n connection to your audit of James Bond Company for the year ended December 31, 2020, you noted the following liability accounts: 10%, 10-year, ₱1,000 Serial bonds payable, dated January 2, 2020 ₱10,000,000 Accrued interest payable 1,150,000 Deferred tax liability 552,000 Notes payable 2,000,000 In addition, you obtained corroborative evidences to validate the balances of the above-mentioned accounts and revealed the following: The company’s bonds were all issued on January 2, 2020. Interest is to be paid annually in arrears. Also, the bond indenture calls the issuer to pay equal annual installments on the principal of the bonds over 5 years which will start on January 2, 2026. The market rate of interest of similar instruments upon issuance of the bonds is at 12%. Based on the provided schedule, the company recorded the issued bonds at face amount and did not recognize any discount/premium.
In connection to your audit of James Bond Company for the year ended December 31, 2020, you noted the following liability accounts:
|
10%, 10-year, ₱1,000 Serial bonds payable, dated January 2, 2020 |
₱10,000,000 |
|
Accrued interest payable |
1,150,000 |
|
|
552,000 |
|
Notes payable |
2,000,000 |
In addition, you obtained corroborative evidences to validate the balances of the above-mentioned accounts and revealed the following:
- The company’s bonds were all issued on January 2, 2020. Interest is to be paid annually in arrears. Also, the bond indenture calls the issuer to pay equal annual installments on the principal of the bonds over 5 years which will start on January 2, 2026. The market rate of interest of similar instruments upon issuance of the bonds is at 12%.
- Based on the provided schedule, the company recorded the issued bonds at face amount and did not recognize any discount/premium.
- You understood that the notes payable account consists of:
|
Notes payable to one of its suppliers, 5% interest-bearing to be paid annually, issued on January 2, 2018 which will mature on January 2, 2022. |
₱500,000 |
|
10% Bank loans – Bank of Oro, issued March 31, 2020 |
500,000 |
|
12% Bank loans – Metrobanking Corp., issued August 1, 2020 |
1,000,000 |
- You sent confirmation requests to the three concerned parties and revealed the following based on their confirmation replies:
|
Notes payable to one of its suppliers, 5% interest-bearing to be paid annually, issued on January 2, 2018 which will mature on January 2, 2022. |
₱1,050,000 |
|
10% Bank loans – Bank of Oro, issued March 31, 2020 |
500,000 |
|
12% Bank loans – Metrobanking Corp., issued August 1, 2020 |
1,000,000 |
- Upon further investigation on the variance between balance per books and balance per confirmation of its supplier, you noted that the Company prepared a check amounting to P 550,000 for its second installment, including interest, on January 2, 2021. You are confirmed that the prepared check has been reflected to the check register and was deducted in the notes payable and accrued interest payable accounts. Based on the Company’s records, the check was only collected by the supplier on January 5, 2021.
- Both bank loans are interest-bearing and have terms of 3 years, however, the Company is obliged to pay semi-annual interest.
- The breakdown of accrued interest payable account was shown below:
|
Dividends declared on 11/28/2020 |
₱150,000 |
|
Accrual of interest on bonds – 2020 |
1,000,000 |
- A schedule of the summary of the difference between the depreciation expense recorded between tax reporting and financial reporting is provided as follows:
|
Year |
Depreciation per Tax |
Depreciation per FS |
Difference |
|
2017 |
₱4,000,000 |
₱2,000,000 |
₱2,000,000 |
|
2018 |
2,400,000 |
2,000,000 |
400,000 |
|
2019 |
1,440,000 |
2,000,000 |
(560,000) |
|
2020 |
864,000 |
2,000,000 |
(1,136,000) |
|
2021 |
1,296,000 |
2,000,000 |
(704,000) |
The Company uses the declining balance method in depreciating its fixed assets for income tax purposes and straight-line method for financial reporting purposes. The effective tax rate for all periods is 30%.
- The Company had not yet recorded adjustments to deferred income taxes for the year 2020. There were no other differences identified between tax and financial reporting.
- On November 28, 2020, the Company’s board of directors declared cash dividends of P1.00 per ordinary share. The cash dividends were to be distributed on January 15, 2021. Total shares outstanding as of the declaration date is 150,000 shares.
- James Bond Company entered into a 10-year lease agreement with STL Properties to lease an office space beginning January 2, 2020. Equal annual payments of P 200,000 are due every January 1, beginning January 2, 2020. The implicit rate at the inception of the lease is determined at 8%. Though a finance lease, the accounting clerk erroneously accounted the payment as a debit to rent expense and a credit to cash.
Determine the audited balances of the following as of December 31, 2020 (kindly use four decimal places for the PV factors to be used):
- Carrying
value of bonds - Notes payable =
- Accrued interest payable =
- Deferred tax liability =
- Liabilities under finance lease =
- Total noncurrent liabilities =
- Current portion of long-term liabilities =
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