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LIM, FRANCES CAMILLE D.

AUDIT OF LIABILITIES CLASS NUMBER: 14

The Winchesters Corp. has been producing quality disposable diapers for more than two decades. The
company’s fiscal year runs from April 1 to March 21. The following information relates to the obligations
of The Winchesters Corp. as of March 31, 2018.
BONDS PAYABLE:
The Winchesters issued ₱ 10 000 000 of 10% bonds in July 1, 2016. The prevailing market rate of interest
for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2026. Interest is paid
semiannually on July 1 and January 1. The Winchesters use the effective interest rate method to amortize
bond premium or discount.
NOTES PAYABLE:
The Winchesters has signed several long-term notes with financial institutions. The maturities of these notes
are given in the schedule below. The total unpaid interest for all of these notes amounts to
₱ 600 000 on March 31, 2018.
Due Date Amount Due
April 1, 2018 ₱ 400 000
July 1, 2018 600 000
October 1, 2018 300 000
January 1, 2019 300 000
April 1, 2019 – March 31, 2020 1 200 000
April 1, 2020 – March 31, 2021 1 200 000
April 1, 2021 – March 31, 2022 1 200 000
April 1, 2022 – March 31, 2023 1 200 000
April 1, 2023 – March 31, 2024 1 200 000
ESTIMATED WARRANTIES:
The Winchesters has a one-year product warranty on some selected items in its product line. The estimated
warranty liability on sales made during the 2016 – 2017 fiscal year and still outstanding as of March 31,
2017 amounted to ₱ 180 000. The warranty costs on sales made from April 1, 2017 through March 31, 2018
are estimated at ₱ 520 000. The actual warranty costs incurred during the current 2017 – 2018 fiscal year
are as follows:
Warranty claims honored on 2016 – 2017 sales ₱ 180 000
Warranty claims honored on 2017 – 2018 sales 178 000
Total Warranty claims honored ₱ 358 000
OTHER INFORMATION:
 Accounts Payable for supplies, goods and services purchased on open account amount to ₱ 740 000
as of March 31, 2018.
 Payroll Related Accruals and Deductions Withheld amounted to a total of ₱ 404 000
 Other accruals not separately classified amount to ̀₱ 150 000 as of March 31, 2018
 On March 15, 2018, The Winchesters’ board of directors declared a cash dividend of ₱ 0.20 per
ordinary share for the 6 000 000 ordinary shares issued and outstanding.

On March 31, 2018, The Winchester’s Statement of Financial Position would report total current
liabilities of? _ ₱ 5 286 000_ __

THEORY:
Which of the following audit procedures is not appropriate for addressing the assertion of valuation?
A. verifying accounts payable trial balance
B. confirming with creditors
C. testing for unrecorded liabilities
D. performing analytical procedures.
LIM, FRANCES CAMILLE D. AUDIT OF LIABILITIES CLASS NUMBER: 14

SOLUTION:
Notes payable – current portion:
April 1, 2018 ₱ 400 000
July 1, 2018 600 000
October 1, 2018 300 000
January 1, 2019 300 000 ₱ 1600 000
Estimated Warranties payable:
Balance, April 1, 2017 180 000
Add: Warranty expense for current year 520 000
Total 700 000
Less: Actual Warranty Costs 358 000 342 000
Accounts Payable 740 000
Payroll-related accruals and deductions withheld 404 000
Miscellaneous Accruals 150 000
Cash dividends payable 1 200 000
Accrued interest on:
Bonds Payable ( ₱ 10 000 000 x 10% x 3/12) 250 000
Notes Payable 600 000 850 000
Total Current Liabilities ₱ 5 286 000