MODAUD2_Unit 3_Audit of Accounts and Notes Payable_T31516_FINAL

UNIT 3 AUDIT OF ACCOUNTS AND NOTES PAYABLE Estimated Time: 3.0 HOURS

Discussion Question 3-1: Nature of Liabilities 1. Define the following: a. Legal Obligation b. Constructive Obligation c. Obligating event 2. What are the initial recognition criteria for financial liabilities? How are these initially and subsequently measured?

Discussion Questions 3-2: Substantive Procedures for Liabilities Prepare an audit work program for the audit of short-term liabilities.

Problem 3-1: Classification of Liabilities On December 31, 2016, the bookkeeper of Manna Company provided the following information: Accounts payable (net of P20,000 debit balance in creditors’ account) Notes Payable (including note payable to bank on Dec. 31, 2017 of P1,000,000) Salaries payable SSS payable Pag-ibig payable Medicare payable Withholding tax payable Vat payable Customers’ account with credit balances Stock dividends payable Serial bonds (payable in semiannual installments P1,000,000) Accrued interest on bonds payable Contested BIR assessment Unearned rent income

P 640,000 1,500,000 800,000 30,000 5,000 15,000 60,000 120,000 50,000 800,000 10,000,000 300,000 600,000 100,000

In the December 31, 2016 statement of financial position, how much current liabilities should be reported? Problem 3-2: Classification of Liabilities At December 31, 2016, Expert Company had a note payable of P2,500,000, due on April 15, 2017. Expert expects to retire this debt with proceeds from the sale of its 100,000 ordinary shares. The shares were sold for P15 per share on March 2, 2017 prior to the issuance of year-end financial statements.

In Expert’s December 31, 2016 statement of financial position, what amount of the notes payable should be excluded from current liabilities?

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Third Term, AY 2015-2016 Page 1-1

Problem 3-3: Various liabilities Due to an unexpected typhoon the other day, one of your clients, Yogi Bear Company, had its books of accounts mixed up. You are now trying to help them compute the correct amount of liabilities as of December 31, 2016. Notes payable Arising from purchase of goods Arising from 5-year bank loans, on which available-for-sale securities valued at P600,000 have been pledged as security, with P75,000 due on December 31, 2017 Arising from advances from officers, due June 30, 2017 Reserve for general contingencies Employee’s income tax withheld Advances received from customers on purchase orders Containers’ deposit Accounts payable arising from purchase of goods, net of debit balances of P25,000 Accounts receivable, net of credit balances, P65,000 Cash dividends payable Stock dividends payable Dividend in arrears on preferred stock not yet declared Convertible bonds, due January 31, 2018 First mortgage serial bonds, payable in semiannual installments of P75,000 due April 1 and October 1 of each year Overdraft with Jelly Stone Bank Cash in bank related to overdraft Estimated damages to be paid as a result of unsatisfactory performance on a contract Estimated expenses on meeting guarantee for service requirements on merchandise sold Estimated premiums payable Deferred revenue Accrued interest on bonds payable Common stock warrants outstanding Common stock options outstanding Unused letters of credit Deficiency VAT assessment being contested Notes receivable discounted

P

310,000 475,000 150,000 600,000 80,000 84,000 75,000 200,000 420,000 95,000 125,000 185,000 1,400,000 2,250,000 78,000 490,000 220,000 135,000 90,000 125,000 330,000 120,000 210,000 400,000 500,000 180,000

On January 15, 2017, the BIR assessed Yogi Bear Company an additional income tax of P300,000 for the 2009 tax year. Yogi Bear’s legal counsel stated that it is likely that the BIR will agree on a P200,000 settlement. The 2016 Financial Statements are expected to be issued on March 31, 2017.

Required - Determine the correct balance of the following: 1. Total current liabilities 2. Total long term liabilities 3. Total liabilities

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Third Term, AY 2015-2016 Page 1-2

Problem 3-4: Accruals Your client, Puscha Corporation gave you the following schedule of accrued expenses as at December 31, 2016. Nature Electricity Water Repairs

Amount P285,000 18,400 30,200

You went over all payments made by the corporation from January 2, 2017 until March 15, 2017, the date of your last day of field work and you ascertained the following data: Date of Supporting Nature Amount Documents 2016 Professional fees (check was prepared in January, 2017) P90,000 2016 Professional fees ( check was dated and recorded in 45,000 2016, but check was released in January, 2017) 2016 Electricity 350,000 2016 Water 150,000 2016 Repairs 30,200 2016 Various Expenses 3,000 2017 Salaries 480,000 2017 Repairs 50,000

Required: 1. Prepare the adjusting journal entries on December 31, 2016. 2. Compute for the correct balances of accrued expenses. Problem 3-5: Non-interest bearing notes payable in installment Sir Price, Inc. (SPI) bought an equipment costing P1.5 million on December 31, 2016 paying P500,000 down payment and the balance in four equal annual installments. SPI can borrow funds from a bank with a 10% interest rate. SPI recorded that equipment at P1,500,000 in December 31, 2016.

Required: 1. What is the equipment’s cost as of December 31, 2016? 2. By how much should the cost be decreased? 3. How much interest expense should be reported for the year 2018? 4. What is the carrying value of the note at December 31, 2019? Problem 3-6: Notes Payable You were able to obtain the following information from the accountant of Itchy and Scratchy Corporation related to the company’s liabilities as of December 31, 2016. Accounts payable Notes payable – trade Notes payable – bank Wages and salaries payable Interest payable Mortgage notes payable – 10% Mortgage notes payable – 12% Bonds payable

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P

730,000 235,800 1,200,000 65,000 ? 750,000 1,850,000 2,500,000

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Provided below are the additional information pertaining to these liabilities: a. All trade notes payable are due within six months from the end of the reporting period. b. Bank notes payable include two separate notes payable to Jetson Bank. (1) A P400,000, 8% notes issued March 1, 2014, payable on demand. Interest is payable every six months. (2) A 1-year, P800,000, 11 ½% note issued January 2, 2016. On December 30, 2016, Itchy and Scratchy negotiated a written agreement with Jetson Bank to replace the note with a 2-year, P800,000, 10% note to be issued January 2, 2017. The interest was paid on December 31, 2016. c. The 10% mortgage note was issued October 1, 2013, with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2016, Itchy and Scratchy is three months behind in paying its required interest payment. d. The 12% mortgage was issued May 1, 2010, with a term of 20 years. The current principal amount due is P1,850,000. Principal and interest payable annually on April 30. A payment of P350,000 is due April 30, 2017. The payment includes interest of P222,000. e. The bonds payable is 10-year, 8% bonds, issued June 30, 2007. Interest is payable semi-annually every June 30 and December 31.

Required: Based on the above and the result of your audit, compute the correct balance of the following as of December 31, 2016: 1. 2. 3. 4.

Interest payable Note payable – bank to be reported under current liabilities Total current liabilities Total non-current liabilities

Problem 3-7: Current vs. Non-current Included in Levan’s Corp.’s liability account balances at December 31, 2016 were the following: 14% note payable issued October 1, 2013, maturing September 30, 2017 16% note payable issued April 1, 2012 due on April 2017

P1,250,000 2,000,000

On December 31, 2016, Levan expects to refinance the P2,000,000 by the issuance of a long-term note payable in lump-sum. The refinancing of the P2,000,000 is at the discretion of Levan. Levan’s December 31, 2016 financial statements were issued on March 31, 2017. On January 15, 2017, the entire P2,000,000 balance of the 16% note was refinanced by issuance of a long-term obligation payable.

On the December 31, 2016 statement of financial position, what amount of the notes payable should Levan’s classify as short-term obligation?

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