COMPREHENSIVE PROBLEMS LIABILITIES-2

PROBLEM 1: You were assigned to audit the financial statements of PIPINO CORP. for the year ended December 31,2016.
The liability portion of the company’s balance sheet shows the following information:
Noncurrent liabilities
Notes payable P 7,195,000
Liability under capital lease 2,240,000 P 9,435,000
Current liabilities
Accounts payable P1,840,500
Warranties liability (42,500)
Deferred tax liability 250,000 2,048,000
Total P 11,483,000

Upon further investigation on the liabilities account, you discovered the following information:
a. The principal amount of the note payable is P8,000,000 and bears interest at 12% payable every March 31.
The note is dated April 1,2014 and is due 5 years after issuance. The prevailing market rate of interest when
the notes were issued was at 15%. The entry made by the client on April 1,2014 was to debit cash and credit
notes payable for the cash consideration received. No entry has been made since apart from the annual
interest payments every March 31, being debited to interest expense and credited to cash.

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b. The capitalized lease is for a eight- year period beginning December 31,2013 . Equal annual payments of

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P1,200,000 are due on December 31 of each year beginning December 31,2013. The implicit rate of the

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lease known to Pipino is 10%. The asset was recorded at the inception of the lease at the cash selling price of
the leased asset. The annual payments related to the lease transaction has been recorded by the company

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as a debit to the liability capital lease account.
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c. The result of a purchase cutoff on the company’s purchases transactions from December 15 to January 15
you have rendered is shown below:
Receiving Invoice Date Receiving Shipment Terms Amount
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Repot No. Report Date

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65212 12/15/2016 12/15/2016 FOB Shipping point P15,000

65213 12/17/2016 12/20/2016 FOB Shipping point 16,000
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65214 12/21/2016 12/21/2016 FOB Destination 17,500

65215 12/26/2016 12/30/2016 FOB Destination 20,000
65216 12/30/2016 01/02/2017 FOB Shipping point 30,000
65217 12/30/2016 01/02/2017 FOB Shipping point 28,000
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65218 12/31/2016 01/03/2017 FOB Destination 19,000

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65219 01/02/2017 01/05/2017 FOB Buyer 30,500

65220 01/05/2017 01/10/2017 FOB Shipping point 41,000
65221 01/07/2017 01/11/2017 FOB Shipping point 22,000
65222 01/10/2017 01/15/2017 FOB Destination 25,000
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d. The company has a two-year warranty on its products. The warranty estimates in the past years were at 5%
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of the net sales. During the current year because of increased returns the company decided to increase
warranty estimates at 8% of its total net sales, 70% of which is expected to be incurred during the year of
sale and the balance on the year following the year of sale. Presented below are information relevant to
your audit:
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2014 2015 2016

Net sales P24,000,000 P 27,150,000 P 31,650,000
Actual warranty costs paid 1,150,000 1,450,000 1,950,000

The company is yet to update its warranty liabilities as of December 31,2016.

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 Required:
1. What is the correct balance of the Notes Payable as of December 31,2016?
a. 7,314,250 b. 7,451,388 c. 7,569,669 d. 7,609,096
2. What was the initial amount debited to the asset account at the inception of the finance lease?
a. 2,240,000 b. 3,440,000 c. 5,640,000 d. 7,040,000
3. How much is the total non-current liabilities to be presented in the 2016 balance sheet?
a. 8,389,565 b. 10,550,813 c. 10,800,813 d. 11,370,709
4. What is the correct accounts payable as of December 31,2016?
a. 1,722,000 b. 1,750,000 c. 1,778,000 d. 1,797,000
5. What is the correct warranty expense in 2016?
a. 582,000 b. 1,582,500 c. 1,950,000 d. 2,532,000
6. How much should be presented as current liabilities in the balance sheet of Pipino as of December 31,2016?
a. 2,289,500 b. 3,871,896 c. 3,109,396 d. 5,539,500

PROBLEM 2: 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, 2016. Information 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

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shall receive a coupon for each P50 spent on Class A laundry appliance. Customers may exchange 400
coupons and P1,000 for a dryer. Labandera pays P5,100 for each dryer and estimates that 60% of the

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coupons given to customers will be redeemed. A total of 4,500 dryers to be used on the premium program

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were purchased during the year and there were 1,680,000 coupons redeemed during the year.

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b.
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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
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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 2016.
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c. The company provides key employees 5% bonus based on the net income of the company after tax. The
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same is yet to be accrued at year end.

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d. Labandera uses the accrual method to account for the warranty and premium cost for financial reporting
purposes. Labandera’s sales for 2016 totaled P280,000,000, 60% of which is attributed to Class A laundry
appliance sales.
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e. The company reported the following balances at year-end:

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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 adjustment 80,164,000
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1. What is the correct premium liability as of December 31, 2016?

a. 4,824,000 b. 3,444,000 c. 1,530,000 d. 1,230,000
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2. What is the correct warranty expense?

a. 1,640,000 b. 1,720,000 c. 2,240,000 d. 3,360,000
3. What is the total bonus to key employees?
a. 2,395,577 b. 2,468,354 c. 2,480,916 d. 3,865,504
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4. What is the correct income tax?

a. 25,381,679 b. 25,386,076 c. 25,411,548 d. 25,897,074
5. What is the correct net income?
a. 47,137,405 b. 47,145,570 c. 47,192,875 d. 46,237,422

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 PROBLEM 3: ABC Corporation, meat processing company, reported the following balances on the liability portion of its
Statement of Financial Position as of December 31, 2016:
Current Liabilities
Accounts payable – trade P1,250,000
Estimated Premiums Liability ?
Accrued Compensated Absences 360,000
Deferred Tax Liability 124,000
Additional information:
a. The result of your purchases cut-off revealed the following results:
December 2016 Purchase Journal Entries

Receiving Invoice Receiving Amount Remarks

Report Date/Shipment Report date
Number Date
100294 12/20 12/23 P20,000 FOB Destination
100295 12/22 12/26 50,000 FOB Destination
100296 12/27 12/30 70,000 On Consignment
100297 12/28 1/2 55,000 FOB Shipping Point

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100298 12/29 1/3 60,000 FOB Destination

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100299 12/30 1/4 80,000 FOB Shipping point

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January, 2017 Purchase Journal Entries

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Receiving Invoice Receiving Amount Remarks
Report Date/Shipment Report date

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Number Date
100300 12/29
rs e 1 /4 P40,000 FOB Destination
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100301 12/30 1 /4 50,000 FOB Shipping point
100302 12/30 1/5 70,000 On Consignment
100303 1 /4 1/6 75,000 FOB Shipping point
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Note: Inventory has been correctly set-up based on an inventory count conducted on December 31, 2016 with
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appropriate reconciliation and adjustments.

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b. The company inaugurated a Premiums Promotional Plan at the beginning of 2015. Under the said promotional
program, customers are given frying pan for every 30 product label that they may be able to present plus P40.
The customers may be able to redeem their premiums within 2 years from date of purchase. In anticipation for
the premium’s redemption, the company acquired 20,000 units of frying pan at P 100 per pan in 2015 (3,500 of
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which remained on hand at the end of 2015) and additional 15,000 units in 2016 (the ending inventory of
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premiums at the end of 2016 is 6,000 units). the company sales volume in 2015 and in 2016 were 1,500,000 and
1,800,000 respectively. The company further estimates that only 60% of the product labels will be presented for
premiums redemption. The premium liability per books, represented the balance of the premiums liability at the
end 2015. Adjustments are yet to be made for the current year for the said liability account.
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c. Employees are entitled 15 day vacation leaves and 15 day sick leaves every year. At the beginning of 2016, the
liability for the compensated absences (as presented per books) was for 1,200 days combines vacation and sick
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leaves forwared from the previous years, as employees are allowed to carry over unused sick leaves and vacation
leaves up to two years, upon which any unused leaves are forfeited. In 2016, additional 900 days unused leaves
were forwarded to subsequent year. From the unused leaves prior to 2016, 450 were used in 2016 and 300 were
forfeited. There was a 10% increase in employees salaries during the current year. The unadjusted balance of the
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accrued liability for compensated absences per books reflected the beginning balance of the account.
Adjustment for accrual at the year-end is yet to be made.
d. The deferred tax liability balance is the net deferred tax consequence of the company’s premiums expense which
is tax deductible when actual redemption occurs and prepayments which are tax deductible upon payment.
Prepayments had adjusted balances of P 1,120,000 and P 970,000 at the end of 2015 and 2016 repectively.

e. The key officers of the company are given incentives in the form of 10% net income after bonus but befor 40%
income tax. The unadjusted net income of the company as reported per books was at P 5,450,000..
1. What is the correct balance of the Accounts Payable-trade as of December 31,2016?

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 a. 1,100,000 b. 1,120,000 c. 1,170,000 d. 1,220,000
2. What is the balance of the Estimated Premiums Liabilities as of December 31,2015?
a. 2,220,000 b. 1,350,000 c. 3,700,000 d. 810,000
3. What is the correct Premiums Expense to be reported in 2016?
a. 2,160,000 b. 3,600,000 c. 990,000 d. 1,800,000
4. What is the correct Accrued Liability for Compensated Absences as of December 31,2016?
a. 360,000 b. 445,500 c. 405,000 d. 396,000
5. What is the correct deferred tax liability as of December 31,2016?
a. 44,000 b. 362,000 c. 388,000 d. 358,400
6. What is the correct Accrued Bonus to key officers as of December 31,2016?
a. 333,450 b. 356,569 c. 366,773 d. 371,901
7. What is the correct total current liabilities to be presented in the 2014 Statement of Financial Position?
a. 4,202,273 b. 4,369,341 c. 5,842,069 d. 6,049,341
PROBLEM 4: YZ Corporation reported the following balances on the liability portion of its Statement of Financial Position
as of Decemeber 31,2016:
Noncurrent Liabilities
Note Payable, Bank 10% 4,500,000
Bonds Payable, 12% 3,231,652
Finance Lease Liability 2,200,000

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Additional Information:
a. The note payable to the bank was originated on September 1, 2015 and is due annually at the rate of P1.5M

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every August 31 starting 2016. Interest which is based on the outstanding balance of the loan is also payable

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every August 31. Interest is yet to be accrued on the note by the balance sheet date. Payments on the note and

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interest duringthe current year had been recorded appropriately.

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b. The 5 year, 12% bonds payable (with a face value of P3M) were issued on January 1, 2016 at the prevailing
market rate of interest which is 10%. Interest on the bonds are payable semi-annually every June 30 and
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December 31. The entry made by the client to record the issuance was debit cash and credit bonds payable for
the total cash consideration received.
c. The Lease Liability is in relation to XYZ’s purchase of a machine on December 31, 2015. The machine was
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delivered the same to the company. The lease stipulates that annual payments will be made for 5 years starting
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December 31, 2015. At the end of the 5 year term, the company may purchase the machine. The estimated
economic life of the machineis 12 years. Your further investigation revealed the following terms of the
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transaction:
Annual lease payments P550,000
Purchase option price 250,000
Estimated fair value after 5 years 750,000
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Emplicit rate 10%

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Borrowing rate 12%

Entry made:
Equipment P2,750,000
Cash 550,000
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Finance Lease Liability 2,200,000

Payment on December 31, 2016 is yet to be recorded.
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1. What is the amount to be capitalized as an asset for the lease of the machinery?
a. 2,293,450 b. 2,240,170 c. 2,448,656 d. 2,759,130
2. What is the carrying value of the leased asset as of December 31, 2016?
a. 1,958,925 b. 2,244,601 c. 2,448,656 d. 2,040,547
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3. What is the correct total noncurrent liabilities to be presented in the 2016 Statement of Fnancial Position?
a. 7,336,271 b. 6,193,897 c. 5,842,069 d. 6,049,341
4. What is the correct total current portion of long-term debts to be presented in the 2016 Statement of Financial
Position?
a. 1,500,000 b. 1,896,148 c. 1,860,134 d. 2,005,457
5. What is the total interest expense to be reported in the 2016 income statement?
a. 1,026,097 b. 1,009,211 c. 1,062,111 d. 662,111

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