PROBLEM NO. 3

In your initial audit of Bulls Co., you find the following

ledger account balances.

12%, 25-year Bonds Payable, 2016 issue

01/01/2016 CR P 1,600,000

Treasury Bonds

10/01/2020 CD P 216,000

Bond Premium

01/01/2016 CR P 80,000

Bond Interest Expense

01/01/2020 CD P 96,000

07/01/2020 CD 96,000

The bonds were redeemed for permanent cancellation on

October 1, 2020 at 105 plus accrued interest.

QUESTIONS:

Based on the above and the result of your audit, answer

the following: (Use straight line amortization method)

1. The adjusted balance of bonds payable as of December

31, 2020 is

a. P1,400,000 c. P1,600,000

b. P1,000,000 d. P1,384,000

2. The unamortized bond premium on December 31,

2020 is

a. P80,000 c. P64,000

b. P56,000 d. P58,800

3. The total bond interest expense for the year 2020 is

a. P189,100 c. P182,900

b. P188,800 d. P182,800

4. The gain or loss on partial bond redemption is

a. P1,900 loss c. P1,900 gain

b. P18,100 loss d. P18,100 gain

5. An auditor's program to audit long term debt should

include steps that require

a. Examining bond trust indentures

b. Inspecting the accounts payable subsidiary ledger.

c. Investigating credits to the bond interest income

account.

d. Verifying the existence of the bondholders.

6. In an audit of bonds payable, an auditor expects the

trust indenture to include the

a. Auditee's debt-to-equity ratio at the time of

issuance.

b. Effective yield of the bonds issued.

c. Subscription list.

d. Description of the collateral

7. In auditing long-term bonds payable, an auditor most

likely will

a. Perform analytical procedures on the bond

premium and discount accounts.

b. Examine documentation of assets purchased with

bond proceeds or liens

c. Compare interest with the bond payable amount

for reasonableness.

d. Confirm the existence of individual bondholders at

year-end.

8. Which of the following audit procedures is least likely

to detect an unrecorded liability?

a. Analysis and recomputation of interest expense.

b. Mailing of standard bank confirmation forms.

c. Reading of the minutes of meetings of the board

directors.

d. Analysis and recomputation of depreciation

expense.

PROBLEM NO. 4

On January 1, 2019, Thunder Corporation issued 2,000

of its 5-year, P1,000 face value, 11% bonds dated January

1 at an effective annual interest rate (yield) of 9%.

Interest is payable each December 31. Thunder uses the

effective interest method of amortization. On December

31, 2020, the 2,000 bonds were extinguished early

through acquisition in the open market by Thunder for

P1,980,000 plus accrued interest.

On July 1, 2019, Thunder issued 5,000 of its 6-year,

P1,000 face value, 10% convertible bonds at par. Interest

is payable every June 30 and December 31. On the date

of issue, the prevailing market interest rate for similar debt

without the conversion option is 12%. On July 1, 2020, an

investor in Thunder's convertible bonds tendered 1,500

bonds for conversion into 15,000 ordinary shares of

Thunder, which had a fair value of P105 and a par value of

P1 at the date of conversion.

QUESTIONS:

Based on the above and the result of your audit, determine

the following: (Round off present value factors to four

decimal places.)

1. The issue price of the 2,000 5-year, P1,000 face value

bonds on January 1, 2019 is

a. P2,155,534 c. P2,000,000

b. P1,844,434 d. P2,147,800

2. The carrying amount of the 2,000 5-year, P1,000 face

value bonds on December 31, 2019 is

a. P1,898,434 c. P2,000,000

b. P2,129,534 d. P2,121,100

3. The gain on early retirement of bonds on December

31, 2020 is

a. P 20,000 c. P121,286

b. P112,000 d. P 0

4. The issuance of the 6-year, P1,000 face value bonds

on July 1, 2019 increased equity by

a. P419,050 c. P371,050

b. P411,300 d. P 0

5. The conversion of the 1,500 6-year, P1,000 face value

bonds on July 1, 2020 increased share premium by

a. P1,485,000 c. P1,415,054

b. P1,374,608 d. P1,377,697