NATIONAL UNIVERSITY

College of Business and Accountancy

2nd term, S.Y. 2019-2020
AUDIT REVIEW
Pre MIDTERM EXAMINATION

Name: _________________________________________ Score: __________

Section: _________________
THEORIES: (35 points)

1. Which of the following procedures is least likely in the audit of capital stock?
A. Examine all outstanding stock certificates for completeness.
B. Account for the proceeds from stock issues.
C. Reconcile shares outstanding with the general ledger.
D. Evaluate compliance with stock option plans.

2. When the auditors obtain an understanding of internal control for the financing cycle
documentation will frequently include a written description as well as a(n):
A. List of audit objectives.
B. Decision table.
C. Summary of tests of controls.
D. Internal control questionnaire.

3. In which of the following accounts would one expect a related party transaction to be
easiest to detect?
A. Accounts receivable.
B. Accounts payable.
C. Notes payable.
D. Cash.

4. The auditor’s program for the examination of long-term debt should include steps that
require the:
A. Verification of the existence of the bondholders.
B. Examination of any bond trust indenture.
C. Inspection of the accounts payable subsidiary ledger.
D. Investigation of credits to the bond interest income accounts.

5. The primary reason for preparing a reconciliation between interest-bearing obligations

outstanding during the year and interest expense presented in the financial statements is to:
A. Evaluate internal control over securities.
B. Determine the validity of prepaid interest expense.
C. Ascertain the reasonableness of imputed interest.
D. Detect unrecorded liabilities.
6. When there are numerous property and equipment transactions during the year, an auditor
who plans to assess control risk at a low level usually performs:
A. Tests of controls and extensive tests of property and equipment balances at the end of the
year.
B. Analytical procedures for current year property and equipment transactions.
C. Tests of controls and limited tests of current year property and equipment transactions.
D. Analytical procedures for property and equipment balances at the end of the year.

7. Which of the following best describes the auditor’s approach to the audit of the ending
balance of property, plant and equipment for a continuing nonpublic client?
A. Direct audit of the ending balance.
B. Agreement of the beginning balance to prior year’s working papers and audit of significant
changes in the accounts.
C. Audit of changes in the accounts since inception of the company.
D. Audit of selected purchases and retirements for the last few years.

8. Which of the following tests of controls most likely would help assure an auditor that
goods shipped are properly billed?
A. Scan the sales journal for sequential and unusual entries.
B. Examine shipping documents for matching sales invoices.
C. Compare the accounts receivable ledger to daily sales summaries.
D. Inspect unused sales invoices for consecutive pre-numbering.

9. While assessing the risks of material misstatement auditors identify risks, relate risk to
what could go wrong, consider the magnitude of risks and
A. Assess the risk of misstatements due to illegal acts.
B. Consider the complexity of the transactions involved.
C. Consider the likelihood that the risks could result in material misstatements.
D. Determine materiality levels.

10. Which of the following is not one of the assertions made by management about an account
balance?
A. Relevance.
B. Existence.
C. Valuation.
D. Rights and obligations.

11. The risk of a material misstatement occurring in an account, assuming an absence of internal
control, is referred to as:
A. Account risk.
B. Control risk.
C. Detection risk.
D. Inherent risk.
12. Which of the following is most likely to be considered a risk factor relating to fraudulent
financial reporting?
A. Low turnover of senior management.
B. Extreme degree of competition within the industry.
C. Capital structure including various operating subsidiaries.
D. Sales goals in excess of any of the preceding three years.

13. Which of the following statements is accurate about "fraud risk factors" considered when
conducting an audit?
A. Factors whose presence indicates that fraud exists.
B. Factors whose presence often have been observed in circumstances where frauds have
occurred.
C. Factors whose presence will require modification to planned audit procedures.
D. Factors obtained during the audit which lead to required communications with the audit
committee.

14. Requirements for training, independence and due professional care are included in which
group of the generally accepted auditing standards?
A. Fieldwork.
B. General.
C. Reporting.
D. Quality control.

15. An audit should be designed to achieve reasonable assurance of detecting material

misstatements due to:
A. Errors.
B. Errors and fraud.
C. Errors, fraud, and those illegal acts with a direct effect on financial statement amounts.
D. Errors, fraud and illegal acts.

16. Which of the following best describes a portion of the auditor’s responsibility regarding
illegal acts by clients?
A. The auditors have a responsibility to discover all material illegal acts.
B. If audit procedures reveal illegal acts, the auditors should take appropriate actions.
C. If the auditors suspect illegal acts have been performed, they should conduct a legal audit
of the company.
D. The auditors’ responsibility for the detection of all illegal acts is the same as their
responsibility regarding material misstatements due to errors and fraud.

17.. Which of the following is not one of the six elements of Quality control?
A. Engagement performance.
B. Monitoring.
C. Relevant ethical requirements.
D. Review.
18. A CPAs duty of due care to a client most likely will be breached when a CPA:
A. Gives a client an oral report instead of a written report.
B. Gives a client incorrect advice based on an honest error of judgment.
C. Fails to give tax advice that saves the client money.
D. Fails to follow generally accepted auditing standards.

19. The hallmark of auditing

A. Professionalism
B. Professional Skepticism
C. Professional Judgement
D. Professional CPA

20. Independence is under what standard of the Generally Accepted Auditing Standards?
A. General Standard
B. Standard of Field Work
C. Standard of Reported
D. Generally Accepted Standard
PROBLEM 1
In the course of your audit of Amanda Inc. for the year ended December 31, 2019, you
took note of the following information.
ITEM AUDIT NOTES

a. Accounts Payable - trade, P The amount is net of P30,000 accounts with

170,000 debit balances

b. Notes payable - trade, The notes are all with five months term
P70,000 bearing interest at 15%. P50,000 from the
notes is dated September 1, while the rest
are dated November 3.

c. Advance receipts from The goods pertaining to these advances will

customers, P 100,000 be delivered in 2020.
d. Containers Deposit, P50,000 This is an amount received from customers
for returnable containers
e. Notes Payable - BPI, P200,000 This is a long term note for five years and are
being paid off at the rate of P4,000 per
month (monthly payment include interest)

f. Dividends in arrears on The company is yet to declare dividends since

cumulative preferred stock its last declared and distributed dividends in
P20,000 2020.

g. Stock dividends payable on The stock dividends was declared at 37,000 as per
common stocks, P37,000 inspection or records at year end.

h. Liabilities under guarantee This pertains to Amanda's guarantee of

agreement, P45,000 its employees' bank loans. As per past
experience, employees unlikely default on
their loan payments.
i. Convertible bonds, P1,000,000 1,000 bonds is convertible to 10 ordinary
shares. Amount due on December 31, 2022

j. Notes Payable - officers, This is due in six months

P40,000
k. Salaries and Wages Payroll for the period December 16, 2019 to
January 15, 2020 amounted to P68,000
l. Notes Receivable, P30,000 This note has been discounted in a bank on a
without recourse basis, where the company
received cash of P24,000
m. Output VAT, P246,000 Input VAT on purchases and other operating
expenses amounted to P164,000

n. Accounts Receivable, The accounts receivable is net of P12,300

P215,000 customer credit balances
o. Cash in Bank, P115,000 The company's cash in banks include a cash
balance with BPI amounting to P125,000;
with PNB amounting to P55,000m and; an
overdraft balance with BDO

p. Common stock warrants Amount to date, P250,000

outstanding

q. Common stock options Amount to date, P150,000

outstanding

r. estimated warranty costs on This pertains to warranty costs on good sold

good sold 46,000 on 2018 and 2019

s. Installment notes payable, This is for the equipment purchase, only one
P75,000 third is due in 2020
t. Provisions for losses During the year, one of the manufacturing
equipment of the company exploded injuring
an employee. The employee filed claims for
damages on Nov. 3. There has still been no
resolution yet on the case as of the Balance
sheet date. The company lawyers however
believe that it is probable that the company
will be liable between P25,000 and P75,000
u. Deferred tax liability This refers to deferred tax liabilities
cumulative temporary difference on taxable
income which will reverse evenly over the
next year 150,000
 21. How much is the total current liability?
a. 767,300 c. 817,300
b. 814,300 d. 892,300
22. How much is the Non-current liability?
a. 1,285,000 c. 1,429,000
b. 1,360,000 d. 1,760,000
23. How much is the Total Liabilities?
a. 2,177,300 c. 2,246,300
b. 2,127,300 d. 2,252,300

PROBLEM NO. 2
A depreciation schedule for semi-trucks of BABYBOO MANUFACTURING COMPANY was requested by your
auditor soon after December 31, 2017, showing the additions, retirements, depreciation, and other data
affecting the income of the company in the 4-year period 2019 to 2022, inclusive.
The following data were ascertained.
Balance of Trucks account, Jan. 1, 2019
Truck No. 1 purchased Jan. 1, 2016, cost P180,000
Truck No. 2 purchased July 1, 2016, cost 220,000
Truck No. 3 purchased Jan. 1, 2018, cost 300,000
Truck No. 4 purchased July 1, 2018, cost 240,000
Balance, Jan. 1, 2019 P940,000
The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2019, and entered in
the ledger, had a balance on that date of P302,000 (depreciation on the four trucks from the respective
dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the
account before January 1, 2019.
Transactions between January 1, 2019, and December 31, 2022, which were recorded in the ledger, are
as follows.
July 1, 2019 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was
P400,000. Babyboo Mfg. Co. paid the automobile dealer P220,000 cash on the transaction.
The entry was a debit to Trucks and a credit to Cash, P220,000. The transaction has
commercial substance.
Jan. 1, 2020 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks, P35,000.
July 1, 2021 A new truck (No. 6) was acquired for P420,000 cash and was charged at that amount to the
Trucks account. (Assume truck No. 2 was not retired.)
July 1, 2021 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000
cash. Babyboo Mfg. Co. received P25,000 from the insurance company. The entry made
by the bookkeeper was a debit to Cash, P32,000, and credits to Miscellaneous Income,
P7,000, and Trucks, P25,000.
Entries for depreciation had been made at the close of each year as follows: 2019, P210,000; 2020,
P225,000; 2021, P250,500; 2022, P304,000.
24. What is the total depreciation expense for the year ended December 31, 2019?
A. P180,000 B. P198,000 C. P172,000 D. P228,000

25. What is the gain (loss) on trade in of Truck #3 on July 1, 2019?

A. (P30,000) B. P10,000 C. (P60,000) D. P190,000

26. What is the net book value of the Trucks on December 31, 2022?
A. P414,000 B. P348,000 C. P228,500 D. P894,000

27. The total depreciation expense recorded for the 4-year period (2019-2022) is overstated by
A. P185,500 B. P265,500 C. P287,500 D. P275,500
28. The books have not been closed for 2017. What is the compound journal entry on December 31,
2017 to correct the company’s errors for the 4-year period (2019-2017)?

A. Accumulated depreciation 629,500

Trucks 480,000
Retained earnings 9,500
Depreciation expense 140,000
B. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000
C. Accumulated depreciation 665,500
Trucks 480,000
Retained earnings 185,500
D. Accumulated depreciation 665,500
Trucks 665,500

PROBLEM NO. 3
MINA MINING CO. has acquired a tract of mineral land for P50,000,000. Mina Mining estimates that the
acquired property will yield 150,000 tons of ore with sufficient mineral content to make mining and
processing profitable. It further estimates that 7,500 tons of ore will be mined the first and last year and
15,000 tons every year in between. (Assume 11 years of mining operations.) The land will have a residual
value of P1,550,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of P12,000,000. The company
estimates that these structures can be used for 15 years but, because they must be dismantled if they
are to be moved, they have no residual value. Mina Mining does not intend to use the buildings elsewhere.

Mining machinery installed at the mine was purchased secondhand at a total cost of P3,600,000. The
machinery cost the former owner P9,000,000 and was 50% depreciated when purchased. Mina Mining
estimates that about half of this machinery will still be useful when the present mineral resources have
been exhausted but that dismantling and removal costs will just about offset its value at that time. The
company does not intend to use the machinery elsewhere. The remaining machinery will last until about
one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be
allocated equally between these two classes of machinery.

29. What are the estimated depletion and depreciation charges for the 1st year?
Depletion Depreciation
A. P4,845,000 P870,000
B. P4,845,000 P780,000
C. P2,422,500 P870,000
D. P2,422,500 P780,000

30. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

31. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

32. What are the estimated depletion and depreciation charges for the 7th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000
33. What are the estimated depletion and depreciation charges for the 11th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000

Substantive Test of Equity

34. In an examination of shareholder’s equity, an auditor is most concerned that
a. Capital stock transactions are properly authorized.
b. Stock splits are capitalized at par or stated value on the dividend declaration date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock transfer
agent.

35. In audit of a medium-sized manufacturing concern, which one of the following areas can be
expected to require the least amount of audit time?
a. Owner’s equity
b. Assets
c. Revenue
d. Liabilities

36. When a corporate client maintains its own stock records, the auditor primarily will rely upon
a. Confirmation with the company secretary of shares outstanding at year-end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of shares outstanding at year-end with the appropriate state
official.
d. Inspection of the stock book at year-end and accounting for all certificate numbers.

37. When a client company does not maintain its own stock records, the auditor should obtain
written confirmation from the transfer agent and registrar concerning
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preferred stock liquidation value.
d. The number of shares subject to agreement to repurchase

38. The auditor is concerned with establishing that dividends are paid to client corporation
shareholders owning stock as of the
a. Issue date c. Record date
b. Declaration date d. Payment date

39. An audit program for the retained earnings account should include a step that requires
verification of the
a. Fair value used to charge retained earnings to account for a two-for-one-stock split.
b. Approval of the adjustment to the beginning balance as a result of a write-down of an
account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.

40. During an audit of an entity’s shareholders’ equity accounts, the auditor determines whether
there are restrictions on retained earnings resulting from loans, agreements, or law. This audit
procedure most likely is intended to verify management’s assertion of
a. Existence c. Valuation
b. Completeness d. Presentation and disclosure
 41. If the auditee has a material amount of treasury stock on hand at year-end, the auditor should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury stock transactions during the
year.
c. No count the certificates if treasury stock is a deduction from shareholders’ equity.
d. Count the certificates only if the company classifies treasury stock with other assets.

42. In performing tests concerning the granting of stock options, an auditor should
a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entity’s payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.

43. The auditor would not expect the client to debit retained earnings for which of the following
transactions?
a. A 4-for 1 stock split.
b. "Loss" resulting from disposition of treasury shares.
c. A 1-for 10 stock dividend.
d. Correction of error affecting prior year's earnings.

PROBLEM NO. 1

The following data were compiled prior to preparing the balance sheet of the Kevin
Corporation as of December 31, 2019:
Authorized common stock, P100 par value P4,000,000
Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on available for sale securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
Subscribe capital stock 480,000
Stock subscriptions receivables 120,000
Stock warrants outstanding 200,000
Treasury stock, at cost 144,000
Unissued common stock 800,000

REQUIRED:
Compute for the following:
A B C D
44. Common stock issued 4,000,000 3,200,000 3,056,000 3,680,000
45. Additional paid-in capital (APIC) 1,400,000 320,000 1,320,000 1,200,000
46. Appropriated retained earnings 400,000 544,000 1,000,000 -
47. Total stockholders’ equity 6,760,000 6,240,000 6,480,000 6,640,000
48. Legal capital 3,200,000 4,000,000 3,560,000 3,680,000
PROBLEM NO. 2
Following is the stockholders’ equity section of Awi Corporation’s balance sheet at December
31, 2018:
Common stock, P10 par value; authorized 1,500,000
shares; issued and outstanding 900,000 shares P9,000,000
Additional paid-in capital 750,000
Retained earnings 2,700,000
Total stockholders’ equity P12,450,000

Transactions during 2019 and other information relating to the stockholders’ equity
accounts were as follows:
 On January 26, Awi reacquired 75,000 shares of its common stock for P11 per share.
 On April 4, Awi sold 45,000 shares of its treasury stock for P14 per share.
 On June 1, Awi declared a cash dividend of P1 per share, payable on July 15, 2019 to
stockholders of record on July 1, 2019.
 On August 15, each stockholder was issued one stock right for each share held to purchase two
additional shares of stock for P12 per share. The rights expire on October 31, 2019.
 On September 30, 150,000 stock rights were exercised when the market value of the stock was
P12.50 per share.
 On November 2, Awi declared a two for one stock split-up and charged the par value of the stock
from P10 to P5 per share. On November 20, shares were issued for the stock split.
 On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It
originally cost P600,000, was carried by the previous owner at a book value of P300,000, and
was recently appraised at P390,000.
 Net income for 2019 was P720,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December
31, 2019:
49. Common stock
a. P12,600,000 b. P10,800,000 c. P10,050,000 d. P12,300,000
50. Additional paid-in capital
a. P1,485,000 b. P1,575,000 c. P3,825,000 d. P1,275,000
51. Unappropriated retained earnings
a. P2,550,000 b. P2,422,500 c. P2,220,000 d. P2,190,000
52. Total stockholders’ equity
a. P16,425,000 b. P14,295,000 c. P16,095,000 d. P16,065,000
PROBLEM NO. 3
The stockholders’ equity section of the Jason Inc. showed the following data on
December 31, 2018: Common stock, P3 par, 450,000 shares authorized, 375,000
shares issued and outstanding, P1,125,000; Paid-in capital in excess of par,
P10,575,000; Additional paid-in capital from stock options, P225,000; Retained
earnings, P720,000. The stock options were granted to key executives and provided
them the right to acquire 45,000 shares of common stock at P35 per share. Each
option has a fair value of P5 at the time the options were granted.

The following transactions occurred during 2019:

Feb. 1 Key executives exercised 6,750 options outstanding at December 31,
2018. The market price per share was P44 at this time.

Apr. 1 The company issued bonds of P3,000,000 at par, giving each P1,000
bond a detachable warrant enabling the holder to purchase two
shares of stock at P40 each for a 1-year period. The bonds would
sell at P996 per P1,000 bond without the warrant.

July 1 The company issued rights to stockholders (one right on each share,
exercisable within a 30-day period) permitting holders to acquire
one share at P40 with every 10 rights submitted. All but 9,000
rights were exercised on July 31, and the additional stock was
issued.
Oct. 1 All warrants issued in connection with the bonds on April 1 were
exercised.
Dec. 1 The market price per share dropped to P33 and options came due.
Because the market price was below the option price, no remaining
options were exercised.
Dec. 31 Net income for 2019 was P375,750.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 2019:
53. Common stock
a. P1,165,950 b. P1,250,775 c. P1,275,075 d. P1,273,050
54. Total additional paid-in capital
a. P12,629,175 b. P11,283,300 c. P12,329,475 d. P12,604,200
55. Retained earnings
a. P870,750 b. P1,095,750 c. P1,287,000 d. P981,225
56. Total stockholders’ equity
a. P13,545,000 b. P15,000,000 c. P14,676,000 d. P14,973,000
PROBLEM NO. 4
With your representation, as Managing Partner of the Limheya, Gutierrez, Bautista, Tupong
& Co., your firm was engaged in the audit of the Pride Company at the close of the
company’s first year of operations on December 31, 2019. The company closed its books
prior to the time you began your year-end fieldwork.
Your audit and review showed the following stockholders’ equity accounts in the general
ledger:

Common Stock
08/30/19 CD P550,000 01/02/19 CR P6,000,000
12/29/19 J 545,000

Retained Earnings
12/29/19 J P545,000 12/01/19 CR P287,500
12/31/19 J 4,000,000

Income Summary
12/31/19 J P26,000,000 12/31/19 J P30,000,000
12/31/19 J 4,000,000

Based on the other working papers submitted by your audit staff, the following additional
information was forwarded:
From the Articles of Incorporation of Fortitude Company:
 Authorized capital stock – 150,000 shares
 Par value per share – P100
From the board of directors’ minutes of meetings, the following resolutions were extracted:
 01/02/19 – authorized the issuance of 50,000 shares at P120 per share.
 08/30/19 – authorized the acquisition of 5,000 shares at P110 per share.
 12/01/19 – authorized the re-issuance of 2,500 treasury shares at P115 per share.
 12/29/19 – Declared a 10% stock dividend, payable January 31, 2006, to stockholders on
record as of January 15, 2020. The market value of the stock on December 29, 2019 was P130
per share.
REQUIRED:

Based on the above and the result of your audit, determine the adjusted balances of the following
as of December 31, 2019.
A B C D
57. Capital stock 5,000,000 5,545,000 5,945,000 5,475,000
58. APIC 1,012,500 1,155,000 1000,000 965,000
59. Total retained earnings 3,525,000 3,572,500 3,382,500 3,512,500
60. Treasury stock 250,000 275,000 550,000 -
61. Total stockholders’ equity 10,012,500 9,215,000 9,262,500 9,737,500
PROBLEM 5
Shawarma Inc., had the following unadjusted liability balances as of December 31, 2019:

Accounts payable P 540,000

Premiums payable 140,000
Deferred taxes (42,000)
10% Bonds payable 5,500,000

Audit notes:
a. Accounts payable is net of a P 50,000 debit balance in one of the company’s suppliers
accounts due to an overpayment made. The agreement with the supplier simply calls
for the supplier to deliver additional merchandise to Shawarma Inc. to offset the
overpayment. No deliveries were made as of the balance sheet date.

b. The company started a promotional program in 2018 where an eco-friendly tote bag
shall be given to customers upon presenting 6 product labels plus P 5 cash. The
following information are deemed relevant in relation to the program:

2018 2019
Sales P7,200,000 P8,400,000
Total cost of tote bags purchased (P25 each) 375,000 500,000
Tote bags actually distributed 9,000 19,000

Estimated tote bags to be distributed the following 7,000 5,000

year

The balance of the premiums liability account, reflects the accrual at the end
of the previous year (2018), no entry had been made during the current year
affecting the said account
 c. Deferred tax balance appearing above is the result of the deferred tax created by the
premiums liability in the previous year which is tax deductible upon settlement.
Adjustments are yet to be made to the said account to reflect the movement in the
account balance during the year. Moreover, another temporary difference arising
during the year created by the company’s excess tax depreciation for the period
amounted to P 150,000. The income tax rate is at 30%.

d. The balance of the bonds payable account was the total proceeds from its issuance
on January 1, 2019. The bonds which shall mature on December 31, 2018 have a total
face value of P 5,000,000 and are convertible into ordinary shares at the rate of P 1,000
bond to 10, P 50 par value shares. On the issuance date, the effective yield rate on
similar securities without the convertibility option was at 8% while each ordinary
shares were selling at P 75 per share. The only other entry made by the client in
relation to the bonds was the payment of interest on December 31, as interest are
payable annually every December 31.

REQUIRED: Determine the following balances

62. Premium expense for 2019
a. 340,000 b. 425,000 c.400,000 d. 500,000
63. Premium Liability for 2019
a.100,000 b.25,000 d.75,000 d.150,000
64. Total deferred tax liability as of December 31, 2019
a. 150,000 b.45,000 c.100,000 d.80,000
65.Accounts Payable as of December 31,2019
a.540,000 b.690,000 d.590,000 d.490,000
66.Total Current Liability
a.540,000 b.690,000 d.590,000 d.490,000
PROBLEM 6
MNO Inc. reported the following information in its long-term liability portion of its
Statement of Financial Position for the period ended December 31, 2018
12% Bonds Payable
10% Note Payable – Bank
Deferred Tax Liability, net

Audit notes:
a. The bonds payable with a face value of P5M was issued with a conversion option into
20,000, P100 par value ordinary shares at any time up to its maturity on June 30, 2023
bonds were issued at Par. These were issued on June 30, 2018 when the prevailing yield
rate on similar debt security without the conversion option was 10%. The company
recorded the transaction as debit to Cash and credit to Bonds payable for the total
consideration received. Interests are being paid semi-annually every December 31, and
June 30 and were recorded appropriately. No other entries were made by the client
affecting the carrying value of the bonds.

Half of the bonds were returned on December 31, 2019 at par value. The prevailing
yield rate on similar debt instrument without the conversion option on this date
was 14%. The transaction is yet to be recorded at year end.
b. The 10% note payable to the bank is dated September 1, 2018 and is payable at the rate
of P500,000, annually every September 1 of each year starting 2019. Interest are also
payable annually every September 1.

REQUIRED:
67. How much is the Carrying Amount of the Convertible Bonds at date of acquisition?
a. 5,386,087 b.5,379,078 c.5,421,126 d. 5,289,319
68.What is the equity portion of the Convertible Bonds ?

a.355,391 b.323,161 c.386.087 d.289,319

69. What is the total interest expense for 2019?

a.533,928 b.767,261 c.233,333 d.166,667

70. How much is the Carrying Amount of the Convertible Bonds at Dec 31 2019

a.5,386,087 b.5,379,087 c.5,289,319 d.5,323,161