Auditing Application

Case 2 (25 points] During your regular annual audit of Karasuno Company for the year ended December 31. 20x4. you obtain the following evidence and data relative to your examination of the bonds payable and related accounts. From your permanent me working papers: Client is authorized to Issue 20,000 bonds with par value of P1.000 each. Bonds are dated May 1. 20x1, and are due May 1, 2x11. Interest at 12% per annum is due semiannually every May 1 and November 1. The December 31, 20x3 balance of P9.500.000 represents proceeds from issuance of 10,000 bonds on November 2, 20:42. 12% 10- ear Bonds Pa able 12131 f20x3 Balance 9.500.000 0301120304 CR 2.100.000 interest nee 05.40020\" Gil-120 800,000 0?f01i20x4 40.000 11!01!20x4 CV-531 720,000 From supporting documents: CR Cash receipts entry for issuance of 2.000 bonds for a total of P2.100.000 on July 1. 20x4. Tmstee's remittance statement attached. Entry recorded Cash 2,140.000 Bonds Payabie 2.100.000 Interest expense 40.000 CV-120 Cash payment to trustee for November 1, 20x3 through April 30, 20x4 interest. Paid check to trustee attached. CV-531 Cash payment to trustee for May 1, 20x4 through October 31, 20x5 interest. Paid check to trustee attached. The following adjusting entries were prepared: Adjusting entries Discount on bonds payable 500,000 Bonds payable 500,000 To correct the original entry on issuance of 10,000 bonds (P10,000,000 - P9,500,000) Retained earnings (P500,000 x 14/102) 68,627 Interest expense (P500,000 x 12/102) 58,824 Discount on bonds payable 127,451 To record discount amortization for the prior and current years Bonds payable (P2, 100,000 - P2,000,000) 100,000 Premium on bonds payable 100,000 To recognize premium on bonds payable Premium on bonds payable (P100,000 x 6/82) 7,317 Interest expense 7,317 To record premium amortization for the year Retained earnings (P10,000,000 x 12% x 2/12) 200,000 Interest expense 200,000 To correct interest expense pertaining to year 20x3 Interest expense (P12,000,000 x 12% x 2/12) 240,000 Accrued interest payable 240,000 To record accrual of interest