UNION CHRISTIAN COLLEGE

City of San Fernando, La Union

School of Business and Sciences

Accountancy Program

MOCK BOARD EXAMINATION

SY 2019-2020

Audit of Liabilities

I. Cute Pipol, Inc. has produced quality children’s apparel for over 25,000. The company’s fiscal year is
from April 1 to March 31. The following information relates to the obligations of Cute Pipol as of March
31,2006:

Bonds Payable: The company issued 7% P4,000,000 bonds on July 1,2000 at 98. The bonds mature on
July 1,2010. Interest is paid semi-annually on July 1 and January 1. Cute Pipol uses the straight-line
method to amortize the bond discount.
Notes Payable: Cute Pipol has signed several long-term notes with financial institutions and insurance
companies. The maturities of these are given below. The total unpaid interests for all these notes
amount to P90,000 as of March 31,2006
Due date Amount due
April 1,2006 100,000
July 1,2006 200,000
October 1,2006 100,000
January 1,2007 200,000
April 1,2007-March 31,2008 600,000
April 1,2008-March 31,2009 400,000
April 1,2009-March 31,2010 400,000
April 1,2010=March 31,2011 500,000
April 1,2011- March 31,2012 500,000
TOTAL P3,000,000

Estimated Warranties: Cute Pipol has a one-year product warranty on selected items. The estimated
warranty liability on sales made during 2004-2005 fiscal year and still outstanding as of March 31,2005,
amounted to P55,000. The warranty costs on sales made fro April 1,2005 to March 31,2006 are
estimated at P145,000. The actual warranty costs incurred during the current 2005-2006 fiscal year were
as follows:
Warranty on 2004-2005 sales 55,000
Warranty on 2005-2006 sales 75,000
TOTAL P130,000

Trade payables: Accounts payable for supplies goods and services purchased on open account
amounted to P325,000 as of March 31,2006.

Payroll related items: The following outstanding obligations relate to the payroll as of March 31,2006:
Accrued salaries and wages 145,000
Income taxes withheld from employees 45,000
Other payroll deductions 3,000

Taxes: The following taxes are incurred but not due until the next fiscal year
Income taxes 250,000
Property taxes 100,000
Value-added taxes 185,000

Other accruals: Other accruals amounted to P50,000 as of March 31,2006.

Dividends: On March 15,2006 the company’s board of directors declared a cash dividend of P0.40 per
share and a 10% share dividend. Both dividends were to be distributed on April 12,2006 to the ordinary
shareholders of record at the close of business on March 31,2006. Data regarding the company’s
ordinary shares were as follows:
Par value P5 per share
Number of shares issued and outstanding 2,000,000
Number of shares subscribed 500,000
Market value of ordinary shares:
March 15,2006 22.00
March 31,2006 21.50
April 12,2006 22.50

1. How much is the total long-term liabilities?

a. 6,320,000
b. 6,366,000
c. 6,354,000
d. 6,400,000

2. What is the total current liabilities?

a. 2,933,000
b. 2,883,000
c. 3,000,000
d. 2,500,000

II. You have conducted several wrap-up audit procedures for BAARRY CORP’s financial statements audit
for the calendar year ended December 31,2007. The financial statements were authorized for issue by
BARRY’s board on March 30,2008. 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 5,2008 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 bale to obtain
the shipment.
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 2006. 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, 2008, an explosion occurrent 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 is
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 5,2008 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 losses?

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

III. You are auditing the financial statements of PUERTO FURNITURES INC. for the year ended
December 31,2007. The liability portion of the company’s balance sheet shows the following
information:
Current Liabilities:
Accounts payable 250,000
Warranties liability 10,000 260,000
Noncurrent Liabilities:
Liability under finance lease 540,000
Bonds payable 851,706 1,391,706

Upon further investigation on the liabilities account, you discovered the following information.
a. Accounts payable:
You rendered purchases cutoff on the company’s purchases transactions from December 15 to January
15. The results of such cut-off are summarized below:
Receiving Report
No. Amount Invoice Date Shipment date Shipment Terms
2631 5,500 12/15/2007 12/15/2007 FOB Supplier
2632 6,000 12/17/2007 12/20/2007 FOB Supplier
2633 7,900 12/21/2007 12/21/2007 FOB Buyer
2635 8,900 12/26/2007 12/30/2007 FOB Buyer
2636 10,000 12/30/2007 12/30/2007 FOB Supplier
2637 8,000 12/30/2007 1/2/2008 FOB Supplier
2638 9,500 12/31/2007 12/31/2007 FOB Buyer
2639 10,500 1/2/2008 1/5/2008 FOB Buyer
2640 11,000 1/5/2008 1/10/2008 FOB Supplier
2641 12,000 1/7/2008 1/11/2008 FOB Supplier
2642 15,000 1/10/2008 1/15/2008 FOB Buyer

The inventory count procedures were done in December 31,2007 and documents cut-off shows that the
last receiving report used and recorded for the current year by the company is RR number 2635.

Receiving report number 2634, is for a shipment made on December 27,2007. The related invoice
amounting to P12,500, was misplaced and was recovered only on January 5,2008 and was recorded
thereafter.

b. Warrant Liability
The company has a two-year warranty on its products. The warranty estimates in the past years were at
5% of the net sales. During the current year because of increased returns the company decided to
increase warranty estimates at 6% of its total net sales, two thirds of which is expected to be incurred
during the year of sale and actual warranty costs incurred for the past three years are presented below
(Assume sales were made evenly throughout the year):
2005 2006 2007
Net Sales 8,000,000 9,050,000 10,550,000
Actual Warranty costs paid 375,000 467,500 310,000

The company is yet to update its warranty liabilities as of December 31,2007.

c. Other accruals
You also conducted a search for unrecorded liabilities by reviewing the voucher register several days
before and after the balance sheet date. You review is summarized below:
Voucher Account
Entry Date Reference Description Amount Charged
Supplies, shipped FOB
December destination Unused
18,2007 12 - 200 received 12/17 1,500 supplies
December Auto insurance, 12/15/2007 Prepaid
18,2007 12 - 203 to 12/15/2008 20,000 insurance
December 12 - 212 Repairs services; 1,900 Repairs and
26,2007 received 12/20 maintenance
December Utilities
28,2007 12 - 215 Utilities for December 2,400 expense
Legal and
Legal services; professional
January 3,2008 1-1 received 12/28/2007 4,600 fees
Medical services for
employees Medical
January 4,2008 1–2 in 2007 5,500 expense
Payroll 12/21/2007 to
1/5/2008
(12 working days, 4 days In Salaries and
January 10,2008 1–3 Jan) 14,400 wages
Royalty
January 12,2008 1–4 Royalties in December 3,900 expense
Repairs services; Repairs and
January 14,2008 1-5 received on 1/9/2008 1,900 maintenance

d. Liability Under Finance Lease

The company leases one of its warehouse from Princesa Properties Inc. The terms of the lease provide
for minimum lease payments of P150,000 per quarter, payable at the beginning of the quarter. The
initial lease term runs for ten years with no renewal or purchase options. The company is responsible for
paying property taxes and also needed repairs to the warehouse. The cost of the warehouse to Princesa
Properties was at P3,000,000 and the market value at the date of completion was P4,185,388. The
explicit interest rate in the lease agreement is 8%. The lease was signed and the warehouse occupied on
January 2,2007.
The company recorded the lease liability at the total amount expected to be paid for the 10-year period
and changes the same for the quarterly payments made.
e. Bonds Payable
The company issued P800,000 of 12% face value bonds for P851,706. The bonds were dated and issued
on April 1,2007 are due March 31,2011 and pay interest semiannually on September 30 and March 31.
The company sold the bonds to yield 10%.

Required:

1. What is the correct balance of the accounts payable account?

a. 272,500
b. 282,000
c. 290,000
d. 260,000

2. What is the correct balance of the warranty’s liability?

a. 308,000
b. 318,000
c. 323,000
d. 333,000
3. How much is the correct additional accruals to be included in the company’s total current liabilities?
a. 49,400
b. 28,400
c. 23,600
d. 25,500

4. What is the balance of the liability under finance lease to be presented as long-term liabilities?
a. 3,912,158
b. 3,823,326
c. 3,616,404
d. 3,50,251

5. How much is carrying value of the bonds payable as of December 31,2007?

a. 843,448
b. 840,606
c. 843,584
d. 840,817