AUDIT OF LIABILITIES

PROBLEM NO. 1
In the audit of the First Corporation’s financial statements at December 31, 2005, the
chief accountant of the said corporation provided the following information:
Notes payable:
Arising from purchase of goods 304,000
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security, P400,000 due
on June 30, 2006; P100,000 due on Dec. 31, 2006 500,000
Arising from advances by officers, due June 30, 2006 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2007 1,000,000
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000

On March 1, 2006, the P400,000 note payable was replaced by an 18-month note for the
same amount. First is considering similar action on the P100,000 note payable due on
December 31, 2006. The 2005 financial statements were issued on March 31, 2006.

On December 1, 2005, a former employee filed a lawsuit seeking P200,000 for unlawful
dismissal. First’ attorneys believe that the suit is without merit. No court date has been set.

On January 15, 2006, the BIR assessed First an additional income tax of P300,000 for the
2003 tax year. First’ attorneys and tax accountants have stated that it is likely that the BIR
will agree to a P200,000 settlement

REQUIRED:
Based on the above and the result of your audit, compute for the following as of December
31, 2005:
1. Total current liabilities
a. P2,500,000 b. P2,100,000 c. P2,300,000 d. P2,400,000

000.200. P992. 2005 to January 15. P2.923.000 d. bears interest at 18%. P912.000. On December 28. P5. 2005: a) A Company – P224. P5.000 4. Accounts payable: Accounts payable per general ledger control amounted to P5. a. P3. Bonus obligation: Second Company’s president gets an annual bonus of 10% of net income after bonus and income tax.500. P3. P3. 2005.000 b. c) C Super Services – P144.841. that should be reported as current liability in Second’s December 31. 1.440. Total noncurrent liabilities a. For each of the numbered items.000. 2006.000 credit memo was not received until January 6.000 is outstanding on December 31. and is payable in three equal annual installment of P800. The note is dated October 1. 2006. Litigation: In May.900.000 d. P776. and no amount is a better estimate of potential liability than any other amount. Inc. 2005. FOB destination. Assume the tax rate of 30% and the correct income before bonus and tax is P9. 2006.000 and shipped on December 20.000 Philhealth contributions 16.000. received on January 10.000 d.400.000 d. (Ignore the effects of other given items on net income. P3. P0 b. P2.601. P628. P722. 2005 are: Accrued salaries and wages P776. Payroll: Items related to Second’s payroll as of December 31.000.200 electric bill covering the period December 16.712.000 c. received on January 16. P5.000 c.000 b.000 PROBLEM NO. P2. The suit is being contested.000 debit balances in suppliers’ accounts.800.000 SSS contributions 64.000 janitorial services for the three-month period ending January 31. a supplier authorized Second to return goods billed at P160. 2005.000.000 3.000 b.000. P5. The goods were returned by Second on December 28. 2005. 2005 balance sheet.400.000 5. 2006. 2 The following information relates to Second Company’s obligations as of December 31. 2005.600 2.) a.000 a. The first interest and principal .300. 2005. d) MERALCO – P67.000. b) B.600 d.400.000 Payroll deductions for: Income taxes withheld 56. P5.600.000 c.000 Advances to employees 80. a.000 c. 2004.000 merchandise shipped on December 26.600 b.000 d. but the P160. 2006. Total liabilities a. 2005. P5. Second became involved in a litigation. P2. P395.200 b. P5.000 c. Note payable: A note payable to the Bank of the Philippine Islands for P2.2.000 3. – P192.240. The unpaid voucher file included the following items that not had been recorded as of December 31. FOB shipping point.000 and P3. but Second’s lawyer believes it is possible that Second may be held liable for damages estimated in the range between P2. determine the amount if any.000 c. P832.000 merchandise shipped on December 31.000. 2005. net of P240.000. P5.

a. The estimated warranty liability on sales made during 2004.000 d.800 b. P0 b. P1. consisting of the following items: Caused by temporary differences in accounting Deferred tax For gross profit on installment sales P376. P872. P72.280. On December 31. Actual warranty costs incurred during the current 2005 fiscal year are as follows: Warranty claims honored on 2004 sales P 416.200 Dr P772.000 c. Description Amount Charged . P320.000 PROBLEM NO. Second placed a coupon redeemable for a premium in each package of product sold. P1.000 c.000 units of inventory at fixed price of P5 per unit. 2005. Purchase commitment: During 2005.800. P1. For the six months ended December 31. 2005. Second Company inaugurated a promotional campaign on June 30.000 Cr.504. P0 b.800 Cr.000 c.000 d. The goods covered by the purchase contract were delivered on January 28. P196. P96. P1.600.000 a. P908.000 d. The warranty costs on sales made in 2005 are estimated at P1. P0 8.000 c. P0 b. P192. Due to Five Six Finance company: Second’s accounting records show that as of December 31. which was outstanding as of December 31.408. P1. 2005. Product warranty: Second has a one year product warranty on selected items in its product line.000 a. the purchase price of this inventory item had fallen to P4.000 of trade accounts receivable assigned to the finance company with recourse.728. 2005. a. 2004. P1. a. Date Ref.000 b.000 10. P772.152.000. a.000 7.600. P1. Second entered in a noncancellable commitment to purchase 320. delivery to be made in 2006. you obtained from the voucher register the information shown in the working paper below. P512. payment was made on October 1.000 Premiums purchased 16.000 9. Deferred taxes: On December 31.000 6. 2006.600. P800. P1. 2005. P1. 2005. The distribution cost per premium is P20. For depreciation on property and equipment 576.408.000 c. Second’s deferred income tax account has a 2005 ending credit balance of P772.600.000 was due to Five Six Finance Company for advances made against P1. Premiums: To increase sales. Each premium costs P100. 2005. Second estimated that only 60% of the coupons issued will be redeemed.800 d.280.000 Warranty claims honored on 2005 sales 992.000 Total warranty claims honored P1. the following is available: Packages of product sold 160. A premium is offered to customers who send in 5 coupons and a remittance of P30.504.000 c. P576.40 per unit.000 b. amounted to P416.000 Cr For product warranty expense 179. 3 In conjunction with your firm’s examination of the financial statements of Third Company as of December 31. P952.000 d.000.000 d. Item Entry Voucher Account No.000 Coupons redeemed 64.

05 20.000 Utilities expense 8 12.05 17.5.28.14.000 wages 14 01.05 to 1.6.000 Inventory 17 01.26. 12. 1.10.02.06 01-006 Manufacturing royalties.05 12-214 Merchandise shipped FOB shipping point.10. received Repairs and 12.10. Machinery and . 12. received.3.05 12-234 Merchandise shipped FOB destination.05 12-204 Auto insurance.06 01-009 Interest on bank loan.18.06.20.06 55.06 01-005 Merchandise shipped FOB shipping point.000 Inventory 5 12.000 insurance 3 12. 11.05.05 to 01. received Legal and 12. received. Date Ref.15.) 72.05.4.000 wages 6 12.4.06 maintenance 18 01.12.05 12-243 Merchandise shipped FOB destination. 12.000 Repairs and received 1.06 01-007 Merchandise shipped FOB destination.05. received.06 01-003 Merchandise shipped FOB shipping point.05 to Prepaid 12.15. 1.05 12-230 Utilities for December 2005 29.05 Salaries and (12 working days) 69.06 01-008 Maintenance services.05 24.02.21.500 Inventory 9 12.000 maintenance 4 12. 1.06 64.000 costs Item Entry Voucher Account No.05.20.000 Inventory 15 01.06 01-001 Legal services.9. Supplies on received.21.06 (12 working days in total.05.28. 1.000 subscription expense 7 12.05.06 01-004 Payroll.06 30.05 46.05.05 to 12.000 Interest expense 19 01. 10.06 01-002 Medical services for employees for December 2005 25. 12.26. Description Amount Charged 16 01. 1. 12.000 professional expense 11 01.05 12-219 Payroll.12. 12.13.000 Medical expense 12 01. 9.000 Inventory 13 01.05 84.29.15. 12.15. 12. 1.24. Manufacturing Dec.2.28.05 12-206 Repair services. purchased FOB destination.28.12.000 hand 2 12.18.10.2.05 12-221 Subscription to tax reporting Dues and service for 2006 5.06.17.20.000 Inventory 10 01.06 01-010 Manufacturing equipment. 12. received.29.05 12-202 Supplies.21.06 38.21. received. 2005 39. 1 12. received.06 111.06 24. Salaries and 4 working days in Jan. 12.

000 Accrued interest payable 26.500. Accrued interest payable. 4 During your regular annual audit of Fourth Company for the year ended December 31. Dividends 12.000 11/01/2005 CV. 2002 and are due May 1. 2004 balance of P9. 2005 were as follows: Accrued payroll 48.000 bonds with par value of P1.000 From supporting documents: CR Cash receipts entry for issuance of 2.100.000 on July 1.500.15. 2004 through April 30.140.000 payable Accrued liabilities as of December 31. 2003.000 Interest Expense 05/01/2005 CV-120 P600. 2006.000 represents proceeds from issuance of 10. Entry recorded Cash P2. 2005.100. Paid check to trustee attached. and Accrued royalties payable accounts were reversed on January 1. .531 720.000 bonds for a total of P2.000 each.000 bonds on November 2. 2005 based on your review of the data givenabove.05 254. REQUIRED: Prepare adjusting entries as of December 31.000 Interest expense 40. installed on 12.000 CV-120 Cash payment to trustee for November 1.000 07/01/2005 CR P40.000 Bonds Payable P2.100. 10-year Bonds Payable 12/31/2004 Balance P9.05 160.29.000 Accrued royalties payable 39. 2005.000 The Accrued payroll. From your permanent file working papers: Client is authorized to issue 20. PROBLEM NO.667 Dividends payable 160.000 07/01/2005 CR 2. From the client’s ledger: 12%. 2005 interest. 2012. Trustee’s remittance statement attached. Bonds are dated May 1. you obtain the following evidence and data relative to your examination of the bonds payable and related accounts.15.06 01-011 Dividends declared.000 equipment 20 01. The December 31. Interest at 12% per annum is due semiannually every May 1 and November 1.

Accrued interest payable d. Bond premium PROBLEM NO. the holders of the bonds with total face value of P1. The bond contract entitles the bondholders to receive 6 shares of P100 par value common stock in exchange for each P1. 2005: a. 2004 were: . 2. Bond discount e. Adjusting journal entries as of December 31. Your audit showed the following details of the issue and the accounts as of December 31. Use the bond outstanding method to amortize bond discount and premium. if any. Use the straight line method to amortize bond discount and premium. 2005 5% Serial Bonds Payable 10/02/2005 VR P1. The company floated a serial bond issue in 2003. the Sixth. Compute for the adjusted balances of the following as of December 31.000. In addition.000 10/02/2003 CR P4. 2005.000. Interest expense c.000 annually. Adjusting journal entries as of December 31.900.000.000. Bonds payable b. issued P2.000 exercised their conversion privilege. On December 31. REQUIRED: 1. 5 Fifth Company presented to you their records in connection with the audit of thecompany’s financial statements for the year ended December 31. the prevailing market interest rate for similar debt without the conversion option is 10%. Bond discount c. 6 On January 2.000 Interest rate 5% per annum Interest payment date October 1 Maturity date P1. 2005.000 Accrued Interest Payable 01/02/05 P62. Accrued interest b. Paid check to trustee attached. 2003 Proceeds from issue P4.000.000. 2004.500 REQUIRED: 1. 2005 interest. On the date of issue. Inc. The bonds will mature on January 1. 2. Compute for the adjusted balances of the following as of December 31. if any. bonds with a face value of P500. 2005. 2005 through October 31. This is the first time the company has been audited.000 Date of issue October 2. The balances in the capital accounts as of December 31. Bond interest expense PROBLEM NO.CV-531 Cash payment to trustee for May 1. the company reacquired at 110. 2005.000 bond.000 of 8% convertible bonds at par. 2005: Total amount P5.900. starting October 1. 2005: a. 2008 and interest is payable annually every January 1. Bonds payable d.

2005.502 3. Seventh uses the interest method to amortize bond discount.000 Premium on common stock 500. P2. P100 par. authorized 50.000 shares P3.000 c. 2011) discounted at 14% was P430. 2004? a. How much is the loss on bond reacquisition on December 31. 2014. 2002. How much of the proceeds from the issuance of convertible bonds should be allocated to equity? a.000 face amount of its 10%.276 b. 2005. P0 5.170 d. P1. 2004: Note payable. bank P 5. P221. Common stock. d. P2. and the 14% interest rate implicit in the lease known by Seventh. P190.000. 2004 118 40 December 31.000 b.774. The Bonds were issued to yield 12%. . 2005? a.000. The note is dated April 1.600. P96.600. P1. 2005 through December 31. 2005 will include a credit to APIC of a.000. On July 1. P160.000 Liability under finance lease 430.893 d. Equal annual payments of P100.000 b. Deferred income taxes are provided in recognition of timing differences between financial and income tax reporting of depreciation. The first principal and interest payment was made on April 1.400 c. P138. P0 2.000 Transactions during 2005 and other information relating to Seventh’s liabilities were as follows: a. Seventh’s effective income tax rate for 2004 was 32%. answer the following: 1. issued and outstanding. P1.796. 2004 and will mature on July 1. 7 In connection with your audit of Seventh Corporation’s financial statements for the year 2005. The entry to record the conversion on December 31. 2004 and is payable in four equal annual installments of P1.816 c. 2005 110 42 QUESTIONS: Based on the above and the result of your audit.500. 2005. The capitalized lease is for a ten-year period beginning December 31.000. The principal amount of the note payable is P5.053 c.000.050 4.000 and bears interest at 12%. P365. The present value at December 31. How much is the interest expense for the year 2005? a. How much is the carrying value of the bonds payable as of December 31. you noted the following liability account balances as of December 31.617 d. P126. P634.664 d.389. Interest is payable annually on July 1. depreciation per tax return exceeded book depreciation by P312. For the year ended December 31. b.000 beginning April 1. P307.000 bonds. c. 2004 of the seven remaining lease payments (due December 31.362 d. P179.000 b.900.400.000 are due on December 31 of each year.000 b. 2005. The bonds are dated July 1.000 Market value of the common stock and bonds were as follows: Date Bonds Common stock December 31. P67.000 Deferred income taxes 700. Seventh issued for P1. P400.000 shares. P1. 30.940 c. P0 PROBLEM NO. P50.

P707. Accrued interest payable as of December 31. P532. 2005 a.268 3. Total interest expense for the year 2005 a.610. P1.200 c.000 5.445.931. 2005 a.576 4. P484. Liability under finance lease as of December 31.000 c.372 b.446. P1. Current portion of long-term liabilities as of December 31. P432. determine the following: 1.760 .000 2.068 c.QUESTIONS: Based on the above and the result of your audit. 2005 a.628 d.000 d. P652. P381. P5.440 b. P5. 2005 a. P1.440 b. P712. Total noncurrent liabilities as of December 31.500.640 d.628 c.725.328 d.440 b. P5. P699. P390.828 d.770. P5. P344. P1.640 c.400. P478.600 b. P330.