REFRESHER COURSE

AUDIT OF CURRENT LIABILITIES

PROBLEM 1
You are auditing the 2017 liabilities of BATALI INC. which follows the calendar year financial
statements reporting. The following information were available with regards to its currently
maturing obligations:
a. On December 31, 2017, Batali had P1M of short-term notes payable due February 7,
2018. On January 15, 2018, the company issued bonds with a face value of P900,000 at
96; brokerage fees and other costs of issuance were P3,450. On January 22, 2018, the
proceeds from the bond issue plus additional cash held by the company on December
31, 2017 were used to liquidate the P1M of short-term notes.
b. Another short-term debt in the form of notes payable totaling to P500,000 were due on
June 1, 2018. On February 2, 2018, Batali entered an agreement with National Life
Insurance Co. whereby National will lend Batali P400,000 payable in 5 years at 14%, the
proceeds of which is intended to be used to partly refinance the said notes. The money
will be available to the company on May 20, 2018.
c. Another P500,000 notes payable is due on June 15, 2018. At the financial statement
date December 31, 2017, Batali signed an agreement to borrow up to P500,000 to
refinance the notes payable on a long-term basis. The financing agreement called for
borrowings not to exceed 80 per cent of the value of the collateral Batali was providing.
At the date of issue of the December 31, 2017 financial statements, the value of the
collateral was P600,000 and was not expected to fall below this amount during 2018.

Assuming that the financial statements of Batali were authorized to be issued on March 31,
2018:
1. How much liabilities above are short term as of the balance sheet date?
a. 1,500,000
b. 1,520,000
c. 1,980,000
d. 2,000,000
2. How much liabilities above are long term as of the balance sheet date?
a. 2,000,000
b. 1,500,000
c. 980,000
d. 480,000

PROBLEM 2
During the performance of the cut-off tests for purchases, you examined the paid invoices file
of FRANCISCO MOTORS INC. Several invoices were found to have been erroneously recorded.
The firm is on the calendar year basis and a physical count was made on December 31, 2017.
The inventory was recorded by a credit to Cost of Sales. Other nominal accounts are yet to be
closed.
The following is a list of the invoices you took note during the cut-off testing:
Entered in
Invoice Shipping Invoice Invoice Receiving the
No. Terms: Date Amount Report Date Accounts
106 Shipping point 12/23/2017 11,000 12/29/2017 1/4/2018
490 Shipping point 12/28/2017 5,000 1/4/2018 12/31/2017
311 Destination 12/28/2017 20,000 12/31/2017 1/4/2018
60 Shipping point 12/29/2017 50,000 1/4/2018 12/31/2017
10 Destination 12/28/2017 7,000 1/4/2018 1/4/2018
11 Shipping point 12/30/2017 9,000 1/4/2018 1/4/2018
920 Destination 12/28/2017 27,000 1/4/2018 12/31/2017
767 Shipping point 12/29/2017 8,000 1/5/2018 1/6/2018

1. Based on the cut-off procedures, how much is the net adjustment to the accounts
payable (Hint: assume invoice date as supplier’s shipment date)?

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a. 21,000
b. 28,000
c. 39,000
d. 48,000
2. What is the net adjustment to inventories, end?
a. 72,000
b. 83,000
c. 88,000
d. 95,000

PROBLEM 3
Mountain Province Home Depot carries a wide variety of promotion techniques to attract
customers.
Kitchen and home appliances are sold in a one-year warranty for replacement of parts and
labor. The estimated warranty cost, based on past experience, is 5% of sales.

The premium is offered on the home furniture. Customer receives a coupon for each peso spent
on home furniture. Customers may exchange 2,000 coupons and P50 for a rice cooker which
the company purchased at P340 for each rice cooker and estimates that 60% of the coupons
given to customers will be redeemed.

The company’s total sales for 2016 were P115.2M – P86.4M from kitchen and home appliances
and P28.8M from home furniture. Replacement parts and labor for warranty work totaled
P2.624M during 2016. A total of 5,200 rice cookers used in the premium program were
purchased during the year and there were 9,600,000 coupons redeemed in 2016.

The accrual method is used by the company 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 items P 340,000
Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000
Based on the information above, determine:
1. Promotional expense related to premiums for the current year 2016?
a. 1,392,000
b. 1,632,000
c. 2,505,600
d. 2,937,600
2. Estimated liabilities for premiums as of December 31, 2016?
a. 716,000
b. 1,829,600
c. 2,021,600
d. 1,589,600
3. Estimated liabilities for warranties as of December 31, 2016?
a. 2,624,000
b. 3,872,000
c. 4,320,000
d. 5,312,000

PROBLEM 4
You have conducted several wrap-up audit procedures for BARRY CORP.’s financial statements
audit for the calendar year ended December 31, 2017. The financial statements were
authorized for issue by BARRY’s board on March 30, 2018. As part of these procedures you
gathered corroborating evidences with regards to the company’s assertions on pending
litigation cases and unasserted claims. Through the process you ascertained the following
information:
a. On January 5, 2018, inventory purchased FOB shipping point from a foreign country was
detained at the country’s boarder because of political unrest. The shipment is valued at
P1 million. The lawyers, in response to a letter of audit inquiry, stated that it is probable
that the company will be able to obtain the shipment.

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b. On December 31, the company is a defendant in a pending lawsuit which arose from an
alleged product defect that the company sold in 2016. The lawyers, in response to a
letter of audit inquiry, stated that it is probable that the company have to pay between
P300,000 to P700,000, with P400,000 as the best estimate. Moreover, it is reasonably
possible that the company will have to pay the P700,000 as a result of the lawsuit.
c. On January 17, 2018 an explosion occurred at the company’s plant causing damages to
adjacent areas. No claims had yet been asserted against the company as of the date of
authorization of the financial statements. The management as corroborated by their
counsel, however believes that it its probable that the company would be responsible for
damages and that P5,000,000 would be a reasonable estimate of its liability. BARRY’s
P20,000,000 comprehensive public liability has a P1,000,000 deductible clause.
d. On December 5, 2018 BARRY initiated a lawsuit against LORIE INC. seeking P2 million in
damages from patent infringement.
1. How much should be recognized as provisions for probable loss?
a. 400,000
b. 700,000
c. 1,700,000
d. 3,700,000
2. How much should be disclosed as contingent liability?
a. 0
b. 300,000
c. 700,000
d. 1,300,000
3. How much should be recognized as contingent asset?
a. 0
b. 1,000,000
c. 2,000,000
d. 2,700,000

PROBLEM 5
You were engaged to audit the financial statements of FELIX Company for the year ended
December 31, 2014. During the course of the audit, you obtained the following information
about the Company’s liabilities outstanding at December 31, 2014:
1. At December 31, 2014, FELIX has an obligation to its suppliers for the purchase of raw
materials amounting to P128,500.
2. At the end of 2014, the Company was in breach of a loan covenant in respect of a
P600,000 long-term loan from a bank that is otherwise repayable three years after. A
review of subsequent events disclosed that before the financial statements were
approved for issue, the bank formally agreed not to demand early repayment of the
loan.
3. On 1 January 2014 FELIX issued 1,000 of its P1,000 bonds for P1,000,000 in a private
transaction. On 1 January each year interest at the fixed rate of 5 per cent per year is
payable on outstanding capital amount of the bonds. On 31 December each year, the
entity has a contracted obligation to redeem 100 of the bonds at P1,000 per bond.
4. At December 31, 2014 the carrying amount of an entity’s unfunded obligation for long-
service leave was P1,000,000, P40,000 of which employees are entitled to take a leave
in the twelve months following the end of the reporting period. The balance of P60,000
is in respect of leave that employees are entitled to take only after the end of the next
annual reporting period. The entity anticipates that only 75 per cent of its employees will
take due during the next annual reporting period.

Required:
1. Compute the amount of current liability as of December 31, 2014.
a. P313,500 b.P903,500 c.P908,500 d.P303,500
2. Compute the amount of non-current liability as of December 31, 2014.
a. P1,470,000 b. P1,460,000 c. P870,000 d. P860,000

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PROBLEM 6
Included in MORGAN Corporation’s liability account balances at December 31, 2014 were the
following:
Notes payable, bank P2,800,000
Liability under Finance Lease 430,000
Deferred income taxes 360,000

Transactions during 2015 and other information relating to MORGAN’s liabilities were as follows:
1. The principal amount of the note payable is P2,800,000 and bears interest at 15%. The
note April 1, 2014 and is payable in four equal installments of P700,000 beginning April
1, 2015. The first principal and interest payment was made on April 1, 2015.
2. The capitalized lease is for ten-year period beginning December 31, 2012. Equal annual
payments of P100,000 are due December 31 of each year, and the 14% interest rate
implicit in the lease is known by MORGAN. The present value at December 31, 2014, of
the seven remaining lease payments (due December 31, 2015, through December 31,
2017) discounted at 14% was P430,000.
3. Deferred income taxes are provided in recognition of timing differences between
financial statement and income tax reporting of depreciation. For the year ended
December 31, 2015 depreciation per tax return exceeded book depreciation by P90,000.
MORGAN’S effective income rate for 2015 was 40%.
4. On July 1, 2015, MORGAN issued for P1,774,000, P2,000,000 face amount of its 10%,
P1,000 bonds. The bonds were issued to yield 12%. The bonds are dated July 1, 2015
and mature on July 1, 2020. Interest is payable annually on July 1. MORGAN puse the
interest method to amortize bond discount.
Compute for the following as of December 31, 2015:
A B C D
1. Long-term liabilities 3,921,268 3,525,268 3,885,268 3,996,640
2. Current Portion of 1,081,622 754,372 745,372 700,000
Long-Term Liabilities
3. Accrued Interest payable 100,000 336,250 268,250 462,250
4. Interest Expense 401,450 547,690 543,890 507,890

/rac

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