Name:_____________________

Year & Section:______________

Score:_____________
Date:______________

Problems
1. The following information relates to Sonia Companys obligations as of December 31, 2015.
For each of the numbered items, determine the amount if any, that should be reported as
current liability in Sonias December 31, 2015 balance sheet.
a. Accounts payable per general ledger control amounted to P5,440,000, net of P240,000
debit balances in suppliers accounts. The unpaid voucher file included the following
items that not had been recorded as of December 31, 2015:
i. A Company - P224,000 merchandise shipped on December 31, 2015,
FOB destination; received on January 10, 2016.
ii. B, Inc. - P192,000 merchandise shipped on December 26, 2015, FOB
shipping
point; received on January 16, 2016.
iii. C Super Services - P144,000 janitorial services for the three-month period
ending
January1 31, 2016.
iv. MERALCO - P67,200 electric bill covering the period December 16,
2015
to
January 15, 2016.
On December 28, 2015, a supplier authorized Sonia to return goods billed at P160,000
and shipped on December 20, 2015. The goods were returned by Sonia on December 28,
2015, but the P160,000 credit memo was not received until January 6, 2016.
Current Liability: _________________
b. Items related to Sonias payroll as of December 31, 2015 are:
Accrued Salaries and Wages
Payroll deductions for:
Income taxes withheld
SSS contributions
Philhealth contributions
Advances to employees

776,000
56,000
64,000
16,000
80,000

Current Liability: _________________

c.

In May 2015, Sonia became involved in a litigation. The suit is being contested, but
Sonias lawyer believes it is possible that Sonia 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.

Current Liability: _________________

d.

In Sonia Companys 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.)

Current Liability: _________________

e.

A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on
December 31, 2015. The note is dated October 1, 2014, 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, 2015.

Current Liability: _________________

f.

During 2015, Sonia entered in a noncancellable commitment to purchase 320,000 units

of inventory at fixed price of P5 per unit, delivery to be made in 2016. On December
31, 2015, 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, 2016.

Current Liability: _________________

g.

On December 31, 2015, Sonias deferred income tax account has a 2015 ending credit
balance of P772,800, consisting of the following items:
Caused by temporary differences in accounting
Deferred Tax
For gross profit on installment sales
376,000 cr

For depreciation on property and equipment

For product warranty expense

576,000 cr
179,200 dr
772,800 cr

Current Liability: _________________

h.

Sonia has a one year product warranty on selected items in its product line. The
estimated warranty liability on sales made during 2014, which was outstanding as of
December 31, 2014, amounted to P416,000. The warranty costs on sales made in
2015 are estimated at P1,504,000. Actual warranty costs incurred during the current
2015 fiscal year are as follows:
Warranty claims honoured on 2014 sales
416,000
Warranty claims honoured on 2015 sales
992,000
Total warranty claims honored
1,408,000

Current Liability: _________________

i.

To increase sales, Sonia Company inaugurated a promotional campaign on June 30,

2015. Sonia 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 5
coupons and a remittance of P30. The distribution cost per premium is P20. Sonia
estimated that only 60% of the coupons issued will be redeemed. For the six months
ended December 31, 2015, the following is available:
Packages of product sold
160,000
Premiums purchased
16,000
Coupons redeemed
64,000

Current Liability: _________________

j.

Sonias accounting records show that as of December 31, 2015, P1,280,000 was due
to Five Six Finance Company for advances made against P1,600,000 of trade accounts
receivable assigned to the finance company with recourse.

Current Liability: _________________

2.

The Cavaliers 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, 2015:
a. Notes Payable
Cavaliers 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 P340,000 on
March 31, 2015.
Due Date
Amount
April 30, 2015
600,000
July 31, 2015
900,000
September 1, 2015
450,000
February 1, 2016
450,000
April 1, 2016 March 31, 2017
2,700,000
5,100,000
b. Estimated Warranties
Cavaliers has a one-year product warranty on some selected items.
The estimated
warranty liability on sales made during the 2013 - 2014 fiscal year and still outstanding as of
March 31, 2014, amounted to P252,000. The warranty costs on sales made from April 1, 2014 to
March 31, 2015, are estimated at P630,000. The actual warranty costs incurred during 2014 2015 fiscal year are as follows:
Warranty claims honored on 2013 2014 sales
Warranty claims honored on 2014 2015 sales
Total

252,000
285,000
537,000

c. Trade Payables
Accounts payable for supplies, goods, and services purchases on open account amount to
P560,000 as of March 31, 2015.
d. Dividends
On March 10, 2015, Cavaliers board of directors declared a cash dividend of P0.30 per

common share and a 10% common stock dividend. Both dividends were to be distributed
on April 5, 2015 to common stockholders on record at the close of business on March 31,
2015. As of March 31, 2015, Cavaliers has 5 million, P2 par value, common shares issued
and outstanding.
e. Bonds Payable
Cavaliers issued P5,000,000, 12% bonds, on October 1, 2009 at 96.
The bonds will
mature on October 1, 2019. Interest is paid semi-annually on October 1 and April 1.
Cavaliers uses the effective interest method to amortize bond discount
Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2015:
1. Estimated Warranty Payable
2. Unamortized Bond Discount
3. Bond Interest Payable
4. Total Current Liabilities
5. Total Noncurrent Liabilities
3.

On January 2, 2014, the Suns, Inc. issued P2,000,000 of 8% convertible bonds at par.
The bonds will mature on January 1, 2018 and interest is payable annually every January 1.
The bond contract entitles the bondholders to receive 6 shares of P100 par value common
stock in exchange for each P1,000 bond. On the date of issue, the prevailing market interest
rate for similar debt without the conversion option is 10%.

On December 31, 2015, the holders of the bonds with total face value of P1,000,000 exercised
their conversion privilege. In addition, the company reacquired at 110, bonds with a face value of
P500,000.
The balances in the capital accounts as of December 31, 2014 were:
Common stock, P100 par, authorized 50,000 shares, issued
and outstanding, 30,000 shares
Premium on common stock
Market value of the common stock and bonds were as follows:
Date
Bonds
December 31, 2014
118
December 31, 2015
110

P3,000,000
500,000
Common stock
40
42

Based on the above and the result of your audit, answer the following:
1. Proceeds from the issuance of convertible bonds that should be allocated to equity
2. Carrying value of bonds payable as of December 31, 2014?
3. Interest expense for the year 2015
4. Entry to record the conversion on December 31, 2015
5. Loss on bond reacquisition on December 31, 2015
Theories
1. In auditing accounts payable, an auditors procedures most likely will focus primarily on managements assertion of
a. Existence or occurrence
c. Completeness
b. Presentation and disclosure
d. Valuation or allocation
2. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The
population for this test consists of all
a. Merchandise received
c. Canceled checks
b. Vendors invoices
d. Receiving reports
3.
a.
b.
c.
d.

The primary audit test to determine if accounts payable are valued properly is
Confirmation of accounts payable
Vouching accounts payable to supporting documentation
An analytical procedure
Verification that accounts payable was reported as a current liability in the balance sheet.

4.
a.
b.

Which of the following procedures is least likely to be performed before the balance sheet date?
Observation of inventory
c. Search for unrecorded liabilities
Testing of internal control over cash
d. Confirmation of receivables

5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase order
was dated after receipt of goods. The purchasing agent had forgotten to issue purchase order. Also a
disbursement of P450 for materials did not have a receiving report. The assistant wanted to select additional
purchase orders for investigation but was unconcerned about lack of receiving report. The audit director
should

a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the
receiving report exception
b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the
failure to fill out a report didnt happen very often.
c. Disagree with the assistant because two problems have an equal risk of loss associated with them.
d. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it.
6. When using confirmation to provide evidence about completeness assertion for accounts payable, the appropriate
population most likely is
a. Vendors with whom the entity has previously done business.
b. Amounts recorded in the accounts payable subsidiary ledger.
c. Payees of checks drawn in the month after the year end.
d. Invoices filed in the entitys open invoice file.
7. Which of the following is a substantive test that an auditor is most likely to perform to verify the existence and
valuation of recorded accounts payable?
a. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and
accounted for.
b. Receiving the clients mail, unopened, for a reasonable period of time after year end to search for unrecorded
vendors invoices.
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
d. Confirming accounts payable balances with known suppliers who have zero balances.
8. Only one of the following four statements, which compare confirmation of accounts payable with suppliers
and confirmation of accounts receivable with debtors is false. The false statement is that
a. Confirmation of accounts receivable with debtors is a more widely accepted auditing procedures than is confirmation
of accounts payable with suppliers.
b. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the
confirmation of accounts receivable.
c. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend
to emphasize accounts with zero balances at the balance sheet date.
d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that
request sent to the debtor will show the amount due.
9. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a
purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the
a. Quantity
b. Quality
c. Price
d. Terms
10.
a.
b.
c.
d.

Which of the following audit procedures is least likely to detect an unrecorded liability?
Analysis and recomputation of interest expense.
Analysis and recomputation of depreciation expense.
Mailing of standard bank confirmation forms.
Reading of the minutes of meetings of the board directors.