University of Nueva Caceres

College of Business and Accountancy

Auditing and Assurance: Concepts and Applications 2

HANDOUT NO. 3
AUDIT OF LONG-TERM LIABILITIES

Problem 1
On January 1, 2019, BSN 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, 2020.

Required:
1. Equity component of the convertible debt
2. Interest expense for the year ended December 31, 2020
3. Entry to record the bond conversion on December 31, 2020

Problem 2
On December 31, 2019, BSIT Company acquired a piece of equipment from Seller Company by issuing a
P1,200,000 note, payable in full on December 31, 2023. BSIT’s credit rating permits it to borrow funds
from its several line of credit at 10%. The equipment is expected to have a 5-year life and a P150,000
salvage value.

Required:
1. Equipment book value on December 31, 2021
2. Carrying amount of the note at December 31, 2021

Problem 3
The following data were obtained from the initial audit of BSE Company:

15%, 10 year, Bonds Payable, dated January 1, 2019

Debit Credit Balance

Cash proceeds from issue on January 1, 2019, of

1,000, P1,000 bonds. The market rate of interest
on the date of issue was 12%. P1,172,044 P1,172,044

Bond Interest Expense

Cash paid, 1/2/20 P75,000 75,000
Cash paid, 7/1/20 75,000 150,000
Accrual, 12/31/20 75,000 225,000
 Accrued Interest on Bonds
Balance, 1/1/20 75,000 75,000
Accrual, 12/31/20 75,000 150,000

Treasury Bonds
Redemption price and interest to date on 200
bonds permanently retired on 12/31/20 265,000 265,000

Required:
Based on the given information, determine the following:
1. Carrying value of bonds payable at December 31, 2020
2. Loss on Bond Redemption
3. Accrued Interest on Bonds at December 31, 2020
4. Bonds Interest Expense for the year ended December 31, 2010

Problem 4
BSAT C. reported net income for the current year 2020 at P10,000,000 before taxes. Included in the
determination of the said net income were:

Permanent differences
Non-deductible expenses 100,000
Non-taxable income 500,000
Temporary differences
Accrued warranty expenses 250,000
Rental payments made in advance 400,000
Advance collections from customers 500,000
Provisions for probable losses 900,000

The income tax rate is 40% and is not expected to change in the future.

Required:
Determine the following:
1. Current tax expense
2. Total tax expense
3. Total deferred tax asset to be presented in the 2020 Statement of Financial Position
4. Total deferred tax liability to be presented in the 2020 Statement of Financial Position

Problem 5
BSFM Co. reported net income for the current year 2020 at P5,000,000 before taxes. Included in the
determination of the said net income were:

Permanent differences
Non-deductible expenses P150,000
Non-taxable income 50,000

Temporary differences at the beginning of the year:

 Cumulative temporary difference creating future
deductible amount 1,200,000
Cumulative temporary difference creating future taxable
amount 800,000

Temporary differences at the end of the year:

Cumulative temporary difference creating future
deductible amount 1,600,000
Cumulative temporary difference creating future taxable
amount 500,000

The income tax rate is 40% and is not expected to change in the future.

Required:
Determine the following:
1. Current tax expense
2. Total tax expense
3. Total deferred tax asset to be presented in the 2020 Statement of Financial Position
4. Total deferred tax liability to be presented in the 2020 Statement of Financial Position

Problem 6
On January 1, 2020, BSN Corp. started leasing a building from BSCE Leasing Co. for a 10 year term. The
lease agreement does not provide for provision for bargain purchase and that the asset shall be reverted
back to BSCE after the lease term. The estimated useful life of the asset is 15 years and its prevailing fair
value on the inception of the lease was at P6.6M.

The lease is payable at the rate of P500,000 every January 1 and July 1 starting in 2020. The implicit interest
rate of lease known to both parties was at 10% while the incremental borrowing rate was at 12%.

BSN accounted for the lease as an operating lease charging rental expense for the semi-annual payments
made.

Required:
1. Effect of any adjustments to be made to the 2020 net income
2. Amount of short term portion of any lease liability as of December 31, 2020
3. Carrying value of the Building as of December 21, 2020