Alvarez Hazel C.audit of Notes Payable Solution

Alvarez, Hazel C.
BSA 3-1
On December 31, 2016, Chris Company acquired a piece of equipment from ABC Company by issuing a P
1,200,000 note, payable in full on December 31, 2020. Chris’ credit rating permits it to borrow funds
from its several lines of credit at 10%. The equipment is expected to have a 5-year life and a P 150,000
salvage value.
1. What is the equipment’s book value on December 31, 2018?

a. P 551,767
b. P 630,000
c. P 491,767
d. P 341,767
SOLUTION:
Notes payable 1,200,000
Present value 1/1.104 x 0.68301
PV of NP 819,612
Less: Salvage value 150,000
669,612 / 5 years = 133,922.4
133,922.4 x 3 years = 401,767 + 150,000 = P 551,767
2. What is the carrying value of the note at December 31, 2018?

a. P 1,090,903
b. P 991,730
c. P 1,200,000
d. P 819,612
SOLUTION:
PV of NP 819,612 x 10% = 81,961 Interest 2016 + 819,612 = 901,573 PV 2017 x 10% = 90,157
901,573 PV 2017 + 90,157 = P 991,730
Chris Company purchased machinery on December 31, 2016, paying P 80,000 down payment and
agreeing to pay the balance in four equal installments of P 60,000 payable each December 31. Implicit in
the purchase price is an assumed interest of 12%.
3. What is the cost of the machinery purchased on December 31, 2016?

a. P 233,083
b. P 320,000
c. P 262,241
d. P 290,842
SOLUTION:
Down payment 80,000
PV of ordinary annuity note (60,000 x 3.03735) 182,241
Cost of machinery P 262,241
4. How much interest expense should be reported in Chris Company income statement for the
year ended December 31, 2017?
a. P 38,131
b. P 21,869
c. P 17,923
d. P 42,707
SOLUTION:
182,241 x 12% = P 21,869
5. What is the carrying value of the note at December 31, 2018?

a. P 120,000
b. P 144,110
c. P 99,310
d. P 101,403
SOLUTION:
PV of NP 182,241
Installment paid (60,000)
122,241
Interest 21,869
144,110 x 12% = 17,293 + 144,110 = 161,403 – 60,000 = P 101,403
You are engaged to audit the December 31, financial statements of Chris Company a manufacturer of
household appliances. Your audit disclosed the following situations.
 In June 2016, the company began producing and selling a new line of dishwasher. By the end of
the year, it had sold 120,000 to various dealers for P 15,000 each. The product was sold under a
1 year warranty, and the company estimates warranty costs to be P 750 per dishwasher. Chris
had paid out P 30M in warranty expense as of December 31, 2016, which is also the amount
shown as warranty expense in its income statement for the current year.
 In response to your letter audit inquiry, Chris’ lawyer informed you that the company is involved
in a lawsuit for violating environmental laws regulating hazardous waste. Although the litigation
is pending, Chris’ lawyer is certain that Chris will most probably have to pay cleanup costs and
fines of P 5,500,000. Chris neither accrued nor disclosed this loss in the financial statements.
 Chris is the defendant in a patent infringement suit by ABC Company over Chris use of a
hydraulic compressor in several of its manufactured appliances. Chris lawyer informed you that
if the suit goes against your audit client, the loss may be as much as P 10M. However, the lawyer
believes that the loss of this suit is only possible. Chris did notin any way disclose this pending
litigation in its financial statements.
6. What amount of warranty expense should be shown on Chris income statement for the year
ended Dec. 31, 2016?
a. P 30M
b. P 0
c. P 60M
d. P 90M
SOLUTION:
120,000 x 750 / dishwasher = P 90,000,000
7. What amount of warranty liability should be shown on Chris’ statement of financial position as
of Dec. 31, 2016?
a. P 60M
b. P 90M
c. P 30M
d. P 0
SOLUTION:
90,000 WE – 30,000,000 paid = P 60,000,000
8. What amount of lawsuit liability should be reported as a provision on Chris Company’s

December 31, 2016 statement of financial position?
a. P 10M
b. P 5,550,000
c. P 15,500,000
d. P 0
SOLUTION:
P 5,500,000 lawsuit liability
Chris Company has the following three loans payable scheduled to be repaid in February of next year.
The company’s accounting year ends on Dec. 31.
 The company intends to repay Loan 1 for P 100,000 when it comes due in February. In the
following October, the company intends to get a new loan for P 80,000 from the same bank.
 The company intends to refinance loan 2 for P 150,000 when it comes due in February. The
refinancing agreement, for P 180,000, will be signed in April, after the financial statements for
this year have been authorized for issue.
 The company intends to refinance Loan 3 for P 200,000 before it comes due on February. The
actual refinancing for P 175,000, took place in January, before the financial statements for this
year have been authorized for issue.
9. As of December 31, of this year, the total current liabilities to be reported in the company’s
statement of financial position should be
a. P 100,000
b. P 250,000
c. P 450,000
d. P 125,000
SOLUTION:
Loan 1 100,000
Loan 2 150,000
Loan 3 200,000
Current liabilities P 450,000
10. As of December 31, of this year, the total noncurrent liabilities to be reported in the company’s
financial position should be
a. P 25,000
b. P 0
c. P 175,000
d. P 350,000

Alvarez Hazel C.audit of Notes Payable Solution

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Alvarez Hazel C.audit of Notes Payable Solution

Uploaded by

Copyright:

Available Formats

Alvarez, Hazel C.

1. What is the equipment’s book value on December 31, 2018?

2. What is the carrying value of the note at December 31, 2018?

3. What is the cost of the machinery purchased on December 31, 2016?

5. What is the carrying value of the note at December 31, 2018?

8. What amount of lawsuit liability should be reported as a provision on Chris Company’s

You might also like