E/o C V/M: (A1) (A2) (A3) (A4) A6) (A7)

Auditing and Assurance: Concepts and Applications
Chapter 3: Audit of Non-Current Liabilities

Case 2
Objective:
To examine and recalculate notes payable, current and non-current, and interest expense of Espresso Company as of 2020
Assertions:
E/O - To test the existence of investment through third party confirmations, tracing of audit trail, and examination of sour
C - To test for completeness through independent recalculation, IPE testing, rollforward of balances, and SL-GL tie-outs.
V/M - To test if the balances are reasonably stated through examination of transaction trail and applicable standards, and
Problem:
On January 1, 2020 Espresso Company bought an equipment by paying cash of P2,000,000 [A1] and issued a 10% [A2] , 4-
at each year-end based on outstanding balance of the note. At issuance date, Espresso recorded the transaction by recogn
On December 31, 2021, Espresso recorded a credit to discount on note payable of P48,037 [A6] upon required payment o
At the end of 2022, the balance of unamortized discount is P17,857 [A7]
Key to Audit Tickmarks:

^ - Footed correctly
Rx - Independently recalculated.
[a] - For Equity Investment measured through FVPL, transaction cost is not capitalized per PFRS 9. Unrealized Gain (Loss) o
eventually closed to Retained Earnings and UGL through the years are not accumulated in the UGL line item in P&L. Upon
of RGL.
[b] - For EI @ FVTOCI, transaction cost is capitalized. Unrealized Gain (Loss) of Investments are presented in OCI at year en
as against the MV at time of sale will be recorded as remeasurement. Unrealized Gain (Loss) accumulated in OCI shall be r
Summary of Answers --------- Rx ---------

Questions TM/Ref Total
1. Carrying Value of Notes Payable, 12/31/2020 [1] -
2. Interest Expense, 12/31/2020 [2] -
3. Carrying Value of Notes Payable - Current, 12/31/2020 [3] -
4. Carrying Value of Notes Payable - Non-Current, 12/31/2020 [4] -
5. Interest Expense, 12/31/2021 [5] -
of Espresso Company as of 2020 and 2021.
dit trail, and examination of source documents.

f balances, and SL-GL tie-outs.
ail and applicable standards, and recalculation.
0 [A1] and issued a 10% [A2] , 4-year note payable [A3] in equal annual installment of P1,000,000 [A4] at the end of each year. Interest is p
corded the transaction by recognizing a discount on note payable of P160,442 [A5]
7 [A6] upon required payment of principal and interest due o this date.
r PFRS 9. Unrealized Gain (Loss) of Investments are presented in P/L at year end for changes in fair value from prior year's MV. Thus, this wi
n the UGL line item in P&L. Upon sale of investment, the MV is not updated and last recorded FV as against the MV at time of sale will be th
s are presented in OCI at year end for changes in fair value from prior year's MV. Upon sale of investment, the MV is updated and last recor
ss) accumulated in OCI shall be reclassified to Retained Earnings upon sale of investment.
E, V
O, C, M
at the end of each year. Interest is payable
from prior year's MV. Thus, this will be

nst the MV at time of sale will be the basis
nt, the MV is updated and last recorded FV

Case 4
Objective:
To examine and recalculate notes payable, current and non-current, and interest expense of Latte Company as of 2021.
Assertions:
Problem:
The following information pertains to a note payable issued by Latte Company as of December 31, 2021:
Note payable from purchase of machinery: On April 1, 2020. Latte purchased a machinery by paying P500,000 [A1] and iss
April 1 starting 2021 as follows: April 1, 2021 - P1,500,000 [A5] , April 1, 2022 - P1,000,000 [A6] , April 1, 2023 - P500,000
Interest on this note is payable every April 1 of each year based on outstanding balance of the note. The effective interest
Your test of journal entries revealed the following entries in 2020 and 2021 in relation to your audit of the notes payable:
Entry made on April 1, 2020 when the machine was purchased:
Machinery 3,500,000
Note payable 3,000,000
Cash 500,000
Entry made on December 31, 2020:

Interest expense112,500
Interest payable 112,500
Entry made on April 1, 2021, when the payment is made:

Notes payable 1,500,000
Interest payable112,500
Interest expense37,500
Cash 1,650,000

of RGL.

1. Carrying Value of Notes Payable, 12/31/2021 [1] -
2. Correct Interest Expense, 12/31/2021 [2] -
3. Notes Payable - Current, 12/31/2021 [3] -
4. Notes Payable - Non-Current, 12/31/2021 [4] -
5. PAJE, 12/31/2021 [5] -
of Latte Company as of 2021.

mber 31, 2021:

y by paying P500,000 [A1] and issued P3,000,000 [A2] , 5% [A3] note payable in four years [A4] . The note is payable in series of payments
0 [A6] , April 1, 2023 - P500,000 [A7]
f the note. The effective interest when the note was issued on April 1, 2020 is 7%. [A8]
your audit of the notes payable:
s are presented in OCI at year end for changes in fair value from prior year's MV. Upon sale of investment, the MV is updated and last reco
E, V
O, C, M
te is payable in series of payments every


Case 7
Objective:
To examine and recalculate bonds payable, and interest expense of Macchiato Corporation as of 2020 and 2021.
Assertions:
Problem:
Macchiato Corporation issued 10% [A1] , P6,000,000 [A2] bonds payable on January 1, 2028 and pays interest semi-annua
interest for similar debt security was at 8% [A3] . The records also revealed that the difference between the proceeds from
The company's accountant recorded the payment of interest as debit to interest expense and credit to cash at nominal am

of RGL.

1. Issuance Price of the Bonds, 01/01/2013 [1] -
2. Carrying Value of Bonds, 12/31/2020 [2]
4. Carrying Value of Bonds, 12/31/2020 [4] -
6. PAJE, 2021 [6] -
n as of 2020 and 2021.

028 and pays interest semi-annually every July 1 and January 1. The bonds were issued on January 1, 2013 when the prevailing market rate
ence between the proceeds from the bond issuance and the face value of the bonds were charged to interest expense when the bond was
and credit to cash at nominal amount.
E, V
O, C, M
13 when the prevailing market rate of
terest expense when the bond was issued.


MC Case 1
Objective:
To examine and recalculate notes payable, current and non-current, and interest expense of Prime Co. as of 2021 and 202
Assertions:
Problem:
In connection with our audit of Prime Co.'s financial statements for the year 2021 Transactions during 2021 and other info
a) On January 1, 2021, the company purchased furniture by paying P50,000 [A1] and issuing a non-interest-bearing note o
rate for this type of note is 8%. [A4]
b) On January 1, 2021, the entity issued a promissory note for the acquisition of factory equipment worth P1,000,000 [B1]
2022 - P500,000 [B3] , December 31, 2023 - P200,000 [B4] . The prevailing interest rate for this type of note is 8% [B5]
c) The 10% [C1] note is dated October 1, 2020 and is payable in four [C2] equal annual installments of P700,000 [C3] begin
d) On July 1, 2021, the company acquired various computer equipment for P500,000 [D1] by paying a down payment of P1
interest rate for this type of note is 9%. [D4]
e) The 12% [E1] , P2,000,000 [E2] loan payable to a bank will mature on June 1, 2022 interest on the loan is due every June
refinance the loan for an additional term of five months [E3] from original maturity date. The refinancing and roll-over tra

of RGL.

1. Total Interest Expense, 2021 [1] -
2. Notes Payable - Non-Current, 2021 [2] -
3. Trade Notes Payable, 2021 [3] -
4. Total Interest Expense, 2022 [4] -
5. Total Current Liabilities, 2022 [5]
6. Total Non-Current Liabilities, 2022 [6] -
of Prime Co. as of 2021 and 2022.

ctions during 2021 and other information relating to the entity's liabilities were as follows:
ing a non-interest-bearing note of P200,000 [A2] due in 4 [A3] equal annual installments beginning December 31, 2021. The prevailing inte
quipment worth P1,000,000 [B1] . The note is non-interest bearing and is to paid as follows: December 31, 2021 - P300,000 [B2] : Decemb
or this type of note is 8% [B5]
stallments of P700,000 [C3] beginning October 1, 2021. The first principal and interest payment was made on October 1, 2021.
] by paying a down payment of P100,000 [D2] and issuing a non-interest-bearing note for the balance payable after 4 years [D3] . The prev
rest on the loan is due every June 1 and December 1. On December 31, 2021, the company entered into a refinancing agreement with a ba
The refinancing and roll-over transaction was completed on December 31, 2021.
E, V
O, C, M
ember 31, 2021. The prevailing interest
31, 2021 - P300,000 [B2] : December 31,
de on October 1, 2021.
ayable after 4 years [D3] . The prevailing
o a refinancing agreement with a bank to


MC Case 2
Objective:
To examine and recalculate notes payable, bonds payable, current and non-current liabilities, accrued interest, and interes
Assertions:
Problem:
Dalgona Company had the following transactions related to your audit procedures in audit of its long term liabilities:
Note payable
A 10% [A1] note was issued May 1, 2021 due in 4 years [A2] . The principal interest are payable every April 30 of each yea
30, 2023 - P300,000 [A4] , April 30, 2024 - P200,000 [A5] , April 30, 2025 - P100,000 [A6]
The interest effective when the note was issued is 9% [A7] . Your test of journal entries revealed that the note is reported
purchased and no adjusting entry was made on December 31, 2021 related to this note.
Bonds payable
Dalgona issued 5% [B1] , P700,000 [B2] bonds payable in seven [B3] equal semi-annual payments including interest based
to be made on January 1, 2022. The bonds were issued when the prevailing market rate of interest for similar debt securit
bonds payable when issued. No other entries affecting the balance of this bond as of December 31, 2021.

of RGL.

2. Total Accrued Interest - Current, 12/31/2021 [2] -
3. Total Non-Current Liabilities, 12/31/2021 [3] -
4. PAJE related to notes payable, 12/31/2021 [4] -
5. PAJE related to bonds payable, 12/31/2021 [5] -
ties, accrued interest, and interest expense of Dalgona Company as of 2021.

t of its long term liabilities:
ayable every April 30 of each year. The first payment is made on April 30, 2022. The note is payable as follows: April 30, 2022 - P400,000 [A
vealed that the note is reported in its unaudited financial statement at face value which is also the amount recognized initially for the equi
ayments including interest based on outstanding balance. Interest is paid every July 1 and January 1, the first payment of principal and inte
of interest for similar debt security was at 9% [B4] . The records also revealed that the proceeds from the bond issuance is the amount cred
ember 31, 2021.
E, V
O, C, M
ollows: April 30, 2022 - P400,000 [A3] , April
unt recognized initially for the equipment
e first payment of principal and interest is

e bond issuance is the amount credited to


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Auditing and Assurance: Concepts and Applications

Chapter 3: Audit of Non-Current Liabilities

Key to Audit Tickmarks:

Summary of Answers --------- Rx ---------

dit trail, and examination of source documents.

from prior year's MV. Thus, this will be

nt, the MV is updated and last recorded FV

Entry made on December 31, 2020:

Entry made on April 1, 2021, when the payment is made:

Key to Audit Tickmarks:

Summary of Answers --------- Rx ---------

dit trail, and examination of source documents.

mber 31, 2021:

from prior year's MV. Thus, this will be

nt, the MV is updated and last recorded FV

Key to Audit Tickmarks:

Summary of Answers --------- Rx ---------

dit trail, and examination of source documents.

from prior year's MV. Thus, this will be

nt, the MV is updated and last recorded FV

Key to Audit Tickmarks:

Summary of Answers --------- Rx ---------

dit trail, and examination of source documents.

31, 2021 - P300,000 [B2] : December 31,

o a refinancing agreement with a bank to

from prior year's MV. Thus, this will be

nt, the MV is updated and last recorded FV

Key to Audit Tickmarks:

Summary of Answers --------- Rx ---------

dit trail, and examination of source documents.

t of its long term liabilities:

unt recognized initially for the equipment

e first payment of principal and interest is

from prior year's MV. Thus, this will be

nt, the MV is updated and last recorded FV

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