Applied Auditing

Audit of Liabilities Part 1

Activity
Problem 1
You were able to obtain the following from the accountant for May-Forever Corp. related to the companys liabilities as of December 31, 2014.
Accounts Payable
P650,000
Notes payable trade
190,000
Notes payable - bank
800,000
Wages and salaries payable
15,000
Interest payable
?
Mortgage notes payable 10%
600,000
Mortgage notes payable 12%
1,500,000
Bonds payable
2,000,000
The following additional information pertains to liabilities:

a.

All trade note payables are due within six months from the end of the reporting period.

b.

Bank notes-payable include two separate notes payable to Metro Bank:

1.
2.

A P300,000, 8% note issued March 1, 2012, payable on demand. Interest is payable every six months.
A 1-year, P500,000, 11 % note issued January 2, 2014. On December 30, 2014, May-Forever negotiated a written agreement
with Metro Bank to replace the note with a 2-year, P500,000, 10% note to be issued January 2, 2015. The interest was paid on
December 31, 2014.

c.

The 10% mortgage note was issued October 1, 2011, 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, 2014, May-Forever is three months behind paying its required interest payment.

d.

The 12% mortgage note was issued May 1, 2008, with a term of 20 years. The current principal amount due is P1,500,000. Principal and
interest payable annually on April 30. A payment of P220,000 is due April 30,2015. The payment includes interest of P180,000.

e. The bonds payable is 10-year, 8% bonds, issued June 30, 2005. Interest is payable semi-annually everu June and December 31.
Based on the above and the result of your audit, answer the following:
1.
2.
3.
4.

Interest payable as of December 31, 2014 ______________________

The portion of the Note Payable bank to be reported under current liabilities as of December 31, 2014 _________________
Total current liabilities as of December 31, 2014 _____________________
Total noncurrent liabilities as of December 31, 2014 _____________________

Problem 2
Conan Corporation is selling audio and video appliances. The companys fiscal year ends on March 31. The following information relates to the
obligations of the company as of March 31, 2014:
Notes Payable
Conan 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 P408,000 on March 31, 2014.
Due Date
Amount
April 30, 2014
P 720,000
July 31, 2014
1,080,000
September 1, 2014
540,000
February 1, 2015
540,000
April 1, 2015 March 31, 2016
3,240,000
P6,120,000
Estimated Warranties
Conan has one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2012 2013 fiscal year and
still outstanding as of March 31, 2013, amounted to P302,400. The warranty costs on sales made from April 1, 2013 to March 31, 2014, are estimated
at P756,000. The actual warranty costs incurred during 2013 2014 fiscal years are as follows:
Warranty claims honored on 2012 2013 sales
Warranty claims honored on 2013 2014 sales
Total
Trade Payables

P302,400
342,000
P644,000

Applied Auditing
Audit of Liabilities Part 1
Activity
On March 10, 2014, Conans board of directors declared a cash dividend of P0.30 per ordinary share and a 10% ordinary share dividend. Both
dividends were distributed on April 5, 2014 to shareholders on record at the close of business on March 31, 2014. As of March 31, 2014, Conan has 6
million, P2 par value, ordinary shares issued and outstanding.
Bonds Payable
Conan issued P6,000,000, 12% bonds, on October 1, 2008 at 96. The bonds will mature on October 1, 2018. Interest is paid semi-annually on
October 1 and April 1. Conan uses the straight line method to amortize the discount.
Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2014:

1.
2.
3.
4.
5.

Estimated warranty payable _______________________

Unamortized bond discount ________________________
Bond interest payable ____________________________
Total current liabilities ____________________________
Total noncurrent liabilities _________________________

Problem 3
Kids Music Emporium carries a wide variety of music promotion techniques warranties and premiums to attract customers.
Musical instrument and sound equipment are sold in one-year warranty for replacement of parts an labor. The estimated warranty cost, based on past
experience, is 12% of sales.
The premium is offered on the recorded and sheet music. Customers received a coupon for each peso spent on record or music sheet. Customer may
exchange 200 coupons and P20 for an AM/FM radio. Kid pays P34 for each radio and estimates that 60% of the coupons given to customers will be
redeemed.
Kids total sales for 2014 wereP57,600,000 P43,200,000 form musical instrument and sound reproduction equipment and P14,400,000 from
recorded music and sheet music. Replacement parts and labors for warranty work totaled P1,312,000 during 2014. A total of 52,000 AM/FM radio
used in the premium program were purchased during the year and there were 9,600,000 coupons redeemed in 2014.
The accrual method is used by Kid to account for the warranty premium costs for financial reporting purposes. The balance in the accounts related to
warranties and premiums on January 1, 2014, were as shown below:
Inventory of Premium AM/FM radio
P319,600
Estimated Premium Claims Outstanding
358,400
Estimated Liability from Warranties
1,088,000
Based on the above and the result of your audit, determine the amounts that will be shown on the 2014 financial statements for the following:

1.
2.
3.
4.
5.

Warranty Expense ___________________________

Estimated liabilities from warranties ____________________________
Premium expense ___________________________
Inventory AM/FM ___________________________
Estimated liability for premiums ______________________________