AUDITING PROBLEMS - LIABILITIES LIABS 3

On January 1, 2020, COPPERNICUS CORP. 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. COPPERNICUS uses the effective interest method of amortization. On
December 31, 2021, the 2,000 bonds were extinguished early through acquisition in the open
market by COPPERNICUS for P1,980,000 plus accrued interest.

On July 1, 2020, COPPERNICUS 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,
2021 an investor in COPPERNICUS’ convertible bonds tendered 1,500 bonds for conversion into
15,000 shares of COPPERCINUS ordinary shares, which had a fair value of P1i05 and a par value
of P100 at the date of conversion.

Based on the above and the result of your audit, determine the following:
(Round off present value factors to four decimal places.)
1. Issue price of the 2,000 5-year, P1,000 face value bonds on January 1, 2020 is
A. P2,000,000 B. 1,844,400 C. P2,155,500 D. P2,147,800

2. The carrying value of the 2,000 5-year, P1,000 face value bonds on Dec. 31, 2020 is
A. P1,898,400 B. P2,000,000 C. P2,129,500(2,129,532) D. P2,121,100

3. The gain on early retirement of bonds on December 31, 2021

A. P20,000 B. P112,000 C. P121,200(121,190) C. P50,000

4. The carrying value of the 5,000 6-year, P1,000 face value bonds on Dec. 31, 2020 is
A. P4,605,800 B. P5,000,000 C. P4,732,875 D. P4,615,400

5. The conversion of the 1,500 6-year P1,000 face value bonds on July 1, 2021 will increase
the share premium by
A. P1,374,600 B. P1,485,000 C. P1,415,054 D. P1,377,697
effective > nominal = discount; effective < nominal = premium
If at discount, add amortization to carrying amount during the period.
If at premium, deduct amortization to carrying amount during the period.
2,000 of its 5-year, P1,000 face value, 11% bonds, effective annual interest rate (yield) of 9%.
Nominal: 11% > Effective: 9% ~ PREMIUM
2,000,000 issue price(2,000shares x 1,000)
220,000 interest annually ( 2,000,000 x 11%)
Cash consideration/payment is 1,980,000

Principal: 2,000,000 x 1.09-5(0.6499) 1,299,800

1−1.09−5 855,734
Interest: 220,000 x (3.8897)
0.09
Carrying amount, Jan. 1, 2020 2,155,534

Date Nominal Effective Annual Carrying

interest(constant) interest(Carrying Amortization(Nominal Amount/Value
11% amount during interest – Effective
the period x interest)
Effective rate)
9%
Jan. 1, 2,155,534
2020
Dec. 31, 220,000 193,998 26,002 2,129,532
2020
Dec. 31, 220,000 191,658 28,342 2,101,190
2021

Cash consideration + accrued interest > Carrying Amount = LOSS

Cash consideration + accrued interest < Carrying Amount = GAIN

Cash consideration/payment 1,980,000

Accrued interest 0
Cash consideration + accrued interest 1,980,000
Carrying Amount, Dec. 31, 2021 2,101,190
GAIN 121,190
There is no accrued interest because the extinguishment of bonds happened at date of interest
payment which is Dec. 31. There will be accrued interest if the extinguishment happened
before the date of interest payment. The accrued interest will be computed by multiplying the
nominal interest to the number of months passed from the date of last interest payment to the
date of extinguishment over 12 months in a year.
______________________________________________________________________________
5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par value of P100
Interest is payable every June 30 and December 31. Interest Payable 2 times in a year(semi-
annual). If semi-annual, the interest rate used in the computation will be halved(nominal
interest rate: 10%÷2=5%; effective interest rate: 12%÷2=6%) and the period will be doubled(6
years x 2 = 12 interest payment periods).
If the problem gives the effective rate, the convertible bond is to be assumed WITH BOND
CONVERSION PRIVILEGE. The problem will indicate if it has no bond conversion privilege.
Nominal: 10%% < Effective: 12% ~ DISCOUNT
5,000,000 issue price(5,000shares x 1,000)
250,000 interest semi-annually ( 5,000,000 x 5%)
5,250,000 Issue price of bond WITH conversion privilege (5,000,000 x 1.05)

Principal: 5,000,000 x 1.06-12(0.4970) 2,485,000

1−1.06−12 2,095,950
Interest: 250,000 x (8.3838)
0.06
Carrying amount, Jul. 1, 2020 4,580,950
Issue price of bond WITH conversion privilege (5,250,000)
Share premium bond conversion privilege 669,050
If at discount, add amortization to carrying amount during the period.

Date Nominal Effective Annual Carrying

interest(constant) interest(Carrying Amortization(Nominal Amount/Value
5% amount during interest – Effective
the period x interest)
Effective rate)
6%
Jul. 1, 2020 4,580,950
Dec. 31, 250,000 274,857 24,857 4,605,807
2020
Jul. 1, 2021 250,000 276,348 26,348 4,632,155
1,500 of the 5,000 bonds were converted into 15,000 shares

Carrying Amount, Jul. 1, 2021 1,389,647

1,500
( x 4,632,155)
5,000
Share premium bond conversion privilege 200,715
1,500
( x 669,050)
5,000
Total consideration 1,590,362
Par value of shares issued(15,000 x 100) (1,500,000)
Share premium 90,362