Auditing Problems
Midterm Lecture
Problem 1: In the course of your audit of Jonas Inc. for the year ended December 31, 2014, you took note
note of the following information:
Item
a. Accounts payable-trade P170,000
b. Notes payable- trade P70,000
c. Advance receipts from customers, P100,000
d. Containers deposit, P50,000
e. Notes payable-BPI P200,000
f. Dividends in arrears on cumulative preferred
stock, P20,000
g. Stock dividends payable on common stocks.
P37,200
h. Liabilities under guarantee agreement, P45,000
i. Convertible bonds, P1,000,000
j. Notes-payable-officers, P40,000
k. Salaries and wages
l. Notes receivable, P30,000
m. Output VAT, P246,000
n. Accounts receivable, P215,000
o. Cash in banks, P115,000
p. Common stocks warrant outstanding
q. Common stock options outstanding
r. Estimated warranty costs on goods sold, P46,000
s. Installment notes payable, P75,000
t. Provision for losses
u. Deferred tax liability, P150,000
Problem 2 You were provided the following information relative to your audit of the financial statements of
Green Company as at December 31, 2011:
Employee income tax withheld
Cash balance at the First Philippine Bank
Cash overdraft at Second Philippine Bank
Accounts receivable with credit balances
Estimated expenses of meeting warranties on merchandises sold
Estimated damages on unsatisfactory performance on a contract
Accounts payable
Dividends in arrears
Deferred serial bonds of P500,000, issued at par, payable in
Auditing Problems – Liabilities
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ACTG 112
AP-04 Liabilities
Notes
This amount is net of P30,000 accounts with debit
balances.
The notes are all with five months term bearing
interest at 15%. P50,000 from the notes is dated
September 1, while the rest are dated November 3.
The goods pertaining to these advances will be
delivered in 2015.
This is an amount received from customers for
returnable containers.
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)
The company is yet to declare dividends since its
last declared and distributed dividends in 2015
This pertains to Jonas guarantee of its employees
bank loans. As per past experience, employees
unlikely default on their loan payments.
1,000 bonds is convertible to 10 ordinary shares.
Amount due on December 31, 2017.
This is due in six months
Payroll for the period December 16, 2014 to
January 15, 2015 amounted to P68,000
This note has been discounted in a bank on a
without recourse basis, where the company
received cash of P24,000.
Input VAT on purchases and other operating
expenses amounted to P164,000
The accounts receivable is net of P12,300 customer
credit balances
The company’s cash in banks include a cash balance
with BPI amounting to P125,000; with PNB
amounting to P55,000, and; an overdraft balance
with BDO
Amount to date, P250,000
Amount to date, P150,000
This pertains to warranty costs on goods sold in
2013 and 2014
This is for equipment purchases, only one-third is
due in 2015
During the year, one of the manufacturing
equipment of the Company exploded injuring an
employee. The employee filed claims for damages
on November 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.
This refers to deferred tax liabilities on cumulative
temporary difference on taxable income and
financial income which will reverse evenly over the
next year.
P900
2,500
1,350
2,850
3,200
1,250
29,750
25,000
AP-04 Lecture
Auditing Problems ACTG 112
Midterm Lecture AP-04 Liabilities
semi-annual installments of P50,000, due April 1 and October 1
of each year; the latest payment shall be in October 2017. These
serial bonds bear a 10% interest that is paid semiannually
Ordinary shares at par to be distributed as a result of share dividend
declaration 40,000
Deferred tax liabilities 10,000
Reserve for contingencies 20,000
1. At year end, how much should be presented as current liabilities?
2. How much is the total non-current liabilities?
a. P 500,000 c. P 410,000
b. P 440,000 d. P 510,000
Problem 3
In conjunction with your December 31, 2007, annual audit of the financial statements of SweetHeart Company,
you have obtained and examined the December 31, 2007, accounts payable trial balance. Your examination of
this trial balance disclosed the following open vouchers:
a. Voucher 761, containing a P380,000 credit to Accounts Payable. This voucher covered a cash transfer to
the factory payroll bank account for the pay period ended December 28, 2007. The payroll cash transfer
was made January 3, 2008, and payroll checks covering this pay period were distributed to factory
employees on January 4, 2008.
b. Voucher 778, containing an P180,000 credit to Accounts Payable. The P180,000 credit covered the
principal and interest due on a ten-year installment loan. The loan was granted to SweetHeart Company
on January 1, 2007. Terms of the loan agreement call for ten equal annual installment payments of
P100,000, each plus interest at 8 percent. Principal and interest payments are due January 5, 2008 – 2017.
The voucher indicated that the Loan Payable and Interest Expense accounts had been properly charged.
c. Voucher 741, containing a credit to Accounts Payable of P50,000. This voucher covered on invoice from
AC Company for a new computer machine. The computer machine was installed December 10, 2007, and
the Office Equipment account was properly charged.
d. Voucher 775, containing a credit to Accounts Payable in the amount of P65,480. This voucher covered
income taxes withheld from employees during December 2007.
e. Voucher 779, containing a credit to Accounts Payable of P41,460. This credit covered the total interest and
principal due on a 180-day P40,000 note payable to the CJ Company. Charges to the Note Payable and
Interest Expense had been properly handled.
f. Voucher 751, containing a P200,000 charge to Accounts Payable. This voucher represented a P200,000
advance payment to SS Company for a special order of ten boxes. The P200,000 check was mailed to SS
Company on January 2, 2008.
Questions
1. Accounts payable at year-end is
a. Overstated by P716,940 c. Overstated by P516,940
b. Overstated by P666,940 d. Overstated by P466,940
2. The entry to adjust Voucher # 778 is
a. Accounts payable 180,000 c. Loans payable100,000
Loans payable 100,000 Interest expense 80,000
Interest payable 80,000 Accounts payable 180,000
b. Accounts payable 180,000 d. Loans payable 100,000
Loans payable 100,000 Interest payable 80,000
Interest expense 80,000 Accounts payable 180,000
3. The entry to adjust Voucher # 741 is
a. Accounts payable – others 50,000
Accounts payable 50,000
b. Accounts payable 50,000
Accounts payable – others 50,000
c. Accounts payable – others 50,000
Machinery 50,000
d. No adjustment
4. The current liability of the company at year-end is
a. Overstated by P340,000 c. Understated by P200,000
b. Overstated by P140,000 d. Understated by P 60,000
Problem 4
In conjunction with your firm’s examination of the financial statements of Ronryan Company as of December
31, 2007, you obtained from the voucher register the information shown in the work paper below.
Item Entry Date Description Amount Account Charged
1. 12/18/07 Supplies, purchased FOB
destination, 12/15/07;
received, 12/17/07 15,000 Supplies on hand

Auditing Problems – Liabilities

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 ACC 24: AUDITING REVIEW (PRACTICE) [HANDOUT#4-LIABILITIES]

2. 12/18/07 Auto insurance, 12/15/07

to 12/15/08 24,000 Prepaid insurance
3. 12/21/07 Repair services; received
12/20/07 19,000 Repairs and Main.
4. 12/21//07 Merchandise shipped FOB
shipping point, 12/20/07;
received, 12/24/07 12,300 Inventory
5. 12/21/07 Payroll, 12/07/07 – 12/21/07
(12 working days) 69,000 Sal. and wages
6. 12/26/07 Subscription to Tax Journals
for 2008 5,000 Dues & subs
7. 12/28/07 Utilities for December 2007 24,000 Utilities expense

8. 12/28/07 Merchandise shipped FOB

destination, 12/24/07;
received, 1/2/08 111,000 Inventory
9. 12/28/07 Merchandise shipped FOB
shipping point, 12/26/07;
received, 1/3/08 84,000 Inventory
10. 1/5/08 Payroll 12/21/07 – 1/05/08
(12 working days. 4 working
days in January) 72,000 Sal. and wages
11. 1/10/08 Merchandise shipped FOB
destination, 1/03/08,
received, 1/10/08 38,000 Inventory
12. 1/14/08 Interest on bank loan,
10/10/07 to 01/10/08 30,000 Interest expense
13. 1/15/08 Manufacturing equipment
installed, 12/29/07 254,000 Machinery

14. 1/15/08 Dividends declared,

12/15/07 160,000 Dividends payable
Accrued liabilities of 12/31/07 were as follows:
Accrued payroll P 48,000
Accrued interest payable 26,667
Dividends payable 160,000
The accruals made on December 31, 2007 were reversed effective January 1, 2008.
Review the data given above and prepare adjusting journal entries to correct the accounts on December 31,
2007. Assume that the company follows FOB terms for recording inventory purchases.
Questions
1. The entry to adjust item #2 is
a. Insurance expense 24,000 c. Prepaid insurance 1,000
Prepaid insurance 24,000 Insurance expense 1,000
b. Insurance expense 1,000 d. No adjustment
Prepaid insurance 1,000
2. The entry to adjust item #10 is
a. Salaries expense 48,000 c. Accrued payroll 48,000
Accrued payroll 48,000 Salaries expense 24,000
b. Accrued payroll 48,000 Cash 72,000
Salaries expense 48,000 d. No adjustment
3. The entry to adjust item #12 is
a. Interest expense 26,667 c. Interest expense 26,667
Interest payable 26,667 Interest payable 3,333
b. Interest expense 30,000 Cash 30,000
Interest payable 30,000 d. No adjustment
4. The entry to adjust item #13
a. Machinery 254,000 c. No adjustment
AP – others 254,000
b. AP – others 254,000 d. No adjustment since payment
Machinery 254,000 was made on Jan. 15, 2008
5. The entry to adjust item #14
a. Dividends declared 160,000 c. No adjustment
Dividends payable 160,000

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 ACC 24: AUDITING REVIEW (PRACTICE) [HANDOUT#4-LIABILITIES]

b. Dividends payable 160,000 d. No adjustment since payment

Dividends declared 160,000 was made on Jan. 15, 2008.
Problem 5 During 2010 Black Company, introduced a new line of machines that carries a two-year warranty
against manufacturer’s defects. Based on industry experience, the estimated warranty cost percentages
related to peso sales are as follows:
Year of sale 4%
Year after sale 6%
Sales and actual warranty expenditures for the years ended December 31, 2010 and 2011 were as follows:

Year Sales Actual Warranties

2010 P500,000 P15,000
2011 700,000 47,000
1. How much is the warranty expense to be recognized in 2010 and 2011 respectively?
a. P 15,000 and 47,000 c. 50,000 and 70,000
b. 20,000 and 58,000 d. 0 and 120,000
2. What is the estimated warranty liability as of December 31, 2010?
a. 0 c. 35,000
b. 16,000 d. 50,000
3. What is the estimated warranty liability as of December 31, 2011?
a. 0 c. 42,000
b. 16,000 d. 58,000
Problem 6Song he-kyo Inc. has initiated a promotional program whereby each box of pancake mix contain
one coupon, which is submitted with P40, entitles the customer to a frying pan. Song he-kyo Inc. pays P90 for
each frying pan and incurs additional P10 for handling and shipping costs upon redemption. The following
information are deemed relevant:
2010 2011
Number of boxes sold 70,000 95,000
Selling price per box P70 P75
Number of frying pans purchased 26,000 32,000
Inventory of frying pans at year 5,000 4,000
end
The company estimates that 40% of the coupons issued from boxes sold will be presented for the
redemption. Coupons are redeemable within one year from the date of purchase of the related pancake mix.
1. How much is the total premium expense to be reported in 2010 and 2011 respectively
a. P 2,800,000 and 3,800,000 c. 1,680,000 and 2,280,000
b. 2,520,000 and 3,420,000 d. 1,400,000 and 1,900,000
2. How much is the total premiums liabilities to be reported at the end of 2010 and 2011?
a. P 350,000 and 600,000 c. 630,000 and 1,080,000
b. 420,000 and 720,000 d. 700,000 and 1,200,000
Problem 7 - BONUS COMPUTATION
Maria Rosa, president of the Villa Nova Company, has a bonus arrangement with the company under which she
receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year, the net
income before deducting either the provision for income taxes or the bonus is P4,650,000. The bonus is
deductible for tax purposes, and the tax rate is 32%.
Questions
1. The amount of Maria Rosa’s bonus is
a. P 465,000.00 b. P 364,285.71 c. P 339,270.39 d. P 296,067.42

2. The appropriate provision for income tax for the year is

a. P 1,488,000.00 b. P 1,393,258.43 c. P 1,371,428.57 d. P 1,379,433.48
3. The entry to record the bonus (which will be paid in the following year) is
a. Bonus expense 296,067.42
Bonus payable 296,067.42
b. Bonus expense 339,270.39
Bonus payable 339,270.39
c. Bonus expense 465,000.00
Bonus payable 465,000.00
a. Bonus expense 364,285.71
Bonus payable 364,285.71
Problem 8 - PREMIUMS
In the packages of its products, ALONDRA, INC. includes coupons that may be presented at retail stores to
obtain discounts on other Alondra products. Retailers are reimbursed for the face amount of coupons redeemed
plus 10% of that amount for handling costs. Alondra honors requests for coupon redemption by retailers up to
3 months after the consumer expiration date. Alondra estimates that 60% of all coupons issued will ultimately
be redeemed. Information relating to coupons issued by Alondra during 2007 is as follows:

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 ACC 24: AUDITING REVIEW (PRACTICE) [HANDOUT#4-LIABILITIES]

Consumer expiration date 12/31/07

Total payments to retailers as of 12/31/07 165,000
Liability for unredeemed coupons as of 12/31/07 99,000
Questions
1. The total face amount of coupons issued in 2007 is
a. P 600,000 b. P 440,000 c. P 400,000 d. P 240,000
2. Coupons expense at year-end is
a. P 440,000 b. P 400,000 c. P 264,000 d. P 240,000
3. Estimated liability for unredeemed coupons is
a. P 219,000 b. P 123,000 c. P 99,000 d. P 3,000
Problem 9:
Determine the implication of the following independent cases to the December 31, 2011 financial statements
as per PAS 37, Provisions, Contingent Liabilities and Contingent Assets.
Case 1:
On December 5, 2011, an employee filed a P3,000,000 lawsuit against FS Company for damages suffered
when one of FS’ equipment malfunctioned in August 2011. In your inquiry of FS Company’s legal counsel, the
legal counsel expects the company will lose the lawsuit, and estimates the loss to be between P500,000 and
P1,500,00. The employee has offered to settle the lawsuit out of court for P1,200,000, but FS Company will
not agree to settlement.
Case 2:
FS Company guaranteed a loan of P2,000,000 of one of its key officers from a bank. By the time the financial
statement of FS Company were approved for issuance by its BOD, it is clear that the key officer is in financial
difficulties and it is probable that FS Company will meet the guarantee.
Case 3:
On December 30,2011, an explosion occurred at FS Company’s plant causing extensive property damages to
adjacent areas. Although no claims had yet been asserted against FS Company by April 15, 2012, FS’
Company’s management and counsel believes that it is probable that the company will be liable for damages,
and that the P2.5 Million would be reasonable estimate of its liability. The legal counsel further opines that
the total liability may possibly be up to the P5M given the extent of the damages to the neighboring areas. FS
Company’s P10M comprehensive public liability policy has a P1M deductible clause.
Case 4:
On January, 12, 2012, a fire at the production area of FS Company damaged a number of adjacent buildings. FS
Company’s insurance policy does not cover damages to property of others. The adjacent neighbors have filed
P2M damages suit against the Company and the legal counsel opines that such damages will be awarded to
them.
Case 1 Case 2 Case 3 Case 4
a. Accrue liability at P1,200,000 Disclose Accrue liability at Accrue liability at
contingency at P1,500,000 P2,000,000
P2,000,000
b. Accrue liability at P1,000,000 Disclose Accrue liability at Disclose
contingency at P P1,000,000 contingency at
2,000,000 P2,000,000
c. Accrue liability at P1,000,000 Accrue liability at Accrue liability at Disclose
P2,000,000 P1,000,000 contingency at
P2,000,000
d. Accrue liability at P1,000,000 Accrue liability at Accrue liability at Accrue liability at
P2,000,000 P1,500,000 P2,000,000

Problem 10: ABC Corp. issued P5,000,000 of 10% bonds on January 1, 2011. 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,
2021. Interests are being paid semi-annually every July 1, and January 1.
The following present value factors are taken from the present value tables:
PV of 1 at 12% for 10 periods 0.32197
PV of 1 at 6% for 20 periods 0.31180
PV of an ordinary annuity of 1 at 12% for 6 periods 5.65022
PV of an ordinary annuity of 1 at 6% for 20 periods 11.46992
Effective Interest Amortization Table
Date Interest Effective Amortization of Unamortized Carrying
Payments Interest Discount Discount amount
(FV*NIR*6/12) (CA*EIR*6/12) (IP-EI) (UD-Amort) (CA+Amort)
1/1/11
7/1/11
1/1/12
7/1/12
1/1/13

1. What is the total proceeds from the bond issuance?

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 ACC 24: AUDITING REVIEW (PRACTICE) [HANDOUT#4-LIABILITIES]

a. 5,000,000 c. 4,426,480
b. 4,458,593 d. 4,442,069
2. What is the correct interest expense in 2011?
a. 871,534 c. 532,113
b. 600,000 d. 500,000
3. What is the adjusted balance of the bonds payable on December 31, 2012
a. 4,494,676 c. 4,426,480
b. 4,458,593 d. 4,442,069
4. If bonds were retired on January 1, 2012 at P.98. What is the gain or loss on retirement?

Problem 11:
On January 1, 2011, SUV Corp. issued a 3-year 8,000 P1,000 convertible bonds at 110. Interest is to be paid
annually at the stated coupon rate of 12% every December 31. Each bond is convertible, at the holder’s
option, into 30, P25 par value common shares at any time up to maturity for P175. On the date of issuance,
prevailing market interest rate for similar debt without the conversion privilege was 9%. On the same date
market price of one common share was P30.
The present value of P1 at 9% for 3 periods is at 0.7722
The present value of P1 at 9% for ordinary annuity is at 2.5313

Amortization Table:
Interest Effective Amortization of Unamortized Carrying
Payment Interest Premium Premium amount
(8M*12%) (CA*9%)
1/1/11
1/1/12
1/1/13
1/1/14
1. What is the equity component of the convertible debt?
a. 192,352 c. 422,335
b. 800,000 d. -0-
2. What is the resulting bonds payable carrying value as of December 31, 2011?
a. 8,607,648 c. 8,422,336
b. 8,220,346 d. 8,000,000
3. Assuming that the convertible bonds above were converted on January 1, 2013, how much should be
credited to Share premium/ Additional Paid in capital from conversion?
a. 2,614,688 c. 2,412,698
b. 192,352 d. -0-

Problem 12: On January 1, 2011 RPS Corp. Issued 1,000 of its January 1, 006 8% 10 year, P 1000 face value
bonds with detachable stock warrants at P 1,250,000. Each bond which pays semi-annual interests every
January 1 and July 1, carried 5 detachable warrants which entitle the holder to acquire one share of RPS Corp.
ordinary shares for every warrant at a specified option price of 55 per share. Immediately after the issuance
the prevailing market rate of interest is at 10% and the market value of the warrants was P30.
a. The present value of P1 at 10% for 5 periods is at .6209
b. The present value of P1 at 5% fpr 10 periods is at .6139
c. The present value of P1 at 10% ordinary annuity is at 3.7908
d. The present value of P1 at 5% ordinary annuity is at 7.7217

Amortization table

Interest Effective Amortization of Unamortized Carrying

payment Interest discount discount amount
(1M*8%*6/12) (CA*10%*6/12)
1/1/11 77,232 P922,768
7/1/11 40,000 46,138 6,138 71,094 928,906
1/1/12 40,000 46,445 6,445 64,649 935,351
1. What is the equity component of the compound instrument?
a. P 327,232 e. c. 250,000
b. 77,232 f. d. NIL

2. What is the balance of the bonds payable as of December 31, 2011?

a. P 922,768 c. P 935,045
b. P 928,906 d. P 935,351
3. How much is the interest expense in 2011?
a. 92,583 c. 92,277
b. 80,000 d. 100,000
Problem 13- BONDS PAYABLE

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 ACC 24: AUDITING REVIEW (PRACTICE) [HANDOUT#4-LIABILITIES]

On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of P1,000,000 due January 1,
2015. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors were willing to
accept an effective interest of 6%.
Questions
1. The bonds were issued on January 1, 2007 at
a. A premium c. Book value
b. An amortized value d. A discount
2. Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective interest
amortization method, LACEA COMPANY recorded interest expense for the 6 months ended June 30, 2007,
in the amount of
a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,884
3. Same information in number 2. LACEA COMPANY recorded interest expense for the 6 months ended
December 31, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,791
4. The carrying value of the bonds on July 1, 2008 is:
a. P 1,056,578 b. P 1,056,484 c. P 1,053,276 d. P 1,053,179
5. A bond issue sold at a premium is valued on the statement of financial position at the
a. Maturity value.
b. Maturity value plus the unamortized portion of the premium.
c. Cost at the date of investment.
d. Maturity value less the unamortized portion of the premium.
Problem 14 - DEBT RESTRUCTURING: ASSET SWAP, EQUITY SWAP AND MODIFICATION OF TERMS
MARIANA CORPORATION is having financial difficulty and therefore has asked NALOOY Bank to restructure
its P3 million note outstanding. The presented note has 3 years remaining and pays a current rate of interest
of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.
Presented below are four independent situations. Determine the journal entry that Mariana would make for
each of the following types of debt restructuring.
1. NALOOY Bank agrees to take an equity interest in Mariana by accepting common stock valued at 2,400 in
exchange for relinquishing its claim on this note. The common stock has a par value of P1,200,000.
a. Notes payable 3,000,000
Common stock 3,000,000
b. Notes payable 3,000,000
Common stock 1,200,000
APIC 1,800,000
c. Notes payable 3,000,000
Common stock 1,200,000
Interest expense 300,000
APIC 1,500,000
d. No adjustment
2. NALOOY Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a
book value of P2,000,000 and a fair value of P2,500,000. (UNDER US GAAP)
a. Notes payable 3,000,000
Land 2,500,000
Gain on debt restructuring 500,000
b. Notes payable 3,000,000
Land 2,000,000
Interest expense 300,000
Gain on exchange 200,000
Gain on debt restructuring 500,000
c. Notes payable 3,000,000
Land 2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
d. No adjustment
3. NALOOY Bank agrees to modify the terms of the note, indicating that Dolores does not have to pay any
interest on the note over the 3-year period.
a. Interest payable 300,000
Gain on debt restructuring 300,000
b. Loss on debt restructuring 300,000
Interest expense 300,000
c. Interest expense 900,000
Gain on debt restructuring 900,000
d. No adjustment

“I can do all things through Christ who strengthens me.”>>Philippians 4:13 | BMS, CPA 7