AP Long Test 3 - Liabilities

AUDITING PROBLEMS LIABILITIES
1. When the interest payment dates of a bond are May1 and November 1, and a bond issue is
sold on June 1 the amount of cash received by the issuer will be
a. Decreased by accrued interest from June 1 to November 1.
b. Decreased by accrued interest from May1 to June 1.
c. Increased by the accrued interest from June 1 to November 1.
d. Increased by accrued interest from May 1 to June 1.
2. Dora Co. is being sued for illness caused to local residents as a result of negligence on the
company’s part in permitting the local residents to be exposed to highly toxic chemicals
from its plant. Dora’s lawyer states that it s probable that Dora will lose from P5,000,000 to
P25,000,000. However, the lawyer states that the most probable cost is P10,000,000. As a
result of the above facts, Dora should accrue
a. A loss contingency of P5,000,000 and disclose an additional contingency of up to
P20,000,000.
b. A loss contingency of P10,000,000 and disclose an additional contingency up to
P15,000,000.
c. A loss contingency of P10,000,000 but nit disclose any additional contingency.
d. No loss contingencies but disclose a contingency of P5,000,000 to P25,000,000.
3. Information prior to the issuance of the financial statements indicates that it is probable
that, at the date of the financial statements, a liability has been incurred for obligations
related to product warranties. The amount of the loss involved can be reasonably estimated.
Based on the above facts, an estimated loss contingency should be
a. Accrued.
b. Disclosed but not accrued.
c. Neither accrued nor disclosed.
d. Classified as an appropriation of retained earnings.
4. Of the following items, the one that should be classified as a current liability is
a. Dividends in arrears on cumulative preferred stock.
b. Unfunded past service costs of a pension plan to the extent that benefits have not
vested and the costs have not been charged to operations.
c. An accommodation endorsement on a demand note issued by an affiliated company.
d. A cash dividend declared before the balance sheet date.
We know that all things work together for good to those who love God. – Romans 8:28 ://KBG Page 1 of 9
Classified as Confidential. Please do not forward this to unintended users. Otherwise, request necessary permission.
5. What is the underlying concept governing the generally accepted accounting principles
pertaining to recording gain contingencies?
a. Conservatism
b. Cost-benefit
c. Reliability
d. Representational faithfulness
6. What is the underlying concept that supports the immediate recognition of a contingent
loss?
a. Substance over form
b. Consistency
c. Matching
d. Conservatism
7. Estimated liabilities are disclosed in financial statements by

a. A footnote to the statements.
b. Showing the amount among the liabilities but not extending it to the liability total.
c. An appropriation of retained earnings.
d. Appropriately classifying them as regular liabilities in the balance sheet.
8. To increase sales, Adversity Company inaugurated a promotional campaign on June 30,

2020. Adversity placed a coupon redeemable for a premium in each package of cereal sold
at P300. Each premium cost P200. A premium is offered to customers who send in 5
coupons and a remittance of P50. The distribution cost per premium is P10. Adversity
estimated that only 80% of the coupons issued will be redeemed. For the six months ended
December 31, 2020, the following is available:
Packages of cereal sold 50,000

Premiums purchased 8,000
Coupons redeemed 30,000
What is the estimated liability for coupons on December 31, 2020?
9. Advisory Company includes one coupon in each box of laundry soap it sells. A towel is
offered as a premium to customers who send in 10 coupons and a remittance of P5. Data for
the premium offer are:
2019 2020
Boxes of soap sold 1,000,000 1,500,000
Number of towels purchased at P50 per towel 40,000 65,000
Number of towels distributed as premium 35,000 58,000
Number of towels to be distributed as premium next period 3,000 5,000
In its 2020 income statement, Advisory Company should report premium expense at
10. Destination Company launched a sales promotional campaign on June 30, 2020. For every
ten empty packs returned to Destination, customers will receive an attractive food
container. The company estimates that only 30% of the packs reaching the market will be
redeemed. Additional data are as follows:
Units Amount
Sales of food packs 3,000,000 9,000,000
Food containers purchased 60,000 1,800,000
Prizes distributed to customers 37,000
At the end of the year, Destination should recognize a liability equal to the estimated cost of
potential prizes at
11. During 2020, Luciana Company introduced a new product carrying a two-year warranty
against defects. The estimated warranty costs related to peso sales are 3% within 12 months
following sale and 5% in the second 12 months following sale. Sales and actual warranty
expenditures for the years ended December 31, 2019 and 2020 are as follows:
Sales Actual expenditures

2019 40,000,000 1,000,000
2020 50,000,000 4,000,000
At December 31, 2020, Luciana would report estimated warranty liability of
12. Loyola Company issued a P5,000,000 notes payable on April 1, 2019 bearing an interest rate
that is compounded annually on March 31, 2021. If the principal and the interest is payable
on maturity date, what is the accrued interest to be reported on Loyola’s December 31,
2020 balance sheet?
13. Included in Ingenuity Company’s liability balances at December 31, 2020 were the following:
10% note payable issued on October 1, 2019, maturing October 1, 2021 3,000,000
12% note payable issued on March 1, 2018, maturing on March 1, 2021 5,000,000
Ingenuity’s 2020 financial statements were issued on March 31, 2021. On January 31, 2021,
the entire P5,000,000 balance of the 12% note payable was refinanced through issuance of a
long-term obligation payable lump sum. Under the loan agreement for the 10% note
payable, Ingenuity has the discretion to refinance the obligation for at least twelve months
after December 31, 2020. What amount of the notes payable should be classified as current
on December 31, 2020?
14. Patio Company sells gift certificates redeemable only when merchandise is purchased. The
certificates have an expiration date two years after issuance date. Upon redemption or
expiration, Patio recognizes the unearned revenue as realized. Data for 2020 are as follows:
Unearned revenue, 1/1/2020 2,500,000

Gift certificates sold 6,000,000
Gift certificates redeemed 6,500,000
Expired gift certificates 500,000
Cost of goods sold 60%
At December 31, 2020, Patio report unearned revenue for gift certificates of
15. Horner Company requires advance payments with special orders for machinery constructed
to customer specifications. These advances are non-refundable. Data for the year are:
Customer advances 6,800,000

Advances received with orders in 2020 9,000,000
Advances applied to orders shipped in 2020 8,700,000
Advances applicable to orders cancelled in 2020 2,600,000
The December 31, 2020 balance sheet should report current liability for advances at
16. On November 5, 2020, a Breakthrough Company truck was in an accident with an auto
driven by McAllen. Breakthrough received notice on January 15, 2021, of a lawsuit for
P4,000,000 damages for personal injuries suffered by McAllen. Breakthrough’s counsel
believes it is probable that McAllen will be awarded an estimated amount in the range
between P2,000,000 and P3,000,000, and no amount is a better estimate of potential
liability than any other amount. The accounting year ends on December 31, and the 2020
financial statements were issued on March 31, 2021. What amount of provision should
Breakthrough accrue at December 31, 2020?
a. 4,000,000
b. 3,000,000
c. 2,000,000
d. 2,500,000
In the course of your audit of PWEDE BA Inc. for the year ended December 31, 2020, you took
note of the following information:
ITEM AUDIT NOTES

a. Accounts payable – trade, Php170,000 This amount is net of Php30,000 accounts
with debit balances.
b. Notes payable – trade, Php70,000 The notes are all with five-months term
bearing interest rate at 5%. Php50,000 from
the notes is dated September 1, while the
rest are dated November 3.
c. Advance receipts from customers, The goods pertaining to these advances will
Php100,000 be delivered in 2020.
d. Containers deposit, Php50,000 This is an amount received from customers
for returnable containers
e. Notes payable – BPI, Php200,000 This is a long-term note for five years and are
being paid off at the rate of Php4,000 per
month.
f. Dividends in arrears on cumulative The company is yet to declare dividends since

preferred stock, Php20,000 its last declared and distributed dividends in
2018.
g. Stock dividends payable on common
stocks, Php37,200
h. Liabilities under guarantee agreement, This pertains to PWEDE BA’s guarantee of its
Php45,000 employees’ bank loans. As per past
experience, employees unlikely default on
their loan payments.
i. Convertible bonds, Php1,000,000 1,000 bonds is convertible to 10 ordinary
shares. Amount due on December 31, 2023.
j. Notes payable – officers, Php40,000 This is due in six months.
k. Salaries and wages Payroll for the period December 16, 2020 to
January 15, 2021 amounted to Php68,000.
l. Notes receivable, Php30,000 This note has been discounted in a bank
where the company received cash of
Php24,000.
m. Output VAT, Php246,000 Input VAT on purchases and other operating
expenses amounted to Php164,000.
n. Accounts receivable, Php215,000 The accounts receivable is net of Php212,300
customer credit balances.
o. Cash in banks, Php115,000 The company’s cash in banks include a cash
balance with BPI amounting to Php125,000;
with PNB amounting to Php55,000, and; an
overdraft balance with BDO.
p. Common stock warrants outstanding Amount to date, Php250,000.
q. Common stock options outstanding Amount to date, Php150,000.
r. Estimated warranty costs on goods sold, This pertains to warranty costs on goods sold
Php46,000. in 2019 and 2020.
s. Installment notes payable, Php75,000 This is for the equipment purchases, only
one-third is due in 2021.
t. Provision for losses During the year, one of the manufacturing
equipment of the company exploded injuring
an employee. The employee filed claims for
damages on November 3. There has still been
no resolution yet on the case as of the
balance sheet date. The company lawyers
however believe that it is probable that the
company will be liable between Php25,000
and Php75,000.
u. Deferred tax liability, Php150,000 This refers to deferred tax liabilities on

cumulative temporary difference on taxable
income and financial income which will
reverse evenly over the next two years.
17. How much is the total current liabilities?
18. How much is the total noncurrent liabilities?
19. How much is the total liabilities?
You are auditing the 2020 liabilities of BATINATAYO Inc. which follows the calendar year
financial statements reporting. The following information were available with regards to its
currently maturing obligation:
a. On December 31, 2020, the company had Php1,000,000 of short-term notes payable due
February 07, 2021. On January 15, 2021, the company issued bonds with a face value of
Php900,000 at 96; brokerage fees and other costs of issuance were Php3,450. On
January 22, 2021, the proceeds from the bond issue plus additional cash held by the
company on December 31, 2020 were used to liquidate the Php1,000,000 of short-term
notes.
b. Another short-term debt in the form of notes payable totaling to Php500,000 were due
on June 1, 2021. On February 02, 2021, the company entered an agreement with
National Life Insurance Co, whereby National will lend BATINATAYO Php400,000 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, 2021.
c. Another Php500,000 notes payable is due on June 15, 2021. At the financial statement
dated December 31, 2020, the company signed an agreement to borrow up to
Php500,000 to refinance the notes payable on a long-term basis. The financing
agreement called for borrowings not to exceed 80% of the value of the collateral the
company was providing. At the date of issue of the December 31, 2020 financial
statements, the value of the collateral was Php600,000 and was not expected to fall
below this amount during 2021.
Assuming that the financial statements of BATINATAYO were authorized to be issued on March
31, 2021:
20. How much liabilities above are short term as of the balance sheet date?
21. How much liabilities above are long term as of the balance sheet date?
During the performance of 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, 2020. 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:
Invoice Shipping Terms Invoice Invoice Receiving Entered in the

No. Date Amount Report Date accounts
106 Shipping Point 12/23/2020 Php 11,000 12/29/2020 01/04/2021
490 Shipping Point 12/28/2020 5,000 01/04/2021 12/31/2020
311 Destination 12/28/2020 20,000 12/31/2020 01/04/2021
060 Shipping Point 12/29/2020 50,000 01/04/2021 12/31/2020
010 Destination 12/28/2020 7,000 01/04/2021 01/04/2021
011 Shipping Point 12/30/2020 9,000 01/04/2021 01/04/2021
920 Destination 12/28/2020 27,000 01/04/2021 12/31/2020
767 Shipping Point 12/29/2020 8,000 01/05/2021 01/06/2021
22. 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)?
23. What is the net adjustment to inventories, end?
San Mig Corp. began operation on January 02, 2019 with 250 employees. The company provides
its employees 2 weeks paid sick leave and 2 weeks paid vacation leave for every operating year.
The company’s policy on sick leave and vacation leave allows each employee to carry over
accumulated leaves for the current period over the next year only. The same shall be forfeited if
not availed of over the said period allowed.
On December 31, 2019, records show that there are 55 employees who are yet to avail of any
leaves, while there are 25 employees who have remaining 2 weeks unused vacation and sick
leaves combined. Employees had an average daily wage rate of Php250 for a 5-day weekly
operation in 2019.
On December 31, 2020, records show that 925 days vacation and sick leaves carried over from
the last operating period were exercised and paid in 2020. In addition, there are 30 employees
who have 6 weeks accumulated unused sick leaves and vacation leaves combined; 25
employees who have accumulated 3 weeks unused sick leaves and 2 weeks unused vacation
leaves; 30 employees who have accumulated 3 weeks unused sick leaves and vacation leaves
combined; 10 employees who have accumulated 1 week unused sick leaves and 1 week unused
vacation leaves. Employees had an average daily wage rate of Php275 for a 5-day weekly
operation in 2020.
24. How much liability for compensated absences should be included as current liabilities as of
December 31, 2020?
25. What is the net adjustment to the compensation expense related to the accrual of the
liability for compensated absences for the year ended 2020?

AP Long Test 3 - Liabilities

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

AP Long Test 3 - Liabilities

Uploaded by

Copyright:

Available Formats

AUDITING PROBLEMS LIABILITIES

7. Estimated liabilities are disclosed in financial statements by

8. To increase sales, Adversity Company inaugurated a promotional campaign on June 30,

Packages of cereal sold 50,000

What is the estimated liability for coupons on December 31, 2020?

Sales Actual expenditures

At December 31, 2020, Luciana would report estimated warranty liability of

Unearned revenue, 1/1/2020 2,500,000

Customer advances 6,800,000

ITEM AUDIT NOTES

f. Dividends in arrears on cumulative The company is yet to declare dividends since

u. Deferred tax liability, Php150,000 This refers to deferred tax liabilities on

17. How much is the total current liabilities?

18. How much is the total noncurrent liabilities?

19. How much is the total liabilities?

Invoice Shipping Terms Invoice Invoice Receiving Entered in the

23. What is the net adjustment to inventories, end?

You might also like