AUDITING PROBLEMS

AUDIT OF LIABILITIES

NAME:_____________________________________________________ DATE:______________________
PROBLEM I
You were able to obtain the following from the accountant of Agdangan Corp. related to the company’s liabilities as of December 31,
2010.

Accounts payable 650,000

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 these liabilities.

a. All trade notes payable are due within six months from the end of the reporting period.
b. Bank notes-payable include the two separate notes payable to Allied Bank.
1. A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every six months.
2. A 1- year, P500,000, 11 ½% note issued January 2, 2010. On December 30, 2010, Agdangan negotiated a written
agreement with Allied Bank to replace the note with a 2-year, P500,000, 10% note to be issued January 2, 2011. The
interest was paid on December 31, 2010.
c. The 10% mortgage note was issued October 1, 2007, 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, 2010, Agdangan is three months behind in paying its required interest payment.
d. The 12% mortgage note was issued May 1, 2004, 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, 2011. The payment includes
interest of P180,000.
e. The bonds payable is 10-year,8% bonds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December
31.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. Interest payable as of December 31, 2010 is
a. P155,000 c. P143,000
b. 203,000 d. 215,000
2. The portion of the Note Payable-bank to be reported under current liabilities as December 31, 2010 is
a. P300,000 c. P500,000
b. 800,000 d. 0
3. Total current liabilities as of December 31, 2010 is
a. P3,950,000 c. P4,138,000
b. 3,938,000 d. 3,998,000
4. Total noncurrent liabilities as of December 31, 2010 is
a. P1,760,000 c. P2,560,000
b. 3,960,000 d. 1,960,000
PROMBLEM II
Atimonan Corporation is selling audio and video appliances. The company’s fiscal ends on March 31. The following informarion
relates to the obligations of the company as of March 31, 2010:
Notes payable
Atimonan has signed several 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, 2010.
Due date Amount
April 31, 2010 P720,000

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 July 31, 2010 1,080,000
September 1,2010 540,000
February 1, 2011 540,000
April 1, 2011- March 31, 2012 3,240,000
P5,100,000
Estimated warranties
Atimonan has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2008-
2009 fiscal year and still outstanding as of March 31, 2009, amounted to P302,400. The warranty costs on sales made from April 1,
2009 to March 31, 2010, are estimated at P756,000. The actual warranty costs incurred during 2009-2010 fiscal year are as follows:
Warranty claims honored on
2008-2009 sales P302,400
Warranty claims honored on
2008-2009 sales 342,000
Total P644,400
Trade payables
Account payable for supplies, goods, and services purchases on open account amount to P672,000 as of March 31, 2010.
Dividends
On March 10,2010, Atimonan’s board of directors declared a cash dividend of P0.30 per ordinary share and a 10% ordinary share
dividend. Both dividends were to be distributed on April 5, 2010 to ordinary shareholders on record at the close of business on March
31, 2010. As of March 31, 2010, Atimonan has 6 million, P2 par value, ordinary shares issued and outstanding.
Bonds payable
Dallas issued P6,000,000, 12% bonds, on October 1,2004 at 96. The bonds will mature on October 1, 2014. Interest is paid semi-
annually on October 1 and April 1. Dallas 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, 2010:
5. Estimated warranty
a. P414,000 c. P302,400
b. 756,000 d. 1,058,400
6. Unamortized bond discount
a. P132,000 c. P240,000
b. 108,000 d. 120,000
7. Bond interest payable
a. P 0 c. P180,000
b. 300,000 d. 360,000
8. Total current liabilities
a. P7,734,000 c. P6,534,000
b. 6,126,000 d. 4,734,000
9. Total noncurrent liabilities
a. P9,240,000 c. P9,108,000
b. 9,132,000 d. 9,000,000
PROBLEM III
The following information relates to Candelaria Company’s obligations as of December 31, 2010. For each of the numbered items,
determine the amount if any, that should be reported as current liability in Candelaria’s December 31, 2010 statement of financial
position.
10. In May 2010, Candelaria became involved in litigation. The suit being contested, but Candelaria’s lawyer believes there is
probable that Candelaria may be held liable for damages estimated in the range between P2,000,000 and P3,000,000, and no
amount is a better estimate of potential liability than any other amount.
a. P0 c. P2,000,000
b. 3,000,000 d. 2,500,000
11. A note payable to the Bank of the Philippine Islands for P2m400,000 is outstanding on December 31, 2010. The note is dated
October 1, 2009, bears interest at 18%, and is payable in three equal annual installment of P800,000. The first interest and
principal payment was made on October 1, 2010.
a. P800,000 c. P908,000

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 b. 72,000 d. 872,000
12. Bonus obligation:
Candelaria Company’s president gets an annual bonus of 10% of net income after bonus and income tax. Assume the tax rate
of 30% and the correct income before bonus and tax is P9,600,000. (Ignore the effects of other given items on net income.)
a. P 722,600 c. P395,000
b. 2,240,000 d. 628,000
PROBLEM IV
In your initial audit of Bulls Co., you find the following ledger account balances.
12%, 25 year Bonds Payable, 2006 issue
1/1/2006 CR P6,400,000

Treasury Bonds
10/1/2010 CD P864,000

Bond Premium
1/1/2006 CR P320,000

Bond Interest Expense

1/1/2010 CD P 384,000
7/1/2010 CD 384,000

The bonds were redeemed for permanent cancellation on October 1, 2010 at 105 plus accrued interest.

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Use straight line amortization method)

13. The adjusted balance of bonds payable as of December 31, 2010 is

a. P5,536,000 c. P5,600,000
b. 6,400,000 d. 4,000,000
14. The unamortized bond premium on December 31, 2010 is
a. P320,000 c. P256,000
b. 224,000 d. 235,200
15. The gain or loss on partial bond redemption is
a. P7,600 loss c. P7,600 gain
b. 72,400 loss d. 72,400 gain

Prepared by: Angevin B. Acaylar, CPA Page 3