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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING PROBLEMS
AUDIT OF LIABILITIES QUIZZERS
PROBLEM NO. 1
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, 2005:
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, 2005.
Due date
April 31, 2005
July 31, 2005
September 1, 2005
February 1, 2006
April 1, 2006 March 31, 2007

Amount
600,000
900,000
450,000
450,000
2,700,000
P 5,100,000
P

Estimated warranties
Cavaliers has a one-year product warranty on some selected items. The estimated
warranty liability on sales made during the 2003 2004 fiscal year and still outstanding as
of March 31, 2004, amounted to P252,000. The warranty costs on sales made from April
1, 2004 to March 31, 2005, are estimated at P630,000. The actual warranty costs incurred
during 2004 2005 fiscal year are as follows:
Warranty claims honored on 2003 2004 sales
Warranty claims honored on 2004 2005 sales
Total

P 252,000
285,000
P 537,000

Trade payables
Accounts payable for supplies, goods, and services purchases on open account amount to
P560,000 as of March 31, 2005.
Dividends
On March 10, 2005, 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, 2005 to common stockholders on record at the close of business on March 31,
2005. As of March 31, 2005, Cavaliers has 5 million, P2 par value, common shares issued
and outstanding.
Bonds payable
Cavaliers issued P5,000,000, 12% bonds, on October 1, 1999 at 96. The bonds will
mature on October 1, 2009. Interest is paid semi-annually on October 1 and April 1.
Cavaliers uses the straight line method to amortize bond discount.
QUESTIONS:
Based on the foregoing information, determine the adjusted balances of the following as of
March 31, 2005:
1.

Estimated warranty payable

a. P252,000
b. P345,000

c. P630,000

d. P882,000

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2.
3.
4.
5.

Unamortized bond discount

a. P110,000
b. P200,000

c. P100,000

d. P90,000

Bond interest payable

a. P0
b. P300,000

c. P150,000

d. P250,000

Total current liabilities

a. P6,445,000
b. P5,105,000

c. P5,445,000

d. P3,945,000

Total noncurrent liabilities

a. P7,700,000
b. P7,590,000

c. P7,500,000

d. P7,610,000

SUGGESTED ANSWERS: B, D, B, C, D

PROBLEM NO. 2
Pirates Music Emporium carries a wide variety of music promotion techniques - warranties
and premiums to attract customers.
Musical instrument and sound equipment are sold in a one-year warranty for replacement
of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for
each peso spent on recorded music or sheet music. Customers may exchange 200
coupons and P20 for an AM/FM radio. Pirates pays P34 for each radio and estimates that
60% of the coupons given to customers will be redeemed.
Pirates total sales for 2005 were P7,200,000 - P5,400,000 from musical instrument and
sound reproduction equipment and P1,800,000 from recorded music and sheet music.
Replacement parts and labor for warranty work totaled P164,000 during 2005. A total of
6,500 AM/FM radio used in the premium program were purchased during the year and
there were 1,200,000 coupons redeemed in 2005.
The accrual method is used by Pirates 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, 2005, were as shown below:
Inventory of Premium AM/FM radio
Estimated Premium Claims Outstanding
Estimated Liability from Warranties

P39,950
44,800
136,000

QUESTIONS:
Based on the above and the result of your audit, determine the amounts that will be shown
on the 2005 financial statements for the following:
1.
2.
3.
4.
5.

Warranty expense
a. P108,000

b. P164,000

c. P144,000

d. P80,000

Estimated liability from warranties

a. P108,000
b. P136,000

c. P164,000

d. P80,000

Premium expense
a. P 75,600

c. P183,600

d. P126,000

Inventory of AM/FM radio

a. P46,950
b. P77,350

c. P39,950

d. P56,950

Estimated liability for premiums

a. P75,600
b. P63,450

c. P36,400

d. P44,800

b. P108,000

SUGGESTED ANSWERS: A, D, A, D, C

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PROBLEM NO. 3
In the audit process, the following data were obtained from the books of the Spurs
Company which uses a voucher system. All invoices are subject to term 2/10, n/30 and
are entered net with the discount entered in the Purchase Discount column of the voucher
register. The accountant in charge of the books went on leave to attend to his family
based in New Jersey. A fresh accounting graduate has been assigned to record the
transactions. At year-end, the substitute accountant finds that the unpaid vouchers do not
agree with the Vouchers Payable control account. You are called to adjust the matter.
A schedule of unpaid vouchers as of December 31, 2005, all of which are net of discount,
is presented to you:
Date
Nov. 27
Dec. 02
11
20
21
22
31

Voucher No.
797
821
829
836
842
856
865

Supplier
Duncan Supply Co.
Ginobili Distributors
Parker Sales
Mohamed Dealers
Bowen Merchandising
Horry Mercantile
Jackson Traders

Amount
P 78,400
19,600
44,100
17,150
22,050
80,850
78,400
P340,550

Vouchers Payable (control account)

Cash disbursements
P1,309,500 Purchases journal
Purchase returns journal
36,750*

P1,645,000

* Voucher Nos. 821 and 836 cancelled as goods were returned in December.

REQUIRED:
Based on the above and the result of your audit, compute for the following as of December
31, 2005:
1.
2.
3.
4.

Adjusted balance of Vouchers Payable

a. P310,000
b. P306,750

c. P303,800

d. P344,250

Purchase discounts lost on unpaid vouchers

a. P6,200
b. P2,950
c. P3,700

d. P0

Purchase discounts lost on paid vouchers

a. P28,750
b. P8,000
c. P5,050

d. P41,800

Adjusting journal entry or entries to correct the accounts will include

a. A debit to Purchase Discounts Lost of P11,250.
b. A debit to Purchase Discounts Lost of P5,050.
c. A credit to Vouchers Payable of P8,000.
d. A credit to Vouchers Payable of P11,250.

SUGGESTED ANSWERS: B, B, C, C

PROBLEM NO. 4
In your initial audit of Bulls Finance Co., you find the following ledger account balances.
12%, 25-year Bonds Payable, 2001 issue
01/01/2001 CR

P 1,600,000

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10/01/2005

CD

Treasury Bonds
P 216,000

Bond Premium
01/01/2001

01/01/2005
07/01/2005

CD
CD

CR

P 80,000

Bond Interest Expense

P 96,000
96,000

The bonds were redeemed for permanent cancellation on October 1, 2005 at 105 plus
accrued interest.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. The adjusted balance of bonds payable as of December 31, 2005 is
a. P1,400,000
b. P1,600,000
c. P1,000,000
d. P1,384,000
2. The unamortized bond premium on December 31, 2005 is
a. P80,000
b. P64,000
c. P56,000

d. P58,800

3. The total bond interest expense for the year 2005 is

a. P189,100
b. P182,900
c. P188,800

d. P182,800

4. The gain or loss on partial bond redemption is

a. P1,900 loss
b. P1,900 gain
c. P18,100 loss

d. P18,100 gain

SUGGESTED ANSWERS: A, C, B, A
End of AP-5902Q

AP-5902Q