ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA

LIABILITIES
PROBLEM 1
The A Corporation’s Chief Accountant provided the following information:
Notes payable:
Arising from purchase of goods 304,000
Arising from 5-year bank loans, on which a security valued at P600,000 have been pledged,
P400,000 due on June 30, 2020; P100,000 due on December 31, 2020. 500,000
Arising from advances by officers, due on June 30, 2020. 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 of P40,000 360,000
Cash dividends payable 80,000
Share dividends payable 100,000
Dividend in arrears on preference shares 200,000
Convertible bonds, due January 31, 2021 1,000,000
First mortgage on serial bonds, payable in semi-annual installments of P50,000, due April 1 and
October 1 of each year. 2,000,000
Overdraft with MIRS bank 90,000
Cash in bank balance with BDO 390,000
Estimated liability for damages 160,000
Estimated liability on meeting guaranteed for service requirements on merchandise sold 120,000
Estimated liability for premiums 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Share warrants outstanding 120,000
Share options outstanding 210,000
Unused letter of credit 400,000
Notes receivable discounted 200,000

On March 1, 2020, the P400,000 note payable was replaced by an 18-month note for the same amount. The
entity is considering similar action on the P100,000 note payable due on December 31, 2020. The 2019
financial statement were authorized for issue on March 31, 2020.

On December 31, 2019, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal. The
entity’s attorney believed that the suit is without merit. No court date has been set.

1. Total current liabilities (2019)

2. Total non-current liabilities (2019)

Page 1 of 8 Compiled & Adapted

ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
PROBLEM 2
You were engaged to audit the liabilities section of B Company for the period ended December 31, 2020. The
following selected transactions were noted during your inquiry and inspection of documents for the period
ending December 31, 2020:

Notes payable:
a. March 1, 2020, borrowed P25,000 on a two-year, 12 percent, interest bearing note. Interest is paid
yearly.
b. April 1, 2020, borrowed cash and signed a P20,000, two-year noninterest bearing note. The market
rate of interest for this level of risk was 16 percent.
c. January 1, 2020, purchased a special truck with a list price of P33,000. Paid P3,000 cash and signed a
P30,000, three year, 10%, interest bearing note payable in equal payments every December 31,
starting 2020 which includes interest based on outstanding balance. The market rate of interest for this
level of risk was 16% percent.

Warranties:
B Company sells washing machine with a 3-year warranty. In the past, B found out that in the year of sale,
warranty cost have been 3% of sale; in the second year after sale, 5% of sales; and in the third year after
sale, 7% of sales. The following data were also available:
Year Sales Warranty
Expenditure
201 500,000 62,000
8
201 600,000 82,000
9
202 700,000 85,000
0
You were able to properly inquire and inspect the related set of evidence and documents, and based on the
working papers that you presented, the liability account had a balance of P88,200 at the end of 2017.

Premiums:
In 2019, B Company initiated a promotional program whereby customers are given coupons redeemable in
P25 special savings certificates. Each certificate can be turned into the savings company for its face amount at
the end of the third year from its issuance to the customer. One coupon is issued for each peso of sales. On
the surrender of 500 coupons, one P25 savings certificate (cost is P20) is given. It is estimated that 25 percent
of the coupons issued will never be presented for redemption. Sales for the period ending 2019 were
P4,000,000 and the number of coupons redeemed totaled 2,100,000. Sales for the period ending 2020 were
P4,400,000 and the number of coupons redeemed totaled 3,000,000. The savings certificates are acquired
when needed.

Other matters:
a. A customer is suing B Company for P800,000 in damages because her child Chona was injured in
November 2020 while riding an escalator that stopped suddenly in one of its sate of the art store in
Makati. The child was hurt, feeling broken down, and feeling the pain from inside and out when she
tripped and fell while walking down an escalator that was going up. Legal counsel feels that the child is
partially at fault, and so deserves all the pain, but that is probable that the lawsuit will be settled for
between P50,000 and P100,000, with P70,000 being the most likely amount.

b. B Company has an incinerator behind its state of the art facility in Makati which is used to burn
cardboard boxes received in shipments of inventory from suppliers. The environmental protection
agency filed a lawsuit against the company in August 2020 for air pollution. The company expects to
stop using the incinerator and began recycling. However, its lawyers believe that it is probable that a
fine of between P40,000 and P60,000 will be levied against the company, although they cannot predict
the exact amount.

1. The balance of estimated liability of warranty at the end of 2020 is:

2. The balance of estimated premium claims outstanding at the end of 2020 is:
3. Interest payable on the notes at the end of 2020 is:
4. Total current liabilities is:
5. As an auditor, your proposed adjusting entry for the other matters will include:

Page 2 of 8 Compiled & Adapted

ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA

PROBLEM 3
Dolores’ 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. Dolores
pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed.

Dolores’ total sales for 2020 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 2020. 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 2020.

The accrual method is used by Dolores 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, 2020 were shown
below:
Inventory of Premium AM/FM radio 33,950
Estimated Premium Claims 44,800
Outstanding
Estimated Liability from Warranties 136,000

Based on the above and the result of your audit, determine the amounts that will be shown on the 2020
financial statements for the following:
1. Warranty expense
2. Estimated liability from warranties
3. Premium expense
4. Inventory of AM/FM radio
5. Estimated liability for premiums

PROBLEM 4
The following were summarized by Little Habitat Accountant related to its long-term benefit to its employees:
Defined Benefit Obligation, 1/1 10,000,000
Fair Value of Plan Assets, 1/1 9,000,000
Current service cost 1,000,000
Past service cost 2,000,000
Gain on settlement 500,000
Increase in defined benefit obligation due to changes in actuarial
assumption 800,000
Market yield on high quality corporate bonds 6%
Yield on bonds issued by the entity 8%
Market rate of interest 10%
Expected return on Plan assets 9%
Actual return on Plan assets 7%

1. How much the defined benefit obligation should be reported in the financial statement at the end of
2020?

Page 3 of 8 Compiled & Adapted

ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
2. Total benefit expense recognized in profit or loss in 2020?

PROBLEM 5
You were able to obtain the following from the accountant of C Company related to the company’s liabilities as
of December 31, 2020:
Current liabilities:
Accounts payable 1,350,000
14% note payable issued October 1, 2019, maturing September 30, 1,250,000
2021
16% note payable issued April 1, 2018, due on April 2021 3,000,000
Interest payable ?
Non-current liability:
10% 2-year, note payable issued on July 1, 2020 2,000,000
The following additional information pertains to these liabilities:
a. The accounts payable balance of P1,350,000 was before any necessary year-end adjustments relating
to the following:
 Goods were in transit to C Company from a vendor on December 31, 202. The invoice cost was
P75,000. The goods were shipped FOB shipping point on December 29, 2020 and were received
on January 2, 2021.
 Goods shipped FOB destination on December 21, 2020, from a vendor to C Company, were
received on January 6, 2021. The invoice cost was P37,500.
 On December 27, 2020, C Company wrote and recorded checks totaling P60,000 which were
mailed on January 10, 2021.
b. The interest of the 14% note payable is payable every September 30.
c. On December 31, 2020, the company expects to refinance the P3,000,000 note by the issuance of a
long-term note payable in lump sum. The refinancing of the P3,000,000 is at the discretion of the
enterprise. C’s December 31, 2020 FSs were issued on March 31, 2021. On January 15, 2021, the
entire P3,000,000 balance of 16% note was refinanced by issuance of a long-term obligation payable.
The interest is payable every April 1.
d. The note payable of P2,000,000 is payable to D Corporation. The interest is payable quarterly. The
existing loan agreement does not carry a provision to refinance. During September, C was experiencing
financial difficulty and was unable to pay the periodic interest. D Company agreed at the reporting date
to provide a grace period ending at least twelve months to rectify the breach.
Required:
1. How much should be the 2020 accounts payable?
a. 1,410,000
b. 1,425,000
c. 1,462,500
d. 1,485,000

2. Total interest expense for the year 2020?

a. 175,000
b. 480,000
c. 655,000
d. 755,000

3. Total interest payable as of December 31, 2020?

a. 143,750
b. 2,423,750
c. 503,750
d. 2,380,750

4. Total current liability as of December 31, 2020?

a. 5,158,750
b. 2,878,750
c. 3,238,750
d. 5,115,000

Page 4 of 8 Compiled & Adapted

ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
5. Total noncurrent liabilities as of December 31, 2020?
a. 3,000,000
b. 2,000,000
c. 5,000,000
d. Nil
PROBLEM 6
Paracelis Inc. has been producing quality children’s apparel for more than 30 years. The company’s fiscal year
runs from April 1 to March 31. The following information relates to the obligations of Paracelis as of March 31,
2020.

Bonds payable
Paracelis issued P10,000,000 of 10% bonds on July 1, 2018. The prevailing market rate of interest for these
bonds was 12% on the date of issue. The bonds will mature on July 1, 2028. Interest is paid semi-annually on
July 1 and January 1. Paracelis uses the effective interest rate method to amortize the bond premium or
discount. (Round present value factors to the nearest 5 decimal places.)

Notes payable
Paracelis 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 P600,000 on March 31, 2020.
Due Date Amount Due
April 1, 2020 400,000
July 1, 2020 600,000
October 1, 2020 300,000
January 1, 2021 300,000
April 1, 2021 - March 31, 2022 1,200,000
April 1, 2022 – March 31, 1,000,000
2023
April 1, 2023 – March 31, 1,400,000
2024
April 1, 2024 – March 31, 800,000
2025
April 1, 2025 – March 31, 1,000,000
2026
Total 0

Estimated warranties
Paracelis has one-year product warranty on some selected items in its product line. The estimate warranty
liability on sale made during 2018-2019 fiscal year and still outstanding as of March 31, 2019 amounted to
P180,000. The warranty costs on sales made from April 1, 2019, through March 31, 2020, were estimated at
P520,000. The actual warranty costs incurred during 2019-2020 fiscal year are as follows:
Warranty claims honored on 2018 – 2019 180,000
sales
Warranty claims honored on 2019 – 2020 178,000
sales
Total warranty claims honored 0

Other information:
a. Trade payable. Accounts payable for supplies, goods and services purchases on open account amount
to P740,000 as of March 31, 2020.
b. Sales commissions payable. Paracelis pays its outside salespersons fixed monthly salaries and
commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the
amount following the month of sale), and the fixed salaries are treated as advances against
commissions.
However, if the fixed salaries for salespersons exceed their sales commissions earned for the month,
such excess is not charged back to them. Pertinent data for the month of March 2020 for the 3
salespersons are as follows:
Salesperson Fixed Salary Net Sales Commission rate
s
A 10,000 200,000 4%
B 14,000 400,000 6%
C 18,000 600,000 6%
Page 5 of 8 Compiled & Adapted
ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
Total 0 0
c. Dividends. On March 15, 2020, Paracelis board of directors declared a cash dividend of P.20 per
ordinary share and a 10% common share dividend. Both dividends were able to be distributed on April
12, 2020 to the ordinary shareholders of record at the close of business on March 31 ,2020. Data
regarding Paracelis common stock as are as follows:
Par value P5 per share
Number of shares issued and 6,000,000 shares
outstanding
Market values of the ordinary shares:
March 15, 2020 P22 per share
March 31, 2020 P21.50 per share
April 12, 2020 P22.50 per share
Required:
1. Proceeds from sale of bonds on July 1, 2018
a. 8,852,960
b. 10,000,000
c. 10,500,000
d. 10,467,040

2. The current portion of Paracelis’ notes payable at March 31, 2020.

a. 2,280,000
b. 1,600,000
c. 1,300,000
d. 3,800,000

3. Estimated warranties payable, March 31, 2020.

a. 342,000
b. 18,000
c. 520,000
d. 180,000

4. Warranty expense of the year

a. 230,000
b. 168,000
c. 520,000
d. 358,000

5. Sales commissions payable at March 31, 2020.

a. 70,000
b. 68,000
c. 28,000
d. 26,000

6. Current liabilities, March 31, 2020

a. 4,732,000
b. 4,760,000
c. 5,286,000
d. 5,642,000

PROBLEM 7
At December 31, 2019, E Corporation had a temporary difference (related to depreciation) and reported a
related deferred tax liability of P60,000 on its SFP. At December 31, 2020, E has four temporary differences.
An analysis of these reveals the following:
Future Taxable (Deductible)
Amounts
2020 2021 2022
Use of straight line depreciation for accounting purposes and
accelerated depreciation for tax purposes 160,000 220,000 760,000
Rent collected in advance; recognized when earned for accounting
purposes and when received for tax purposes (380,000) - -

Page 6 of 8 Compiled & Adapted

ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
Various expenses accrued when incurred for accounting purposes;
recognized for tax purposes when paid (90,000) - -
Recognition of gain on installment sales during the period of sale for
accounting purposes and during the period of collection for tax purposes 276,000 210,000 -
(34,000) 430,000 760,000
Assume that the company has income taxes of P435,000 due as per tax return for 2020. The installment
receivable collectible in 2020 is classified as noncurrent. The enacted tax rate is 30% for all periods.
1. What amount of deferred tax asset should be shown on E’s SFP at December 31, 2020?
a. 114,000
b. 514,800
c. 141,000
d. 27,000

2. What amount of deferred tax liability should be shown on E’s SFP at December 31, 2020?
a. 342,000
b. 456,000
c. 141,000
d. 487,800

3. How much is E’s pretax accounting income for 2020?

a. 1,563,900
b. 2,406,00
c. 1,450,000
d. 2,606,000

4. How much is E’s net income for 2020?

a. 1,971,000
b. 1,684,200
c. 2,406,000
d. 1,450,000

PROBLEM 8
On December 31, 2019, F Company signs a 10-year non-cancelable lease agreement to lease a storage
building from G Company.
The following information pertains to this lease agreement:
 The agreement requires rental payments of P720,000 beginning on December 31, 2019.
 The fair value of the building on December 31, 2019, is P4,400,000.
 The building has an estimated economic life of 12 years, with an unguaranteed residual value of
P100,000. F depreciates similar buildings on the straight line method.
 The lease is non-renewable. At the termination of the lease, the building reverts to the lessor.
 The interest rate implicit in the lease is 12% per year.
 The yearly rental payment includes P24,705 of executory costs related to taxes on the property.

The following present value factors are for 10 periods at 121% annual interest rate:
Present value of an annuity due of 1 6.32825
Present value of an ordinary annuity of 5.65022
1
Present value of 1 0.32197
1. What amount should be capitalized as the cost of the right of use asset?
a. 4,556,340
b. 4,400,000
c. 4,432,197
d. 0

2. What amount should be included in the current liabilities section of F’s SFP at December 31, 2020?
a. 720,000
b. 414,477
c. 695,295
d. 280,818

Page 7 of 8 Compiled & Adapted

ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
3. What amount should be included in the noncurrent liabilities section of F’s SFP at December 31, 2020?
a. 3,453,975
b. 3,173,157
c. 5,562,360
d. 0

4. What is the total lease-related expenses to be reported in F’s income statement for the year ended
December 31, 2020?
a. 909,270
b. 879,182
c. 1,160,000
d. 464,705

Page 8 of 8 Compiled & Adapted