AP 5902Q Liabs

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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila

AUDITING PROBLEMS AUDIT OF LIABILITIES – QUIZZERS PROBLEM NO. 1 Cavaliers Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The following information relates to the obligations of the company as of March 31, 2005: Notes payable Cavaliers 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 amounts to P340,000 on March 31, 2005. Due date April 31, 2005 July 31, 2005 September 1, 2005 February 1, 2006 April 1, 2006 – March 31, 2007

Amount 600,000 900,000 450,000 450,000 2,700,000 P 5,100,000 P

Estimated warranties Cavaliers has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2003 – 2004 fiscal year and still outstanding as of March 31, 2004, amounted to P252,000. The warranty costs on sales made from April 1, 2004 to March 31, 2005, are estimated at P630,000. The actual warranty costs incurred during 2004 – 2005 fiscal year are as follows: Warranty claims honored on 2003 – 2004 sales Warranty claims honored on 2004 – 2005 sales Total

P 252,000 285,000 P 537,000

Trade payables Accounts payable for supplies, goods, and services purchases on open account amount to P560,000 as of March 31, 2005. Dividends On March 10, 2005, Cavaliers’ 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 April 5, 2005 to common stockholders on record at the close of business on March 31, 2005. As of March 31, 2005, Cavaliers has 5 million, P2 par value, common shares issued and outstanding. Bonds payable Cavaliers issued P5,000,000, 12% bonds, on October 1, 1999 at 96. The bonds will mature on October 1, 2009. Interest is paid semi-annually on October 1 and April 1. Cavaliers uses the straight line method to amortize bond discount. QUESTIONS: Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2005: 1.

Estimated warranty payable a. P252,000 b. P345,000

c. P630,000

d. P882,000

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2. 3. 4. 5.

Unamortized bond discount a. P110,000 b. P200,000

c. P100,000

d. P90,000

Bond interest payable a. P0 b. P300,000

c. P150,000

d. P250,000

Total current liabilities a. P6,445,000 b. P5,105,000

c. P5,445,000

d. P3,945,000

Total noncurrent liabilities a. P7,700,000 b. P7,590,000

c. P7,500,000

d. P7,610,000

SUGGESTED ANSWERS: B, D, B, C, D PROBLEM NO. 2 Pirates’ Music Emporium carries a wide variety of music promotion techniques - warranties and premiums – to attract customers. Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio. Pirates pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed. Pirates’ total sales for 2005 were P7,200,000 - P5,400,000 from musical instrument and sound reproduction equipment and P1,800,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled P164,000 during 2005. A total of 6,500 AM/FM radio used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2005. The accrual method is used by Pirates to account for the warranty and premium costs for financial reporting purposes. The balance in the accounts related to warranties and premiums on January 1, 2005, were as shown below: Inventory of Premium AM/FM radio Estimated Premium Claims Outstanding Estimated Liability from Warranties

P39,950 44,800 136,000

QUESTIONS: Based on the above and the result of your audit, determine the amounts that will be shown on the 2005 financial statements for the following: 1. 2. 3. 4. 5.

Warranty expense a. P108,000

b. P164,000

c. P144,000

d. P80,000

Estimated liability from warranties a. P108,000 b. P136,000

c. P164,000

d. P80,000

Premium expense a. P 75,600

c. P183,600

d. P126,000

Inventory of AM/FM radio a. P46,950 b. P77,350

c. P39,950

d. P56,950

Estimated liability for premiums a. P75,600 b. P63,450

c. P36,400

d. P44,800

b. P108,000

SUGGESTED ANSWERS: A, D, A, D, C

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PROBLEM NO. 3 In the audit process, the following data were obtained from the books of the Spurs Company which uses a voucher system. All invoices are subject to term 2/10, n/30 and are entered net with the discount entered in the Purchase Discount column of the voucher register. The accountant in charge of the books went on leave to attend to his family based in New Jersey. A fresh accounting graduate has been assigned to record the transactions. At year-end, the substitute accountant finds that the unpaid vouchers do not agree with the Vouchers Payable control account. You are called to adjust the matter. A schedule of unpaid vouchers as of December 31, 2005, all of which are net of discount, is presented to you: Date Nov. 27 Dec. 02 11 20 21 22 31

Voucher No. 797 821 829 836 842 856 865

Supplier Duncan Supply Co. Ginobili Distributors Parker Sales Mohamed Dealers Bowen Merchandising Horry Mercantile Jackson Traders

Amount P 78,400 19,600 44,100 17,150 22,050 80,850 78,400 P340,550

Vouchers Payable (control account) P1,309,500 Purchases journal Purchase returns journal 36,750* Cash disbursements

P1,645,000

* Voucher Nos. 821 and 836 cancelled as goods were returned in December.

REQUIRED: Based on the above and the result of your audit, compute for the following as of December 31, 2005: 1. 2. 3. 4.

Adjusted balance of Vouchers Payable a. P310,000 b. P306,750

c. P303,800

d. P344,250

Purchase discounts lost on unpaid vouchers a. P6,200 b. P2,950 c. P3,700

d. P0

Purchase discounts lost on paid vouchers a. P28,750 b. P8,000 c. P5,050

d. P41,800

Adjusting journal entry or entries to correct the accounts will include a. A debit to Purchase Discounts Lost of P11,250. b. A debit to Purchase Discounts Lost of P5,050. c. A credit to Vouchers Payable of P8,000. d. A credit to Vouchers Payable of P11,250.

SUGGESTED ANSWERS: B, B, C, C PROBLEM NO. 4 In your initial audit of Bulls Finance Co., you find the following ledger account balances. 12%, 25-year Bonds Payable, 2001 issue 01/01/2001 CR

P 1,600,000

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10/01/2005

CD

Treasury Bonds P 216,000 Bond Premium 01/01/2001

01/01/2005 07/01/2005

CD CD

CR

P 80,000

Bond Interest Expense P 96,000 96,000

The bonds were redeemed for permanent cancellation on October 1, 2005 at 105 plus accrued interest. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. The adjusted balance of bonds payable as of December 31, 2005 is a. P1,400,000 b. P1,600,000 c. P1,000,000 d. P1,384,000 2. The unamortized bond premium on December 31, 2005 is a. P80,000 b. P64,000 c. P56,000

d. P58,800

3. The total bond interest expense for the year 2005 is a. P189,100 b. P182,900 c. P188,800

d. P182,800

4. The gain or loss on partial bond redemption is a. P1,900 loss b. P1,900 gain c. P18,100 loss

d. P18,100 gain

SUGGESTED ANSWERS: A, C, B, A – End of AP-5902Q –

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