AUDIT OF LIABILITIES – 1st SET

Problem 1
In conjunction with your December 31, 2019, annual audit of the financial statements of
SweetHeart Company, you have obtained and examined the December 31, 2019, accounts
payable trial balance. Your examination of this trial balance disclosed the following open
vouchers:

a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher covered a
cash transfer to the factory payroll bank account for the pay period ended December 28,
2019. The payroll cash transfer was made January 3, 2020, and payroll checks covering
this pay period were distributed to factory employees on January 4, 2020.

b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000 credit
covered the principal and interest due on a ten-year installment loan. The loan was
granted to SweetHeart Company on January 1, 2019. Terms of the loan agreement call
for ten equal annual installment payments of P100,000, each plus interest at 8 percent.
Principal and interest payments are due January 5, 2020 – 2017. The voucher indicated
that the Loan Payable and Interest Expense accounts had been properly charged.

c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher covered
on invoice from AC Company for a new computer machine. The computer machine was
installed December 10, 2019, and the Office Equipment account was properly charged.

d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480. This
voucher covered income taxes withheld from employees during December 2019.

e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit covered the
total interest and principal due on a 180-day P40,000 note payable to the CJ Company.
Charges to the Note Payable and Interest Expense had been properly handled.

f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher

represented a P200,000 advance payment to SS Company for a special order of ten boxes.
The P200,000 check was mailed to SS Company on January 2, 2020.

Questions
1. Accounts payable at year-end is
a. Overstated by P716,940 c. Overstated by P516,940
b. Overstated by P666,940 d. Overstated by P466,940

2. The entry to adjust Voucher # 778 is

a. Accounts payable 180,000 c. Loans payable 100,000
Loans payable 100,000 Interest expense 80,000
Interest payable 80,000 Accounts payable 180,000
b. Accounts payable 180,000 d. Loans payable 100,000
Loans payable 100,000 Interest payable 80,000
Interest expense 80,000 Accounts payable 180,000

3. The entry to adjust Voucher # 741 is

a. Accounts payable – others 50,000
Accounts payable 50,000
b. Accounts payable 50,000
Accounts payable – others 50,000
 c. Accounts payable – others 50,000
Machinery 50,000
d. No adjustment

4. The current liability of the company at year-end is overstated (understated)

Problem 2
In conjunction with your firm’s examination of the financial statements of Ronryan Company
as of December 31, 2019, you obtained from the voucher register the information shown in
the work paper below.

Item Entry Date Description Amount Account Charged

1. 12/18/19 Supplies, purchased FOB

destination, 12/15/19;
received, 12/17/19 15,000 Supplies on hand

2. 12/18/19 Auto insurance, 12/15/19

to 12/15/20 24,000 Prepaid insurance
3. 12/21/19 Repair services; received
12/20/19 19,000 Repairs and Main.

4. 12/21//19 Merchandise shipped FOB

shipping point, 12/20/19;
received, 12/24/19 12,300 Inventory

5. 12/21/19 Payroll, 12/19/19 – 12/21/19

(12 working days) 69,000 Sal. and wages

6. 12/26/19 Subscription to Tax Journals

for 2020 5,000 Dues & subs

7. 12/28/19 Utilities for December 2019 24,000 Utilities expense

8. 12/28/19 Merchandise shipped FOB

destination, 12/24/19;
received, 1/2/20 111,000 Inventory

9. 12/28/19 Merchandise shipped FOB

shipping point, 12/26/19;
received, 1/3/20 84,000 Inventory

10. 1/5/20 Payroll 12/21/19 – 1/05/20

(12 working days. 4 working
days in January) 72,000 Sal. and wages
11. 1/10/20 Merchandise shipped FOB
destination, 1/03/20,
received, 1/10/20 38,000 Inventory

12. 1/14/20 Interest on bank loan,

10/10/19 to 01/10/20 30,000 Interest expense
13. 1/15/20 Manufacturing equipment
installed, 12/29/19 254,000 Machinery

14. 1/15/20 Dividends declared,

12/15/19 160,000 Dividends payable

Accrued liabilities of 12/31/19 were as follows:

Accrued payroll P 48,000

Accrued interest payable 26,667
Dividends payable 160,000

The accruals made on December 31, 2019 were reversed effective January 1, 2020.

Review the data given above and prepare adjusting journal entries to correct the accounts on
December 31, 2019. Assume that the company follows FOB terms for recording inventory
purchases.

Questions

1. The entry to adjust item #2 is

a. Insurance expense 24,000 c. Insurance expense 1,000
Prepaid insurance 24,000 Prepaid insurance 1,000
b. Insurance expense 1,000 d. No adjustment
Prepaid insurance 1,000

2. The entry to adjust item #10 is

a. Salaries expense 48,000 c. Accrued payroll 48,000
Accrued payroll 48,000 Salaries expense 24,000
b. Accrued payroll 48,000 Cash 72,000
Salaries expense 48,000 d. No adjustment

3. The entry to adjust item #12 is

a. Interest expense 26,667 c. Interest expense 26,667
Interest payable 26,667 Interest payable 3,333
b. Interest expense 30,000 Cash 30,000
Interest payable 30,000 d. No adjustment

4. The entry to adjust item #13

a. Machinery 254,000 c. No adjustment
AP – others 254,000
b. AP – others 254,000 d. No adjustment since payment
Machinery 254,000 was made on Jan. 15, 2020

5. The entry to adjust item #14

a. Dividends declared 160,000 c. No adjustment
Dividends payable 160,000
b. Dividends payable 160,000 d. No adjustment since payment
Dividends declared 160,000 was made on Jan. 15, 2020.
Problem 3 - ADJUSTMENT FOR LOSS CONTINGENCIES
The following items have not been reflected in the financial statements of ALTAGRACIA CORP.
for the year ended December 31, 2019. You are asked if the information should be adjusted
and disclosed in the financial statements, disclosed only in the financial statement, or no
adjustment or disclosure.

1. Altagracia owns a small warehouse located on the banks of a river in which it stores
inventory worth approximately P250,000. Altagracia is not insured against flood losses.
The river last overflowed its banks 200 years ago.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

2. Altagracia offers an unconditional warranty on its toys. Based on past experience,

Altagracia estimates its warranty expense to be 1% of sales. Sales during 2019 were
P5,000,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

3. On October 30, 2019, a safety hazard related to one of Altagracia’s toy products was
discovered. It is considered probable that Altagracia will be liable for an amount in the
range of P50,000 to P250,000.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

4. On November 29, 2019, Altagracia initiated a lawsuit seeking P125,000 in damages from
a patent infringement.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

5. On December 15, 2019, a former employee filed a lawsuit seeding P50,000 for unlawful
dismissal. Altagracia’s attorneys believe the suit is without merit. No court date has been
set.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

6. On December 12, 2019, Conchita guaranteed a bank loan of P500,000 for its president’s
personal use.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

7. On January 5, 2020, a warehouse containing a substantial portion of Altagracia’s inventory

was destroyed by fire. Altagracia expects to recover the entire loss, except for a P125,000
deductible from insurance.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.
8. On January 5, 2020, inventory purchased FOB shipping point from a foreign country was
detained at that coutnry’s border because of political unrest. The shipment is valued at
P750,000. Altagracia’s attorneys have stated that it is probable that Altagracia will be able
to obtain the shipment.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

9. On January 30, 2020, Altagracia issued P5,000,000 bonds at a premium of P250,000.

a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

10. On February 14, 2020, the BIR assessed Altagracia an additional P200,000 for the 2013
tax year. Altagracia’s attorneys and tax accountants have stated that it is likely that the
BIR will agree to a P150,000 settlement.
a. Adjusted and disclosed in the financial statements.
b. Only disclosure is required in the financial statements.
c. No adjustment or disclosure required in the financial statements.

Problem 4 - BONUS COMPUTATION

Maria Rosa, president of the Villa Nova Company, has a bonus arrangement with the company
under which she receives 10% of the net income (after deducting taxes and bonuses) each
year. For the current year, the net income before deducting either the provision for income
taxes or the bonus is P4,650,000. The bonus is deductible for tax purposes, and the tax rate
is 32%.

Questions
1. The amount of Maria Rosa’s bonus is
a. P 465,000.00 b. P 364,285.71 c. P 339,270.39 d. P 296,069.42

2. The appropriate provision for income tax for the year is

a. P 1,488,000.00 b. P 1,393,258.43 c. P 1,371,428.57 d. P 1,379,433.48

3. The entry to record the bonus (which will be paid in the following year) is
a. Bonus expense 296,069.42
Bonus payable 296,069.42
b. Bonus expense 339,270.39
Bonus payable 339,270.39
c. Bonus expense 465,000.00
Bonus payable 465,000.00
d. No entry
Problem 5 - PREMIUMS
In the packages of its products, ALONDRA, INC. includes coupons that may be presented at
retail stores to obtain discounts on other Alondra products. Retailers are reimbursed for the
face amount of coupons redeemed plus 10% of that amount for handling costs. Alondra
honors requests for coupon redemption by retailers up to 3 months after the consumer
expiration date. Alondra estimates that 60% of all coupons issued will ultimately be redeemed.
Information relating to coupons issued by Alondra during 2019 is as follows:

Consumer expiration date 12/31/19

Total payments to retailers as of 12/31/19 165,000
Liability for unredeemed coupons as of 12/31/19 99,000

Questions
1. The total face amount of coupons issued in 2019 is

2. Coupons expense at year-end is

3. Estimated liability for unredeemed coupons is

Problem 6 - DEBT RESTRUCTURING: ASSET SWAP, EQUITY SWAP AND

MODIFICATION OF TERMS

MARIANA CORPORATION is having financial difficulty and therefore has asked NALOOY Bank
to restructure its P3 million note outstanding. The presented note has 3 years remaining and
pays a current rate of interest of 10%. The present market rate for a loan of this nature is
12%. The note was issued at its face value.

Presented below are four independent situations. Determine the journal entry that Mariana
would make for each of the following types of debt restructuring.

1. NALOOY Bank agrees to take an equity interest in Mariana by accepting common stock
valued at 2,400 in exchange for relinquishing its claim on this note. The common stock
has a par value of P1,200,000.
a. Notes payable 3,000,000
Common stock 3,000,000
b. Notes payable 3,000,000
Common stock 1,200,000
APIC 1,800,000
c. Notes payable 3,000,000
Common stock 1,200,000
Interest expense 300,000
APIC 1,500,000
d. No adjustment

2. NALOOY Bank agrees to accept land in exchange for relinquishing its claim on this note.
The land has a book value of P2,000,000 and a fair value of P2,500,000.
a. Notes payable 3,000,000
Land 2,500,000
Gain on debt restructuring 500,000
b. Notes payable 3,000,000
Land 2,000,000
 Interest expense 300,000
Gain on exchange 200,000
Gain on debt restructuring 500,000
c. Notes payable 3,000,000
Land 2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
d. No adjustment

3. NALOOY Bank agrees to modify the terms of the note, indicating that Dolores does not
have to pay any interest on the note over the 3-year period.
a. Interest payable 300,000
Gain on debt restructuring 300,000
b. Loss on debt restructuring 300,000
Interest expense 300,000
c. Interest expense 900,000
Gain on debt restructuring 900,000
d. No adjustment

4. NALOOY Bank agrees to reduce the principal balance due to P2,000,000 and require
interest only in the second and third year at a rate of 10%.
a. Notes payable – old 3,000,000
Notes payable – new 2,400,000
Gain on debt restructuring 600,000
b. Notes payable - old 3,000,000
Notes payable – new 3,000,000
c. Notes payable – old 3,000,000
Notes payable – new 2,600,000
Gain on debt restructuring 400,000
d. No adjustment

Problem 7 - CURRENT LIABILITY

The December 31 trial balance of the Ruel Corporation includes, among others, the following:

Long-term Notes – which are payable in annual installment

of P10,000 on February 1 of each year P 60,000
Rental income received in advance 16,000
Notes payable, which are trade notes, with the exception of P20,000
Notes payable to bank on June 30 of the following year 60,000
Accounts payable which include account with debit balance of P2,000 80,000
Notes Receivable which have been reduced by notes discounted of
P20,000 that are not yet due and on which the Corporation is
contingently liable 100,000
Accounts Receivable, which include accounts with credit balances
of P10,000 and past due accounts of P6,000 on which a loss
of 80% is anticipated 200,000
Merchandise Inventory, which includes goods held for consignment,
P8,000, and goods received on December 31 of P12,000; neither
of these items having been recorded as a purchase 180,000
Questions
1. What is the amount of the current liabilities on December 31?

2. The long-term debt at year-end is

Problem 8
Abam Corporation is selling audio and video appliances. The company’s fiscal year ends on
March 31. The following information relates the obligations of the company as of March 31,
2019.

Notes payable
Abam has signed several long- term notes with financial institutions. The maturities of these
notes are given below. The total unpaid interest for all of these notes amount to P340,000 on
March 31, 2019.

Due date Amount

April 31, 2019 P 600,000
July 31, 2019 900,000
September 1, 2019 450,000
February 1, 2020 450,000
April 1, 2020- March 31, 2023 2,700,000
P5,100,000
Estimated warranties:
Abam has one year product warranty on some selected items. The estimated warranty liability
on sales made during the 2017-2018 fiscal year and still outstanding as of March 31, 2018,
amounted to P252,000. The warranty costs on sales made from April 1, 2018 to March 31,
2019 are estimated at P630,000. The actual warranty costs incurred during 2018- 2019 fiscal
year as follows:

Warranty claims honored on 2017- 2018 P252,000

Warranty claims honored on 2018- 2019 sales 285,000
Total P537,000

Trade payables
Accounts payable for supplies, goods and services purchases on open account amount to
P560,000 as of March 31, 2019.

Dividends
On march 10, 2019, Abam’s board of directors declared a cash dividend of P0.30 per common
share and a 10% common stock dividend. Both dividends were to be distributed on Aptil 5,
2019 to common stockholders on record at the close of business on March 31, 2019. As of
March 31, 2019, Abams has 5 million, P2 par value common stock shares issued and
outstanding.

Bonds payable
Abams issued P5,000,000, 12% bonds, on October 1, 2013 at 96. The bonds will mature on
October 1, 2023. Interest is paid semi- annually on October 1 and April 1. Abams uses straight
line method to amortize bond discount.

Based on the forgoing information, determine the adjusted balances of the following as of
March 31, 2019:
Questions
1. Estimated warranty payable

2. Unamortized bond discount

3. Bond interest payable

4. Total current liabilities

5. Total noncurrent liabilities