Problem 1

On January 1, 2021, Dolomite Corp. issued a 3-year, 8,000, P1,000 convertible bonds at 110.
Interest is to be paid annually at the stated coupon rate of 12% every December 31. Each bond
is convertible, at the holder’s option, into 50, P10 par value common shares at any time up to
maturity. On the date of issuance, prevailing market interest rate for similar debt without the
conversion privilege was 10%. On the same date market price of one common share was P30.
The transaction was recorded as a debit to cash and credit to bonds payable for the total
consideration received. Interest at the end of the year was recorded as a debit to interest
expense account at the stated rate with a corresponding credit to cash at the same amount.

Requirements:
1. The equity component of the convertible debt at January 1, 2021 is?
2. The adjusting journal entries in relation to the convertible debt for 2021 would be?
3. Assuming the convertible bonds were converted on January 1, 2023, how much should
be credited to share premium from the equity conversion?
Problem 2
On January 1, 2021, Dallas Corp issued 2,000 if its January 1, 2015, 8%, 10 year, P1,000 face value
bonds with detachable stick warrants at P2,250,000. Each bond, which pays semi-annual
interests every January 1 and July 1, carried 5 detachable warrants which entitle the holder to
acquire on share of Dallas Corp, P50 par, ordinary shares for every warrant at a specified option
price of P55 per share up to July 31, 2021. Immediately after the issuance the prevailing market
rate of interest on similar bonds without the warrant is at 10% and the market value of the
warrants was P30. The company recorded the transaction by debiting cash and crediting bonds
payable at the total consideration received. Interest paid during the period are charged to
interest expense, while accrual is yet to be made at the end of the period.

Requirements:
1. What is the equity component of the compound instrument?
2. What is the balance of the bonds payable as of December 31, 2021?
3. What is the resulting share premium, assuming that 60% of the warrants were exercised
on July 31, 2021.
4. The correcting entries for 2021 would be?
Problem 3
In the audit of its long-term liabilities, Sumacumlaude’s Bonds payable balance as of December
31, 2021 is P5,500,000.

The balance of the bonds payable accounts was the total proceeds from its issuance on
January 1, 2021. Upon reviewing of the bond debenture, you took note of the following:

✓ The bonds mature on December 31, 2025

✓ The face value of the bonds issued was P5,000,000
✓ Coupon rate of 10%
✓ The bonds are convertible into ordinary shares at the rate of P1,000 bond to 10, P50 par
value ordinary shares

On the issuance date the effective yield rate on similar securities were selling at P75 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 every December 31.

Requirements:
1. The equity component of the convertible debt at January 1, 2021 is?
2. The adjusting journal entries in relation to the convertible debt for 2021 would be?
3. Assuming that the bonds were retired on January 2, 2023, at 104, when the prevailing
market rate of interest for similar securities without conversion is at 9%, how much should
be reported in the profit or loss as a result of the retirement?
Problem 4
You have conducted several wrap-up audit procedures for Baro Corps’ financial statements
audit for the calendar year ended December 31, 2021. The financial statements were authorized
for issue by Baro Corp’s board on March 30, 2022. The following are the audit notes relating to
provisions and contingencies.

Case 1: On December 31, the Company is a defendant in a pending lawsuit which arose form
an alleged product defect that the Company sold in 2021. The lawyers, in response a letter of
audit inquiry, stated that it is probable that the company have to pay between P300,000 to
P700,000 with P400,000 as the best estimate. Moreover, it is reasonably possible that the
company will have to pay the P700,000 as a result of the lawsuit. The company accrued
P700,000 on this particular case.

Case 2: On November 1, 2021, the company entered into a non-cancellable purchase

commitment with Sharp, Inc. to acquire 10,000 units of a specific product at P100 per unit fixed
price. The purchase commitment is expected to be executed on February 1, 2022. On
December 31, 2021, because of a significant decline in the demand for Sharp’s products, the
net realizable value of the product decreased to P60 per unit. The contract was executed on
February 5, 2022 when the net realizable value of the product remained P60. The company
made a memorandum entry as of December 31, 2021 to remind it about the purchase
commitment.

Case 3: On December 31, 2021 an explosion occurred at the Company’s plant totally damaging
the plant and causing additional damages to adjacent neighbors. The carrying value of the
plant on the company’s book was P5M. It had a prevailing fair value of P4M prior to the
explosion. No claims had yet been asserted against the company as the date of authorization of
the financial statements. The management as corroborated by their counsel, however believes
that it is probable that would be responsible for damages and that P5 million would be a
reasonable estimate of its liability. Baro Corp.’s had an insurance covering this type of accident.
The insurance shall reimburse the Company at 80% of any payments to be made for damages
caused to neighbors. The reimbursements are virtually certain and that the company is no
longer principally liable over the portion to be reimbursed for damages to other parties. The
company only recorded P5 million as provisions for damages pertaining to this event.

Case 4: On December 5, 2021 Baro Corp. initiated a lawsuit against Lore Inc. seeking P2 million in
damages from patent infringement. The lawyers are under the impression that they will likely win
the case with the damage being sought to be awarded to Baro Corp. A contingent asset of P2
million was accrued by the Baro as of December 31, 2021.

Requirements:
1. The correct amount of provisions to be recognized as of December 31, 2021 is?
2. The adjustment to the provision expense for December 31, 2021 amounts to?
3. How much is the total expense pertaining to the above transactions?
4. The amount of contingent asset to be recognized as of December 31, 2021 is?
Problem 5
In the course of your audit of BAMBOO Inc. for the year ended December 31, 2021, you took
note of the following information:

Account Amount Audit Notes

This amount is net of P30,000
Accounts payable – trade, P170,000
accounts with debit balances
The notes are all with five-
months term bearing interest
at 15%. 50,000 from the notes
Notes payable – trade 70,000
is dated September 1, while
the rest are dated November
3.
The goods pertaining to this
Advance receipts from
100,000 advances will be delivered in
customers
2022.
This is an amount received
Containers Deposit 50,000 from customers for returnable
containers
This is a long-term note for five
years and are being paid off
Notes payable – BPI 200,000 at a the rate of P4,000 per
month (monthly payment
include interest)
The company is yet to
Dividends in arrears on declare dividends since its last
20,000
cumulative preferred stock declared and distributed
dividends in 2019.
Stock dividends payable on its
37,200
commons stock
This pertains to the
Company’s guarantee of its
Liabilities under guarantee employees’ bank loans. As
45,000
agreement per past experience,
employees unlikely default on
their loan payments.
1,000 bonds is convertible to
Convertible bonds 1,000,000 10 ordinary shares. Amount
due on December 31, 2024
Notes payable – officers 40,000 This is due in six months.

(Continued)
 Account Amount Audit Notes
Payroll for the period
Salaries and wages P68,000 December 16, 2021 to
January 15, 2022.
This note has been
discounted in a bank on a
Notes receivables 30,000 without recourse basis, where
the company received cash
of P24,000.
Input VAT on purchases and
Output VAT 246,000 other operating expenses
amounted to P164,000
The accounts receivable is
Accounts receivable 215,000 net of P12,300 customer
credit balances
The company’s cash in banks
include a cash balance with
BPI amounting to P125,000;
Cash in banks 115,000
with PNB amounting to
P55,000, and; and overdraft
balance with BDO.
Common stock warrants Cumulative amount
250,000
oustanding
Common stock options Cumulative amount
150,000
oustanding
This pertains to warrant costs
Estimated warrant costs on
46,000 on goods sold in 2020 and
goods sold
2021.
This is for the equipment
Installment notes payable 75,000 purchases, only one-third is
due in 2022.
Damages filed against the
company. The company
Provision for losses 30,000 lawyers believe that the
company will be liable
between P25,000 and P75,000
This refers to deferred tax
liabilities on cumulative
temporary difference on
Deferred tax liability 150,000
taxable income and financial
income which will reverse
evenly over the next year.

As the auditor-in-charge
1. How much is the total current liabilities?
2. How much is the total noncurrent liabilities?
3. How much is the total liabilities?