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AUDIT OF LIABILITIES

PROBLEM 1

He following information relates to Ghost Fighter Company’s obligations as of December


31, 2016:
Accounts payable P 10,880,000
Payroll 1,984,000
Litigation and damages payable 4,000,000
Notes payable 4,800,000
Purchased commitment 3,200,000
Deferred taxes 1,545,600
Warranties None
Premiums None
Notes Payable – Nontrade 3,200,000
Additional information follow –
Accounts Payable. Accounts payable per general ledger control amounted to
P10,880,000 net ad been recorded as of December 31, of P480,000 debit balances in
supplier’s accounts. The unpaid voucher file included the following items that not had
been recorded as of December 31, 2016.
a.) A Company – P448,000 merchandised shipped on December 31, 2016 FOB
destination; received on January 10, 2017
b.) B Inc – P384,000 merchandised shipped on December 26, 2016, FOB Shipping
point; received on January 16, 2017
c.) C Super Services – P288,000 janitorial services for the three-month period ending
January 31, 2017.
d.) MERALCO - P134,400 electric bill covering the period December 16, 2016 to
January 15, 2017.
On December 28, 2016, a supplier authorized Ghost Fighter to return goods billed
P320,000 and shipped on December 20, 2016. The goods were returned by Ghost Fighter
on December 28, 2016 but the P320,000 credit memo was not received until January 6,
2017.
Payroll. Items related to Ghost Fighters payroll as of December 31, 2016 are:
Accrued salaries and wages P1,552,000
Payroll deduction for:
Income taxes withheld 112,000
SSS Contributions 128,000
Phil health contributions 32,000
Advances to employees 160,000
Litigation and Damages Payable. In May 2016, Ghost Fighter became involved in
litigation. The suit being contested, but Atty. Ngo, Ghost Fighter’s lawyer believes it is
probable that Ghost Fighter may be held liable for damages estimated in the range
between P4,000,000 and P6,000,000, and no amount is a better estimate of potential
liability than any other amount.
Note Payable – bank. A note payable to BDO Unibank for P4,800,000 is outstanding
on December 31, 2016. The note is dated October 1, 2015, bears interest at 18% and is
payable in three equal annual installments of P1,600,000. The first interest and principal
payment was made on October 1, 2016.
Purchase Commitment. During 2016, Ghost Fighter entered in a non-cancellable
commitment to purchase 640,000 units of inventory at fixed price of P5 per unit, delivery
to be made in 2017. On December 31, 2016, the purchase price of this inventory item
had fallen to P4.40 per unit. The goods covered by the purchase contract were delivered
on January 28, 2017.
Deferred taxes. On December 31, 2016, Ghost Fighter’s deferred income tax account
has a 2016 ending credit balance of P1,545,600 consisting the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P 752,000 Cr
For depreciation on property and equipment 1,152,000 Cr
For Product warranty expense 358,400 Cr
P 1,545,600
Product warranty. Ghost Fighter has a one year product warranty on a selected item
in its product line. The estimated warranty liability on sales made during 2015, which was
outstanding as of December 31, 2015 amounted to P832,000. The warranty costs on
sales made in 2016 are estimated at P 3,008,000 Actual warranty costs incurred during
the current 2016 fiscal year are as follows;
Warranty claims honored in 2015 sales P 832,000
Warranty claims honored in 2016 sales 1,984,000
P 2,816,00
Premiums. To increase sales, Ghost Fighter Company inaugurated a promotional
campaign on June 30, 2016. Ghost Fighter placed a coupon redeemable for a premium
in each package of product sold. Each premium costs P100. A premium is offered to
customers who send in 10 coupons and a remittance of P30. The distribution cost per
premium is P20. Ghost Fighter estimated that only 60% of the coupons issued will be
redeemed. For the six months ended December 31, 2016. The following available:
Packages of product sold 320,000
Premiums purchased 32,000
Coupons redeemed 128,000
Notes payable – assignment. Ghost Fighter’s accounting records show that as of
December 31, 2016, P 2,560,000 was due to Five Six Finance Company for advances
made against P 3,200,000 of trade accounts receivable assigned to the finance company
with resource. This liability is recorded as Note Payable – Assignment.
REQUIRED: Prepare any necessary adjustments and corrections and determine the
amount that should be reported as current liability in Ghost Fighter’s December 31,
2016 statement of financial position.

a b c d

1. Accounts Payable 11,846,400 11,203,200 11,424,000 11,683,200

2. Payroll 1,552,000 1,664,000 1,984,000 1,824,000

3. Litigation and damages payable none 6,000,000 4,000,000 5,000,000

4. NP - Bank 1,600,000 144,000 1,816,000 1,744,000

5. Liability for purchase


none 2,816,000 3,200,000 384,000
commitments

6. Deferred tax liability 1,545,600 393,600 1,904,000 none

7. Warranty payable none 192,000 3,008,000 1,024,000

8. Provisions for Premiums 3,456,000 3,200,000 2,304,000 115,200

9. NP - assignment none 640,000 3,200,000 2,560,000


PROBLEM 2
In the course of your audit of Probe Inc. for the year ended December 31, 2014, you
took note of the following information.

ITEM AUDIT NOTES

a. Accounts Payable - trade, P The amount is net of P30,000 accounts with


170,000 debit balances

b. Notes payable - trade, The notes are all with five months term
P70,000 bearing interest at 15%. P50,000 from the
notes is dated September 1, while the rest
are dated November 3.

c. Advance receipts from The goods pertaining to these advances will


customers, P 100,000 be delivered in 2015.

d. Containers Deposit, P50,000 This is an amount received from customers


for returnable containers

e. Notes Payable - BPI, P200,000 This is a long term note for five years and are
being paid off at the rate of P4,000 per
month (monthly payment include interest)

f. Dividends in arrears on The company is yet to declare dividends since


cumulative preferred stock its last declared and distributed dividends in
P20,000 2015.

g. Stock dividends payable on


common stocks, P37,000

h. Liabilities under guarantee This pertains to Probe's guarantee of its


agreement, P45,000 employees' bank loans. As per past
experience, employees unlikely default on
their loan payments.

i. Convertible bonds, P1,000,000 1,000 bonds is convertible to 10 ordinary


shares. Amount due on December 31, 2017

j. Notes Payable - officers, This is due in six months


P40,000

k. Salaries and Wages Payroll for the period December 16, 2014 to
January 15, 2015 amounted to P68,000
l. Notes Receivable, P30,000 This note has been discounted in a bank on a
without recourse basis, where the company
received cash of P24,000

m. Output VAT, P246,000 Input VAT on purchases and other operating


expenses amounted to P164,000

n. Accounts Receivable, The accounts receivable is net of P12,300


P215,000 customer credit balances

o. Cash in Bank, P115,000 The company's cash in banks include a cash


balance with BPI amounting to P125,000;
with PNB amounting to P55,000m and; an
overdraft balance with BDO

p. Common stock warrants Amount to date, P250,000


outstanding

q. Common stock options Amount to date, P150,000


outstanding

r. estimated warranty costs on This pertains to warranty costs on good sold


good sold o 2013 and 2014

s. Installment notes payable, This is for the equipment purchase, only one
P75,000 third is due in 2015

t. Provisions for losses During the year, one of the manufacturing


equipment of the company exploded injuring
an employee. The employee filed claims for
damages on Nov. 3. There has still been no
resolution yet on the case as of the Balance
sheet date. The company lawyers however
believe that it is probable that the company
will be liable between P25,000 and P75,000

u. Deferred tax liability This refers to deferred tax liabilities


cumulative temporary difference on taxable
income which will reverse evenly over the
next year
10. How much is the total current liability?
a. 767,300 c. 817,300
b. 814,300 d. 892,300
11. How much is the Non-current liability?
a. 1,285,000 c. 1,429,000
b. 1,360,000 d. 1,760,000
12. How much is the Total Liabilities?
a. 2,177,300 c. 2,246,300
b. 2,127,300 d. 2,252,300
PROBLEM 3
Radio Inc. a manufacturer of heavy machinery, grants a 2-year warranty on its products.
The estimated liability for product warranty account shows the following entries for the
year:
Beginning balance P 225,000
Provision during the year (quarterly accrual) 200,000
P 425,000
A reviewee of the company’s policy of accounting for warranties revealed that based on
the company’s past experience, warranty claims averaged 5% on net sales. Moreover,
the company provides for a quarterly accrual of the estimated warranties expenditure
based on rough estimates;
The following additional information is available from the company’s records:
Gross sales P7,250,000
Sales returns and allowances 150,000
Cost of sales 3,678,000
the cost of sales included P415,500 cost of servicing the warranty claims for the year;
13. What is the correct balance of estimated liability for product warranty at the end of
the year?
a. 164,500 c. 355,000
b. 264,500 d. 364,50
PROBLEM 4
SAN MIG CORP. began operation on January 2, 2014 with 250 employees. The company
provides its employees 2 weeks paid sick leave and 2 weeks paid vacation leave for every
operating year. The company policy on sick leave and vacation leave allows each
employee to carry over accumulated leaves for the current period over the next year only.
The same shall be forfeited if not availed of over the said period allowed

On December 31, 2014, records show that there are 55 employees who are yet to avail
of any leaves, while there are 25 employees who have remaining 2 weeks unused
vacation and sick leave combined. Employees had an average daily wage rate of P250
for a 5-day weekly operation in 2014.

On December 31, 2015, records show that 925 days vacation and sick leaves carried over
from the last operating period were exercised and paid in 2015. In addition, there are 30
employees who have 6 weeks accumulated unused sick leaves and vacation leaves
combined; 25 employees who have accumulated 3 weeks unused sick leaves and 2 weeks
unused vacation leaves; 30 employees who have accumulated 3 weeks unused sick leaves
and vacation leaves combined 10 employees who have accumulated 1 week unused sick
leaves and 1 week unused vacation leaves. Employees had an average daily wage rate
of P275 for a 5 day weekly operation in 2015.

14. How much liability for compensated absences should be included as current liabilities
as of December 31, 2014?
a. 570,625 c. 412,500
b. 453,750 d. 337,500

15. How much liability for compensated absences should be included as current liabilities
as of December 31, 2015?
a. 570,625 c. 412,500
b. 453,750 d. 337,500
PROBLEM 5

Dragonball Corporation is selling electronic gadgets and home appliances. The company’s
fiscal year ends every March 31. The following information relates to all the obligations
of the company as of March 31, 2016:

Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount
to P 1,344,000 as of March 31, 2016.
Estimated warranties
Dragonball has a one-year product warranty on selected gadgets. The estimated warranty
liability on sales made during the 2014 – 2015 fiscal year and still outstanding as of March
31, 2015, amounted to P 604,800. The warranty costs on sales made from April 1, 2015
to March 31, 2016 are estimated at P 1,512,000. The actual warranty costs incurred
during 2015 – 2016 fiscal year are as follows:
Warranty claims honored on 2014 – 2015 sales P 604,800
Warranty claims honored on 2015 – 2016 sales 684,000
Total P1,288,800

Bonds payable
Dragonball issued P 12,000,000, 12% bonds, on October 1, 2010 at 96. The bonds will
mature on October 1, 2020. Interest is paid semi-annually on October 1 and April 1.
Dragonball uses the straight line method to amortize bond discount.
Notes payable
Dragonball has signed long-term notes with financial institutions. The maturities of these
notes are given below. The unpaid interest for all of these amounts to P 816,000 on
March 31, 2016.
Due date Amount
April 31, 2016 P 1,440,000
July 31, 2016 2,160,000
September 1, 2016 1,080,000
February 1, 2017 1,080,000
April 1, 2017 – March 31, 2018 6,480,000
Dividends
On March 10, 2016, Dragonball’s board of directors declared a cash dividend of P 0.30
per ordinary share and a 10% ordinary share dividend. Both dividends were to be
distributed on April 5, 2016 to ordinary shareholders on record at the close of business
on March 31, 2016. As of March 31, 2016, Dragonball has 12 million, P 2 par value,
ordinary shares issued and outstanding.

REQUIRED: Determine any necessary adjustments and corrections, and compute for
the adjusted balances of the following accounts at March 31, 2016:

16. Estimated warranty payable


a. 828,000 c. 604,000
b. 1,512,000 d. 2,116,800

17. Unamortized bond discount


a. 264,000 c. 480,000
b. 216,000 d. 240,000

18. Bond interest payable


a. 720,000 c. 360,000
b. 600,000 d. None

19. Total current liabilities


a. 15,468,000 c. 13,068,000
b. 12,252,000 d. 9,468,000

20. Total non-current liabilities


a. 18,480,000 c. 18,216,000
b. 18,264,000 d. 18,000,000
PROBLEM 6
Pokemon 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 music and sheet music. Customers receive a
coupon for each peso spent on recorded music or sheet music. Customers may exchange
coupons and P 20 for an MP4 Player. Pokemon pays P 34 for each player and estimates
that 60% of the coupons given to customers will be redeemed.
Pokemon total sales for 2016 were P 115,200,000 – P 86,400,000 from musical
instrument and sound reproduction equipment and P 28,800,000 from recorded music
and sheet music. Replacement parts and labor for warranty work totaled P 2,624,000
during 2016. A total of P 104,000 MP4 players used in the premium program were
purchased during the year and there were 19,200,000 coupons redeemed in 2016.

The accrual method is used by Pokemon 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, 2016, were as shown below:

Inventory of Premium MP4 players P 639,200


Provision for Premium Claims Outstanding 716,800
Provision for Warranties 2,176,000

REQUIRED: Compute for the amounts to be presented on the 2016 financial


statements of Pokemon Company:
21. Warranty Expense
a. 1,728,000 c. 2,624,000
b. 2,304,000 d. 1,280,000

22. Provision for warranties


a. 1,728,000 c. 2,176,000
b. 2,624,000 d. 1,280,000
23. Premium expense
a. 1,209,600 c. 1,728,000
b. 2,937,600 d. 2,016,000

24. Inventory of MP4 player


a. 751,200 c. 1,237,600
b. 639,200 d. 911,200
25. Provision for premium claims outstanding
a. 1,209,600 c. 1,015,200
b. 582,400 d. 716,800

PROBLEM 7
Pikachu Corp. issued P10,000,000 of 10% bonds on January 1, 2016. The prevailing
market rate of interest for similar type of securities was at 12% on the date of issue. The
bonds will mature on January 1, 2026. Interests are being paid semi-annually every July
1 and January 1.
REQUIRED: Compute for the following items:
26. Total proceeds from the bond issuance
a. 10,000,000 c. 8,852,960
b. 8,917,186 d. 8,884,138
27. Correct interest expense in 2016
a. 1,743,068 c. 1,064,226
b. 1,200,000 d. 1,000,000
28. Adjusted balance of the bonds payable as of December 31, 2016
a. 8,989,350 c. 8,852,960
b. 8,917,186 d. 8,884,138
PROBLEM 8

ABC. Co. reported net income for the current year 2013 at P10,000,000 before taxes.
Included in the determination of the said net income were:
Permanent differences
Non-deductible expenses P 100,000
Non-taxable income 500,000
Temporary differences
Accrued warranty expenses 250,000
Rental payments made in advance 400,000
Advance collections from customers 500,000
Provision for probable losses 900,000

The income tax rate is 40% and is not expected to change in the future.
29. How much is the current tax expense?
a. 3,840,000 c. 4,000,000
b. 4,340,000 d. 3,340,000
30. How much is the total tax expense?
a. 3,840,000 c. 4,000,000
b. 4,340,000 d. 3,340,000
LONG PROBLEMS
PROBLEM 1
Adelaida Inc., had the following unadjusted liability balances as of December 31, 2014:

Accounts payable P 540,000


Premiums payable 140,000
Deferred taxes (42,000)
10% Bonds payable 5,500,000

Audit notes:
a. Accounts payable is net of a P 50,000 debit balance in one of the company’s
suppliers accounts due to an overpayment made. The agreement with the
supplier simply calls for the supplier to deliver additional merchandise to
Adelaida Inc. to offset the overpayment. No deliveries were made as of the
balance sheet date.

b. The company started a promotional program in 2013 where an eco-friendly


tote bag shall be given to customers upon presenting 6 product labels plus P 5
cash. The following information are deemed relevant in relation to the program:
2013 2014
Sales P 7,200,000 8,400,000
Total cost of tote bags purchased (P25 each) 375,000 500,000
Tote bags actually distributed 9,000 19,000
Estimated tote bags to be distributed the following 7,000 5,000
year

The balance of the premiums liability account, reflects the accrual at the
end of the previous year (2013), no entry had been made during the current year
affecting the said account.
c. Deferred tax balance appearing above is the result of the deferred tax created
by the premiums liability in the previous year which is tax deductible upon
settlement. Adjustments are yet to be made to the said account to reflect the
movement in the account balance during the year. Moreover, another
temporary difference arising during the year created by the company’s excess
tax depreciation for the period amounted to P 150,000. The income tax rate is
at 30%.

d. The balance of the bonds payable account was the total proceeds from its
issuance on January 1, 2014. The bonds which shall mature on December 31,
2018 have a total face value of P 5,000,000 and are convertible into ordinary
shares at the rate of P 1,000 bond to 10, P 50 par value shares. On the issuance
date, the effective yield rate on similar securities without the convertibility
option was at 8% while each ordinary shares were selling at P 75 per share.
The only other entry made by the client in relation to the bonds was the
payment of interest on December 31, as interest are payable annually every
December 31.

REQUIRED: Determine the following balances


a. Premium expense for 2014
b. Total deferred tax liability as of December 31, 2014
c. Total current liability

PROBLEM 2
An excerpt of Jovi Company’s trial balance for the period ended December 31, 2016
revealed the following liability balances:

Accounts payable P 420,000


Provision for warranties 273,000
Accrued salaries expense 770,000
Bonds payable, 10% maturing December 31, 2019 2,000,000
Audit notes:
a. The accounts payable balance refers to the accounts of the suppliers of the
merchandise. A purchase cut-off procedure was conducted to entries several
days before and after the balance sheet in the purchase journal. The
corresponding inventories were appropriately included/excluded from the
count. The result of the cut-off procedures are as follows:

December 2016 entries on the purchases journal


Receiving Receiving Report Amount Remarks
Report No. Date
2132 December 18 P 26,000 FOB Shipping Point
2133 December 22 40,000 FOB Destination
2134 December 28 19,000 FOB Destination (from a consignor)
2135 January 2 24,000 FOB Destination (in transit)

January 2017 entries on the purchases journal


Receiving Receiving Report Amount Remarks
Report No. Date
2817 December 31 P 25,000 FOB Destination
2818 January 2 23,000 FOB Destination (in transit)
2819 January 3 41,000 FOB Shipping Point

b. The company’s inventories are covered by a two-year warranty program. Sales


in 2015 and in 2016 are covered by the said warranty program are at 2,600
units and 3,200 units, respectively. The company estimates that 20% of the
units sold will be returned for repairs on the year of sale while additional 30%
of the units sold will be returned on the year following the year of sale. The
company also further estimates that cost to repair a returned unit shall be at P
300 in parts and labor. The balance of the provision for warranties per books
is the amount accrued in the prior period. No entry has been made by the
company during the year in relation the warranty except for the actual repairs
costs incurred during the year amounting to P 388,000 which was charged to
current year’s warranty expense.
c. The accrued salaries expense include employee’s used compensated absences
amounting to P 560,000 which was the accrued amount at the end of the prior
year and employee incentive bonus amounting to P 210,000 which was 10%
of the net income after 30% income tax and after bonus (before any audit
adjustments)
As of December 31, 2015, the employees had an accumulated 1,750 days of
unused vacation and sick leaves. In 2016, employees exercised 1,200 days from
the leaves carried forward in the prior year. Additional 1,400 vacation and sick
leaves were earned by the employees in 2016. The average daily salary rate of
employees increased by 10% during 2016. The company estimates that from the
cumulative unused employee leaves, only 80% shall probably be exercised by the
employees.
d. The bonds were issued on January 1, 2015 when the prevailing market rate of
interest was at 12%. The bonds pay interest every December 31. The company
recorded the bond issuance by debiting cash for the cash consideration
received, crediting the bonds payable account at face value. The difference
was charged to interest expense. The only other entries made by the clients
were the payment of the annual interest on December 31, 2015 and 2016.
REQUIRED: Determine the balances of the following as of December 31, 2016:
a. Adjusted accounts payable
b. Adjusted provision for warranties
c. Carrying value of the bonds payable

PROBLEM 3
You are auditing the financial statements of Labandera Inc., a company which carries a
wide variety of laundry appliance and supplies, for the year ended December 31, 2014.
In formation about the company’s varied liability accounts are as follows:
a. Premiums items are being offered to its Class A (residential use) washing machines
and dryers. Customers shall receive a coupon for each P50 spent on Class A
laundry appliance. Customers may exchange 400 coupons and P1000 for a dryer.
Labandera pays P5,100 for each dryer and estimates that 60% of the coupons
given to customers will be redeemed. A total of 4,500 dryers to be used on the
premium program were purchased during the year and there were 1,600,000
coupons redeemed during the year.
b. Class B laundry appliances are sold with a two-year warranty for replacement of
parts and labor. The estimated warranty cost, based on the past experience, is 1%
of sales to be incurred on the year of sale and 2% of sales to be incurred on the
year following the year of sale. Replacement parts and labor for warranty work
totaled P1,640,000 during 2014.
c. The company provides key employees 5% bonus based on the net income of the
company after tax. The same is yet to be accrued at year end.
d. Labandera uses the accrual method to account for the warranty and premium costs
for financial reporting purposes. Labandera’s sales for 2014 totaled 280,000,000 ,
60% of which is attributed to Class A laundry appliance sales.
e. The Company reported the following balances at year end:
Inventory of premium items 1,530,000
Premium expense 17,220,000
Warranties expense 1,640,000
Net income, before 35% income tax
and before any adjustments 80,164,000
REQUIRED:
What is the correct premiums liability as of December 31, 2014?
What is the correct net income?

PROBLEM 4
MNO Inc. reported the following information in its long-term liability portion of its
Statement of Financial Position for the period ended December 31, 2013
12% Bonds Payable
10% Note Payable – Bank
Deferred Tax Liability, net
Audit notes:
a. The bonds payable with a face value of P5M was issued with a conversion option
into 20,000, P100 par value ordinary shares at any time up to its maturity on June
30, 2018. These were issued on June 30, 2013 when the prevailing yield rate on
similar debt security without the conversion option was 10%. The company
recorded the transaction as debit to Cash and credit to Bonds payable for the total
consideration received. Interests are being paid semi-annually every December 31,
and June 30 and were recorded appropriately. No other entries were made by the
client affecting the carrying value of the bonds.

Half of the bonds were returned on December 31, 2014 at par value. The prevailing
yield rate on similar debt instrument without the conversion option on this date
was 14%. The transaction is yet to be recorded at year end.
b. The 10% note payable to the bank is dated September 1, 2013 and is payable at
the rate of P500,000, annually every September 1 of each year starting 2014.
Interest are also payable annually every September 1.
c. The deferred tax liability at the beginning of the year resulted to the following
cumulative temporary difference as of December 31, 2013:
Cumulative temporary difference creating
future taxable amount P1,050,000
Cumulative temporary difference creating
future deductible amount 200,000
At the end of the year the balance of the cumulative temporary differences were:
Cumulative temporary difference creating
future taxable amount P1,550,000
Cumulative temporary difference creating
future deductible amount 300,000
Income tax is at 40%
REQUIRED:
What is the equity portion of the Convertible Bonds?
What is the total interest expense for 2014?
MULTIPLE CHOICE SOLUTIONS

PROBLEM 1

Accounts Payable

1. Supplier’s Account w/ debit balance 480,000


Accounts payable 480,000

a. No entry
b. Purchases 384,000 Accounts Payable
Accounts payable 384,000 320,000 10,880,000
Inventory 384,000 480,000
Cost of Good Sold 384,000 384,000
c. Janitorial Expense 192,000 192,000
Accrued Janitorial Expense 192,000 67,200
11,683,200
(288,000 x 2/3)
d. Utilities Expense 67,200
Utilities Payable 67,200

(134,400/2)
Accounts Payable 320,000

Purchase Return & Allow 320,000

Payroll

Total Payroll 1,984,000


Less: Advances to Employees (160,000)
Adjusted Payroll Balance 1,824,000

Litigation and Damages payable

Adjusting; (4,000,000 + 6,000,000/2) = 5,000,000


Damage Payable
4,000,000
1,000,000
Damage Expense 1,000,000
5,000,000
Damage Payable 1,000,000
(disclose additional loss of P 1,000,000 (maximum of 6,000,000))
Notes Payable - Bank

Accrued Interest Notes Payable - CL


Last payment was 10/1/16 1,600,000
(Accrued 3 months) 144,000
(3,200,000 x 18% x 3/12) = P 144,000
Entries: 1,744,000
Interest Expense 144,000
Interest Payable 144,000
Purchase Commitment

Committed Price 5.0


Current Price 4.4
Loss on Purchase Commitment 0.6
Multiplied by 640,000
Purchase Commitment 384,000
Deferred Tax Liability. (None)

Warranties

Warranty Payable (GL)


2,816,000 832,000
3,008,000
1,024,000

Premiums
Entry:
Premium expense 90
Cash 10
Premium Inventory 100
(100 + 20 – 30 = 90)
Est. Coupons 192,000
Redeemed coupons (128,000)
Coupons sold 320,000
64,000
Multiply by 60%
Est. Coupons divided by 5
redeemed 192,000 Premiums still to be
given 12,800
divided by 5
Multiply by 90
Premiums 38,400
Premium Liability 1,152,000
Multiply by 90
Premium expense 3,456,000
Notes Payable – assignment

Current liability is 2,560,000


PROBLEM 2
Current Non-current Total
Item
Liability Liability Liabilities
AP - Trade 170,000 + 30,000 200,000
b. Notes payable - trade, P70,000 70,000
Interest in notes: 50,000 * 15% *4/12 2,500
20,000 * 15% * 2/12 500
c. Advance receipts from customers 100,000
d. Containers Deposit 50,000
e. Notes Payable - BPI, P200,000/5 40,000 160,000
i. Convertible bonds, P1,000,000 1,000,000
j. Notes Payable - officers 40,000
k. Salaries and Wages(68,000*15/30) 34,000
m. Output VAT, net of Input (246,000 - 164,000) 82,000
n. Accounts Receivable credit balance 12,300
o. Cash in Bank(overdraft) P115,000 - (125,000 +
55,000) 65,000
r. estimated warranty costs on good sold 46,000
s. Installment notes payable, P75,000*1/3 25,000 50,000
t. Provisions for losses (25,000 + 75,000)/2 50,000
u. Deferred tax liability 150,000
TOTAL 817,300 1,360,000 2,177,300
10. c 11. b 12. a
PROBLEM 3
Estimated Warranties payable, Beginning balance 225,000
Required Estimated expense (7,250,000 - 150,000) * 5% 355,000
Less: Actual cost incurred for the year (415,500)
Estimated Warranties payable, Ending balance 13. a 164,500

PROBLEM 4
LIABILITY FOR COMPANY ABSENCES, 2014
55 Employees with 4 weeks 220
25 employees with 2 weeks 50 270
Multiply by (5 day daily operations) 5
TOTAL LIABILITY FOR COMPANY ABSENCES IN DAYS 1,350
Multiply by: daily rate 250
Required liability balance, 12,31,2104 337,500 14. d
LIABILITY FOR COMPANY ABSENCES, 2015
30 employees with 6 weeks (4 weeks limit) 120
25 employees with 5 weeks (4 weeks limit) 100
30 employees with 3 weeks 90
10 employees with 2 weeks 20 330
Multiply by: (5 day operation) 5
TOTAL LIAB FOR COMPANY ABSENCES IN DAYS 1,650
Multiply by: daily rate 275
Required balance of the Liability, 12/31/2015 453,750 15. b

PROBLEM 5
Year under audit 4/15 to 3/31/16

Current liabilities due 4/1/16 to 3/31/17

Non-current liabilities due 4/1/17 onwards

Current liabilities Non-current liabilities


Trade Accounts Payable P 1,344,000
Warranties payable 828,000
Interest payable – bonds payable 720,000
Bonds payable P 11,784,000
Notes payable 5,760,000 6,480,000
Interest payable – Notes payable 816,000
Dividends payable 3,600,000

TOTAL 13,068,000 18,264,000

Warranties Payable

Warranties Payable
1,288,800 604,800
1,512,000

828,000

Bonds payable
1) Accrued interest
- Last paid 10/1/16
- Accrue 6 months ( 10/1/16 – 3/31/17 )
Interest Expense 720,000
Interest Payable 720,000
(12m x 12% x 6/12)
2) Valuation of Bonds payable at 3/31/16
Face Value 12,000,000
Issue price (12,000,000 x 96%) 11,520,000
Discount (480,000)

Amortized: 264,000 (480,000x66/120)


Unamortized: 216,000 (480,000x54/120)

Term 120 months


Amortized portion
2010 3 months
2011-2015 60 months
2016 3 months 66 months
Unamortized portion 54 months

Face value 12,000,000


Discount (216,000)
Carrying value 3/31/16 11,784,000

Retained Earnings 3,600,000


Dividends payable 3,600,000
(12m shares x P 0.30/share)

Retained Earnings 3,600,000


Share Dividends Distributed 2,400,000
Share Premium 1,200,000
(12m x 10% x P 3)

PROBLEM 6

1) Warranty expense (P 86,400,000 x 2%) P 1,728,000

Entries
Cash/Accounts Receivable 86,400,000
Sales 86,400,000
Warranty expense 1,278,000
Warranty payable 1,728,000
Warranty expense 2,624,000
Cash, Inventory 2,624,000
2) Provision for warranties
Warranties Payable
2,624,000 2,176,000
1,728,000

1,280,000

3) Premium expense

Ratio: P 1.00 sale = 1 coupon

P 28,800,000 sales = 28,800,000 coupons

Expected redemptions (28,800,000 x 60%) 1,728,000

Expected premiums to be issued (1,728,000/200) 84,000 units

Premium cost:
Purchase price P 34/unit
Less: Remittance (20)

Net Cost P 14/unit

Premium Expense (86,400 units x P 14/unit) P 1,209,600

4) Inventory of MP4 players


In units In pesos
Beginning Inventory 18,800 639,200
Add: Purchases 104,000 3,536,000
Total 122,800 4,175,200
Less: Redemptions (96,000)* (3,264,000)
Ending Inventory 26,800 911,200

*Units actually distributed (19,200,000 / 200) 96,000

Journal Entries

(1) Purchase Premiums


Premium Inventory 3,536,000
Cash 3,536,000

(2) Sale of recorded /sheet music


Cash/Accounts Receivable 28,800,000
Sales 28,800,000
(3) To record premium expense
Premium expense 1,209,600
Premium payable 1,209,600
(4) Actual redemption
Cash 1,920,000
Premium payable 1,344,000
Premium Inventory 3,264,000

5) Provision for premium claims outstanding

Premiums payable (In Units)


96,000 51,200 Premiums Payable (In Pesos)
86,400 1,344,000 716,800
1,209,600
41,600

582,400

Premiums Expense
1,209,600

*Premium claims outstanding (41,600 units x P14) 582,400

PROBLEM 7

PV of principal (10M x 0.31180) 3,118,000


PV of interest (500k x 11.46992) 5,734,960
Bond issuance price 8,852,960

Interest Expense, 7/1/16 531,178


Interest Expense, 1/1/17 533,048
Interest Expense 2016 1,064,226

Bond Issuance price 8,852,960


Discount Amortization, 7/1/16 31,178
Discount Amortization, 1/1/17 33,048
Discount Amortization, 7/1/17 35,031
Discount Amortization, 1/1/18 37,133
Adjusted Balance of BP, 12/31/16 8,989,350
PROBLEM 8

Financial Income P 10,000,000


Add: Non-deductible expenses 100,000
Less: Nontaxable income (500,000)
Financial income after perm. diff. 9,600,000
Add: FDAAB: Warranty liability 250,000
Adv. from customers 500,000
Provision for losses 900,000
Less: FTALE: Prepayments (400,000)
Taxable Income 10,850,000

CURRENT TAX EXPENSE (P 10,850,000 X 40%) P 4,340,000


TOTAL TAX EXPENSE (P 9,600,000 x 40%) P 3,840,000

LONG PROBLEMS SOLUTION:


PROBLEM 1
Tote bags actually distributed in 2014 19,000
Estimated premiums liability at the end of 2013, in tote bags (7,000)
Estimated premiums liability at the end of 2014, in tote bags 5,000
Estimated premiums expense in 2014, in tote bags 17,000
Multiply by: Net expense per tote bag (P25-5) 20
Estimated premiums expense in 2014 340,000

The temporary difference from excess tax depreciation over financial depreciation is future
taxable amount creating deferred tax liability:

Deferred tax liability (Non-current liability): P150,000*30%


P45,000

Accounts payable, as adjusted (P540,000 + 50,000) 590,000


Estimated premiums payable, 2014 (5,000 * P20) 100,000
Current Liabilities 690,000

PROBLEM 2
Accounts Payable, unadjusted balance 420,000
RR 2134 Consigned goods (19,000)
RR 2135 Goods in transit, FOB Dest. (24,000)
RR 2316 Goods in transit, FOB SP. 25,000
Accounts Payable, adjusted balance 402,000
Provision of Warranties, beg 273,000
Estimated expense, 2016;
(3,200 units * 50%)* P300 480,000
Less: Actual repairs cost incurred (388,000)
Provision of Warranties, end 365,000

Amortization Table:
Nominal Correct
Date Interest Interest Difference Amortization
1/1/15 initial
measurement 1,855,809*
12/31/2015 Amortization 200,000 222,697 22,697 1,878,506
12/31/2016 Amortization 200,000 225,421 25,421 1,903,927

Principal (2,000,000 * .567427) 1,134,854


Interest (200,000 * 3.6047762) 720,955
Initial Fair value of bonds 1,855,809*

PROBLEM 3
Class A laundry appliances sales (280,000,000 *60%) 168,000,000
Divide by 50
Number of coupons distributed 3,360,000
Multiply by: probable redemption 60%
Coupons that will probably redeemed 2,016,000
Divide by: number of coupons to acquire 1 premium 400
Estimated number of premiums to be redeemed 5,040
Number of premiums actually redeemed (1,680,000/400) (4,200)
Liability for premiums in units 840
Liability for premiums in Peso (840*4,100) 3,444,000

Unadjusted net income 80,164,000


Adjustment for additional premium expense (3,444,000)
Adjustment for additional warranties expense (1,720,000)
Adjusted net income 75,000,000
Less: Bonus* (2,480,916)
Income tax (35%)** (25,381,679)
Net Income 47,137,405
B = 5%(75M - 35%(75M - B)) Tax = 35%(75M - 2,480,916)
B = 5%(48,750,000 + .35B) T = 25,381,679**
B = 2,437,500 + .0175B
.09825B = 2,437,500
B = 2,480,916*

PROBLEM 4

Amortization Table
Date Nominal Current Amortization Balance
6/30/13 5,386,087
12/31/13 300,000 269,304 (30,696) 5,355,391
6/30/17 300,000 267,770 (32,230) 5,323,161
12/31/14 300,000 266,158 (33,842) 5,289,319

Interest in Bonds Payable


from 1/1 - 6/30 (see amortiz.) 267,770
from 7/1 - 12/31 (see amortiz.) 266,158 533,928
Interest from Notes Payable
from 1/1 - 8/31 (2.5M*10%*8/12) 166,667
from 9/1 - 12/31 (2M*10%*4/12) 66,667 233,333
TOTAL INTEREST EXPENSE 767,261