Central Luzon State University

College of Business Administration and Accountancy

Department of Accountancy

ACCTG 4230 – IAR in Auditing and Assurance: Concepts and Applications Janssen Tongco
Exercises: Audit of Financing Cycle II May 10, 2023

Instruction:
Write your answer after each requirement. Round-off your present factor up to four decimal places only, unless
specified otherwise.

Problem 1: Cash P680,000

You are engaged in the audit of Jumbo Josh Co., a new Interest income P180,000
client, at December 31, 2016. You review the following Notes receivable 500,000
notes receivable and other related interest income
accounts in the general ledger:
You found out the no accrual of interest was
Notes Receivable made in 2015 and 2016.
Beg. bal. P1,700,000 P1,350,000 Bal. end
Apr. 1, 2016 250,000 500,000 Apr. 1, 2016 B. The entry on April 1, 2016 represents the note
100,000 Dec. 31, 2016 received when it sells equipment from Opila Bird
Corp. on the same date. The equipment cost
P1,000,000 and has accumulated depreciation of
Interest Income
P400,000 on the date of sale. The company receives
Bal. end P180,00 P180,000 Apr. 1, 2016
as consideration P350,000 and a noninterest bearing
note for P250,000 due on April 1, 2020. The
prevailing rate of interest for a note of this type is
Additional information: 10%. The following entries were made by the
A. The beginning balance of the notes receivable is company on April 1, 2016:
composed of the following: Cash P350,000
• Note received from sale of machinery on January Notes receivable 250,000
1, 2015 consisting P800,000 with accumulated Accumulated depreciation 400,000
depreciation of P450,000. The company receives Equipment P1,000,000
as consideration P200,000 and a noninterest
bearing note for P300,000 due annually in equal Required:
amounts of P100,000 every December 31, 1. How much is the adjustment to retained earnings as
starting in 2015. The prevailing rate of interest of January 1, 2016?
for a note of this type is 12%. The company 2. The total interest income in 2016
made the following entry on January 1, 2015: 3. Current portion of long-term receivables as of
Cash P200,000 December 31, 2016
Notes receivable 300,000 4. Noncurrent receivables as of December 31, 2016
Accumulated depreciation 450,000 5. If none of the errors were detected and corrected in
Equipment P950,000 2016, the net income in 2016 would be overstated by
how much?
The company credited the notes receivable
account when it received the P100,000 annual
payment on December 31, 2015. The same entry
was made on December 31, 2016 regarding the
collection.

• Note receivable from sale of plant dated April 1,

2015 amounts to P1,500,000 which bears interest
at 12% per annum. No gain or loss was realized
from sale. The note is payable in 3 annual
installments of P500,000 plus interest on the
unpaid balance every April 1. The initial
principal and interest payment was made on
April 1, 2016. The company made the following
entry:

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Problem 2:
Slow Seline Corp. reports a loan receivable from
Captain Fiddles Co. in the amount of P5,000,000. The
initial loan’s repayment terms include a 10% interest
rate plus annual principal payments on December 31
each year of P1,000,000. The loan was made on January
1, 2013. Captain Fiddles made the P500,000 interest
payment in 2013, but did not make the P1,000,000
principal payment nor the P500,000 interest payment in
2014. Slow Seline is preparing its annual financial
statements at December 31, 2014. The loan receivable
has a carrying value of P5,500,000, including the
P500,000 interest receivable for 2014. Captain Fiddles is
having financial difficulty, and Slow Seline has
concluded that the loan is impaired. Analysis of
Captain Fiddles’ financial condition indicates the
principal and interest currently due can be probably
collected, but it is probable that no further interest can
be collected. The probable amount and timing of the
collection is determined to be as follows:
December 31, 2015 P1,750,000
December 31, 2016 P2,000,000
December 31, 2017 P1,750,000
Required:
1. The present value of the expected future cash flows
as of December 31, 2014
2. The loan impairment for the year 2014
3. How much is the interest income for the year 2015,
assuming that Slow Seline’s assessment of the
collectability of the loan has not changed?
4. How much is the carrying amount of the loan
receivable as of December 31, 2016?
On December 31, 2016, after payment of interest, the
remaining bonds were converted into P40 par value,
5,000 ordinary shares when the fair value of the
securities is P460. The bonds were converted because
of the equity swap.
Required (Carry all decimal places in computing for
the answers):
1. Issue price of the bonds on January 1, 2014
2. The gain or loss on the retirement of the bonds on
December 31, 2015
3. The interest expense in 2016
4. The gain (or loss) on the conversion of the bonds on
December 31, 2016
5. The net increase in the share premium as a result of
the conversion of the bonds on December 31, 2016
Problem 5:
Nabnaleena Company issued 15,000, P1, 10%
redeemable preference shares on January 1, 2016. The
shares are subject to compulsory redemption by the
company on December 31, 2018. The effective interest
rate on the date of issuance is 11.4890%. On December
31, 2018, the directors resolved to redeem the
preference shares at a premium of P0.05 per share. This
was in accordance with the terms of the original issue.
In order to obtain funds for the redemption, the
company issued 20,000 unsecured, P1, 12% debenture
on December 30, 2018 at a discount of 3%, to be
redeemed on December 30, 2023 at a premium of 2%.
These debentures were issued at an effective interest
rate of 13.1640%.

Required (Carry all decimal places in computing for

Problem 3: the answers):
On January 1, 2016, Sheriff Toadster Co. acquired a 1. What is the interest expense in 2016?
machine from Zolphius Co. In lieu of cash payment, 2. What is the interest expense in 2017?
Sheriff Toadster gave Zolphius a 3-year, P1,200,000, 3. What is the interest expense in 2018?
noninterest-bearing note payable due on December 31, 4. What ins the interest expense in 2019?
2018. Based on your audit, the prevailing rate for this
5. What is the carrying amount of the debentures on
type of note is 12%.
December 30, 2019?
Required:
1. How much is the cost of the machinery acquired on
January 1, 2016? -end-
2. How much is the interest expense for 2016?
3. How much is the carrying amount of the note on
December 31, 2016?
4. How much is the current portion of the note on
December 31, 2016?
5. How much is the noncurrent portion of the note on
December 31, 2016?

Problem 4:
On January 1, 2014, Claire Co. issued its 3,000, P1,000,
12%, 5-year at the prevailing rate of interest of the
bonds of 9%. Interest is payable every December 31.

On December 31, 2015, after payment of interest, ½ of

the bonds were retired at P1,900,000 when the fair value
of the securities is P450. The prevailing rate of interest
of the bonds is 11%.

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 Problem 4:
Problem 1:

Problem 5:

Problem 2:

Problem 3: