3. Stated or nominal interest rate (P55,000/500,000) = 11%

4. Effective interest rate (P56,610/471,747) = 12%

5. Cash 471,747
Discount on Bonds Payable 28,253
Bonds Payable 500,000

PROBLEM 5 - Convertible Debt Issue

On January 1, 2018, DIAS COMPANY issued 3-year, 4,000 convertible bonds at face value of P1,000 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 200 P2 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 ordinary share was P3. The bonds were converted on
December 31, 2019.
The following present value factors are obtained from the present value tables:
6% 9%
Present value of 1 for 3 periods 0.83962 0.77218
Present value of an ordinary annuity of 1 for
3 periods 2.67301 2.53130
Present value of an annuity due of 1 for 3
Periods 2.83339 2. 75911

QUESTIONS:

1. The liability component of the convertible debt is

2. The equity component of the convertible debt is
3. The interest expense to be reported on Dias Company's income statement for the year ended
December 31, 2019, is
4. The entry to record the bond conversion on December 31,2019, should include a credit to share
premium-Issuance of

SOLUTIONS:
1. PV of Principal (P4,000,000 x 0.77218) P3,088,720
PV of Interest Payments
(P4,000,000 x 6% = P240,000 x 2.53130) 607,512
Liability component of convertible debt P3,696,232

2. Proceeds P4,000,000
Less: Liability components 3,696,232
Equity component of convertible debt P303,768

3. Interest expense for 2019 is P341,000

4. CV of Bonds, Dec 31, 2019 P3,889,893

Add: Share premium – conversion privilege 303,768
Total consideration 4,193,661
Less: PV of Ordinary Shares (2 x 4000 x 200) 1,600,000
Share Premium Issuance 2,593,661

Bonds Payable 4,000,000

SP – conversion privilege 303,768
Bonds Discount (4M – 3,889,893) 110,107
Ordinary Shares (2 x 800,000sh) 1,600,000
SP – issuance 2,593,661