ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Quizzer

AUDITING (Auditing Problems) S. Ireneo Ÿ C. Espenilla

AP-300Q: QUIZZER ON FINANCING CYCLE, PURCHASING/EXPENDITURE:

AUDIT OF LIABILITIES

PROBLEM 1:
Cut Inc. has produced quality children’s apparel for over 25 years. The company’s fiscal year is from
April 1 to March 31. The following information relates to the obligations of Cut Inc. as o f March 31,
2018:

Bonds Payable: The company issued 7%, P4,000,000 bonds on July 1, 2012 at 98. The bonds mature
on July 1, 2022. Interest is paid semi-annually on July 1 and January 1. Cut Inc. uses the straight-
line method to amortize the bond discount.

Notes Payable: Cut Inc. has signed several long-term notes with financial institutions and insurance
companies. The maturities of these notes are given below. The total unpaid interests for all these
notes amount to P90,000 as of March 31, 2018.
Due Date Amount Due
April 1, 2018 P100,000
July 1, 2018 200,000
October 1, 2018 100,000
January 1, 2019 200,000
April 1, 2019 – March 31, 2020 600,000
April 1, 2020 – March 31, 2021 400,000
April 1, 2021 – March 31, 2022 400,000
April 1, 2022 – March 31, 2023 500,000
April 1, 2023 – March 31, 2024 500,000
TOTAL P3,000,000

Estimated Warranties: Cut Inc. a one-year product warranty on selected items. The estimated
warranty liability on sales made during 2016–2017 fiscal year and still outstanding as of March 31,
2017, amounted to P55,000. The warranty costs on sales made from April 1, 2017, to March 31,
2018, are estimated at P145,000. The actual warranty costs incurred during the current 2017–2018
fiscal year were as follows:
Warranty on 2016-2017 sales P 55,000
Warranty on 2017-2018 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, 2018.

Payroll related items: The following outstanding obligations relate to the payroll as of March 31, 2018:
Accrued salaries and wages P145,000
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 P250,000
Property taxes 100,000
Value-added taxes 185,000

Other accruals: Other accruals amounted to P50,000 as of March 3,1 2018.

Dividends: On March 15, 2018, 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, 2018, to the
ordinary shareholders of record at the close of business on March 31, 2018. 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, 2018 P22.00
March 31, 2018 21.50
April 12, 2018 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

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-300Q
Quizzer: FINANCING, EXPENDITURE/PURCHASE & DISBURSEMENT CYCLES: AUDIT OF LIABILITIES

PROBLEM 2:
RADO INC. a manufacturer of heavy machinery, grants a 2-year warranty on its products. The
Estimated Liability for Product Warranty account shows the following entries for the year:
Beginning balance P225,000
Provision during the year (quarterly accrual) 200,000
Total P425,000

A review of the company’s policy of accounting for warranties revealed that based on the company’s
past experience, warranty claims averaged 5% on net sales. Moreover, the company provides for a
quarterly accrual of the estimated warranties expenditure based on rough estimates.

The following additional information is available from the company’s records:

Gross sales P7,250,000
Sales returns and allowances 150,000
Cost of sales 3,678,000

The cost of sales included P415,500 cost of servicing the warranty claims for the year.
What is the correct balance of the estimated liability for product warranty at the end of the year?
a. 164,500 b. 264,500 c. 355,000 d. 364,500

PROBLEM 3:
Mountain Province Home Depot carries a wide variety of promotion techniques to attract customers.

Kitchen and home appliances are sold in a one-year warranty for replacement of parts and labor. The
estimated warranty cost, based on past experience, is 5% of sales.

The premium is offered on the home furniture. Customer receive a coupon for each peso spent on
home furniture. Customers may exchange 2,000 coupons and P50 for a rice cooker which the
company purchased at P340 for each rice cooker and estimates that 60% of the coupons given to
customers will be redeemed.

The company’s total sales for 2018 were P115.2M – P86.4M from kitchen and home appliances and
P28.8M from home furniture. Replacement parts and labor for warranty work totaled P2.624M during
2018. A total of 5,200 rice cookers used in the premium program were purchased during the year and
there were 9,600,000 coupons redeemed in 2018.

The accrual method is used by the company 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, 2018, were as shown below:

Inventory of Premium items P340,000

Estimated liabilities for premiums 716,000
Estimated liabilities for warranties 2,176,000

Based on the information above, determine:

1. Promotional expense related to premiums for the current year 2018?
a. 1,392,000 b. 1,632,000 c. 2,505,600 d. 2,937,600

2. Estimated liabilities for premiums as of December 31, 2018?

a. 716,000 b. 1,892,600 c. 2,021,600 d. 1,589,600

3. Estimated liabilities for warranties as of December 31, 2018?

a. 2,624,000 b. 3,872,000 c. 4,320,000 d. 5,312,000

PROBLEM 4:
Abra Company had the following selected balances in the liability portion of its unaudited balance sheet
as of December 31, 2018:

Accrued compensated absences P238,000

Accrued bonus 113,490

The Accrued compensated absences refers to the balance of the liability accrued in the prior year for
unavailed sick leaves and vacation leaves of the company’s employees. Company records shows the
following information:

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Sick leaves Vacation

leaves
2017 leaves carried forward to 2018 500 days 350 days
2017 leaves used/availed in 2018 300 250
2018 leaves to be carried forward to 2019 300 200

Additional information:
a. Employees are entitled to accumulate unused sick and vacation leaves up to 2 years from date
of grant.
b. Prior year leaves availed during the current year were charged to current year salaries and
wages.
c. Average daily salaries in 2018 and 2019 amounted to P350 and P400, respectively.
d. Past experience indicate that 20% of the unused leaves ultimately expires.

The balance in the accrued bonus account is based on the accountants estimate on the unadjusted net
income. The company provides incentive bonus to its key officers based on the net income after bonus
and after tax. The company’s unadjusted net income amounted to P1,277,500.

Additional information:
a. Bonus rate is at 15%
b. Income tax rate is 35%

Required:
1. What is the correct balance of the accrued compensated absences account?
a. 297,500 b. 320,000 c. 256,000 d. 280,000

2. What is the correct balance of the accrued bonus account?

a. 117,489 b. 116,814 c. 113,491 d. 111,892

PROBLEM 5:
In the course of your audit of Ascott Inc’s December 31, 2018 liabilities the following schedule was
presented to you by Ascott’s bookkeeper:
Current liabilities:
Accounts payable P325,000
Estimated premiums liability 118,750
Accrued salaries 396,460
Deferred tax liability 250,000
Notes payable, 20% due 4/1/19 500,000
Interest payable on Notes payable 75,000
Total 1,665,210

Audit notes:
a. The accounts payable balance is net of a P55,000 advances made to a supplier for
merchandise to be delivered in 2019.

b. The company started a promotional program in 2018 whereby for every 5 product labels a
customer surrenders with P25 cash, a customer shall receive a specially designed umbrella.
The company sold 40,000 units of the product covered by the said promotional program and
purchased 5,000 umbrellas in anticipation for the premium’s redemption which the company
appropriately debited to premiums inventory account. Each umbrella costs P95. The company
estimates that 75% of the product labels accompanying sales shall ultimately be presented
for the redemption of premiums. 1,250 umbrellas remained on hand as of December 31,
2018, as such the company accrued the cost of the remaining umbrellas as the year-end
estimated premiums liability:
Premiums expense 118,750
Estimated premiums liability 118,750

Actual redemptions during the year were appropriately recorded as:

Premiums expense 262,500
Cash 93,750
Premiums inventory 356,250

c. The accrued salaries at year end reflects the company’s liability for compensated absences,
P300,000; and accrued bonus, P96,460.

The liability for compensated absences was the accrual at year end of 750 days cumulative
unused vacation and sick leaves of employees by the end of the year at current daily salary
rate. Audit investigation revealed the following regarding the said cumulative unused leaves:

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Quizzer: FINANCING, EXPENDITURE/PURCHASE & DISBURSEMENT CYCLES: AUDIT OF LIABILITIES

• 50 days were earned by employees in 2016, 350 days in 2017, with the balance in
2018.
• The company’s policy is to allow employees to carry over unused leaves up to two
years from the year they were earned, thereafter it shall expire.
• According to past experience, 80% of allowed leaves to be carried-forward are
ultimately exercised by the employees.
• The current daily salary rates of employees were P350 in 2016, P380 in 2017 and
P400 in 2018.

The accrued bonus was based on the BOD approved employee profit sharing bonus which
was 15% of the unadjusted net income P1,015,131 after bonus and after 30% tax. Assume
that there had been no tax payments yet for the current taxable year.

d. The deferred tax liability was as a result of the excess tax depreciation over financial
depreciation which is expected to reverse the following year.

e. The 20% Notes payable was to a bank and was originally dated April 1, 2016 with a 3 year
term with interest payable annually every April 1. On December 31, 2018, the company
entered into an agreement with the bank to refinance the notes payable by issuing another 5
year notes payable, the proceeds of which shall be used to refinance the obligation maturing
currently. As part of the agreement, the company is to offer an asset as a security/collateral
on the loan and that the loan amount will be set at 75% of the fair market value of the asset
being offered as collateral. As of December 31, 2018 the asset offered as collateral had a
fair market value of P600,000. Due to the nature of the asset, its fair market value is not
expected to materially change at any time up to the execution of the refinancing agreement.

Requirements:
1. What is the correct estimated premiums liability as of December 31, 2018?
a. 38,750 b. 118,750 c. 157,500 d. 70,000

2. What is the correct accrued salaries from unused compensated absences as of December 31 2018?
a. 224,000 b. 240,000 c. 220,000 d. 244,000

3. What is the correct accrued salaries from employee bonus as of December 31 2018?
a. 100,000 b. 103,682 c. 89,522 d. 95,432

4. What is the correct current tax expense in 2018?

a. 285,714 b. 296,234 c. 255,777 d. 272,663

5. How much from the notes payable to the bank should be presented as current liability in the 2018
statement of financial position?
a. none b. 50,000 c. 125,000 d. 450,000

PROBLEM 6:
In the course of your audit of Scarlet Inc.’s December 31, 2020 liabilities the following schedule was
presented to you by Scarlet Inc.’s bookkeeper:

Accounts payable P225,000

Estimated premiums liability ?
Estimated warranties payable 320,750
Accrued salaries 240,400
Deferred tax liability 200,000
Notes payable, 20% due 4/1/21 500,000
Interest payable on Notes payable 75,000
Serial bonds payable, 12% 1,000,000
Total

Audit notes:
f. The accounts payable balance is net of a P35,000 advances made to a supplier for
merchandise to be delivered in 2021.

Moreover, the following summarizes the result of your purchases cut-off procedures. You
have ascertained that all related inventories were correctly accounted for.
Receiving
Report (RR) Supplier’s Receiving
No. Amount Shipment Date Report Date Shipment Terms
Last entries on the December 2020 Journal
0633 P5,500 12/26/2020 12/28/2020 FOB Destination

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0634 6,000 12/28/2020 1/2/2021 FOB Destination

0635 7,900 12/28/2020 12/30/2020 FOB Shipping Point
First entries on the January 2021 Journal
0636 8,900 12/28/2020 1/3/2021 FOB Shipping Point
0637 10,000 12/29/2020 12/31/2020 FOB Destination
0638 15,000 1/3/2021 1/1/2021 FOB Shipping Point

g. The company started a promotional program in 2020 whereby for every five product labels
customer surrenders with P25 cash, a customer shall receive an especially designed t-shirt.
The company sold 40,000 units of the product covered by the said promotional program and
purchased 4,500 t-shirts in anticipation of the premium’s redemption which the company
appropriately debited to premiums inventory account upon purchase. Each t-shirt costs P95.
The company estimates that 60% of the product labels accompanying sales shall ultimately
be presented for the redemption of premiums. 1,200 t-shirts remained on hand as of
December 31, 2020. Actual redemptions during the year were appropriately recorded, while
accrual at year-end is yet to be made.

h. The company also has a two-year warranty on its products. The warranty estimate is at 8% of
the peso sales, two thirds of which is expected to be incurred during the year of sale and
one-third on the year following the year of sale. The summary of the company’s total sales
and actual warranty costs incurred for the past three years are presented below (Assume
sales were made evenly throughout the year):
2018 2019 2020
Net Sales P4,000,000 4,525,000 5,275,000
Actual costs paid 127,500 233,750 285,250
The company is yet to update its warranty liabilities as of December 31, 2020

i. The deferred tax liability, is net of a P50,000 deferred tax asset, and has resulted from excess
tax depreciation over financial depreciation and is expected to reverse the following year.

j. The 20% Notes payable was to a bank and was originally dated April 1, 2018 with a 3 year
term with interest payable annually every April 1. On December 31, 2020, the company
entered into an agreement with the bank to refinance the notes payable by issuing another 5
year notes payable, the proceeds of which shall be used to refinance the obligation maturing
currently. As part of the agreement, the company is to offer an asset as a security/collateral
on the loan and that the loan amount will be set at 75% of the fair market value of the asset
being offered as collateral. As of December 31, 2020 the asset offered as collateral had a
fair market value of P600,000. Due to the nature of the asset, its fair market value is not
expected to materially change at any time up to the execution of the refinancing agreement.

k. The 12% bonds payable matures at the rate of P200,000 annually every December 31.
Interests are also payable every December 31. The last P200,000 bonds will be paid on
December 31, 2026.

Requirements:
6. What is the correct balance of the accounts payable?
a. 264,000 b. 282,900 c. 272,900 d. 282,900

7. What is the correct estimated premiums liability as of December 31, 2020?

a. 329,000 b. 105,000 c. 231,000 d. 336,000

8. What is the correct estimated warranties payable as of December 31, 2020?

a. 423,500 b. 411,750 c. 457,500 d. 421,750

9. How much from the 20% Notes payable is classified as noncurrent as of December 31, 2020?
a. None b. 50,000 c. 450,000 d. 500,000

10. How much should be presented as current liabilities in the December 31, 2020 statement of
financial position?
a. 1,150,800 b. 1,200,800 c. 1,400,800 d. 1,650,800

11. How much should be presented as non-current liabilities in the December 31, 2020 statement of
financial position?
a. 1,450,000 b. 1,650,000 c. 1,700,000 d. 1,750,000

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PROBLEM 7:
You are auditing the financial statements of Grey Appliance Center Inc. for the year ended December
31, 2020. The current liability portion of the company’s statement of financial position shows the
following information:

Current Liabilities
Accounts payable P488,500
Accrued Salaries Expense 222,200
Warranty liability 89,100

Your audit revealed the following information:

a. Accounts payable:
You rendered purchases cutoff on the company’s purchases transactions from December 15 to January
15. Unadjusted purchases for the year amounted to P2,550,000. The results of the cut-off are
summarized below:

Receiving Amount Shipment Shipment Terms

Report No. Date
78055 8,100 12/21/2020 FOB Shipping Point
78056 9,100 12/27/2020 On Consignment Basis
78057 10,200 12/28/2020 FOB Destination
78059 8,200 12/29/2020 FOB Shipping Point
78060 9,700 12/29/2020 FOB Destination
78061 10,700 12/30/2020 FOB Shipping Point
78062 11,200 12/31/2020 FOB Destination
78063 12,900 1/11/2021 FOB Shipping Point

• The inventory count procedures were done in December 31, 2020 and documents cut-off
shows that the last receiving report used and recorded for the current year by the company is
RR number 78059.

• Receiving report number 78058 is for a shipment made on December 28, 2020. The related
invoice amounting to P8,500, was misplaced and was recovered only on January 5, 2020 and
was recorded thereafter.

b. Accrued Salaries Expense

The accrued salaries expense was the accrual for the unused compensated in the previous year. Upon
further inquiry, the following information were determined from the company’s records:

2018 leaves forwarded to 2020 125 days

2019 leaves forwarded to 2020 380 days
Leaves exercised in 2020 (60 days from 2018) 250 days
2020 leaves forwarded to 2021 420 days

Employees are allowed to carry-over unused leaves up to two years from year they were earned,
thereafter the unused leaves shall be forfeited. Because of high forfeiture rate in the past years,
starting the current year, the company decided to adopt a policy in which only 80% of the forwarded
leaves shall be accrued. Current daily salary rates were P400, P440 and P484 in 2018, 2019 and 2020,
respectively.

c. Liability for Warranties

The company has a one-year warranty on selected appliances. 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 to 6% of its total sales. The summary of the company’s total
sales and actual warranty costs incurred for the past three years are presented below (Assume sales
were made evenly throughout the year):
2018 2019 2020
Net Sales P8,000,000 9,250,000 10,550,000
Actual warranty costs paid 295,800 477,600 422,800
The company is yet to update its warranty liabilities as of December 31, 2020.

d. Provision
On November 30, 2020 an explosion occurred at the company’s plant totally damaging the plant and
causing additional damages to adjacent neighbors. The carrying value of the plant on the company’s
books on the date of the explosion was at P5M. It had a prevailing fair value of P6M prior to the
explosion. No claims had yet been asserted against the company as of the date of authorization of the

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financial statements. The management as corroborated by their counsel, however believes that it its
probable that the company would be responsible for damages to its neighbors and that P4,000,000
would be a reasonable estimate of its liability. The company had an insurance covering this type of
accident. The insurance shall reimburse the company at 80% of the prevailing fair value of the asset
prior to the fire while it has a 40% participation/deductible clause on any payments to be made for
damages caused to neighbors. The reimbursements are virtually certain and that the company is no
longer principally liable over the portion to be reimbursed for damages to other parties.

Required:
1. What is the correct balance of the accounts payable account?
a. 498,600 c. 507,700
b. 508,300 d. 587,900

2. What is the correct balance of the accrued salaries expense for the compensated absences as
of Decemer 31?
a. 295,240 c. 261,360
b. 236,192 d. 326,700

3. What is the correct balance of the warranties liability?

a. 193,800 c. 299,300
b. 236,192 d. 326,700

4. How much is the correct provision for unasserted claims to be accrued as of December 31,
2020?
a. None c. P2,400,000
b. P4,000,000 d. P1,600,000

5. In assessing control risk for purchases, an auditor traced a sample purchase orders, receiving
reports and suppliers’ sales invoice to the entries in the voucher register. Which assertion would
this test of controls most likely support?
a. Completeness
b. Existence or occurrence
c. Valuation or allocation.
d. Rights and obligations.

PROBLEM 8:
Xavier Corp. reported the following financial liabilities in its December 31, 2019 statement of financial
position:

10%, Serial notes payable P5,000,000

10%, Bonds payable 3,000,000
9%, Convertible bonds payable 4,000,000

Additional information and audit notes:

a. The 10% Serial notes payable was as a result of a P5,000,000 loan from BPI on June 30, 2019.
The loan proceeds amounting to P5,000,000 was debited to cash and credited to Notes
payable. The loan is payable at the rate of P1,000,000 plus interest every June 30 starting
2020. The first principal and interest payment was made in June 30 of the current year.

b. The 10% bonds payable were issued on January 1, 2019 at an 8% yield rate. Interest on the
bonds which shall mature on December 31, 2022 is payable annually every December 31. The
company credited bonds payable at face value. Any difference between the proceeds and the
face value was charged to interest expense. Interst paid on December 31, 2019 was
appropriately recorded.

On September 30, 2020, half of the bonds were retired at P1,750,000.

c. The 9% convertible bonds payable were issued on December 31, 2019 at its face value. The
prevailing market rate of interest on similar securities without conversion option was at 10%.
The issuance was recorded as debit to cash and credit to bonds payable at P4M. Interest on
the bonds which shall mature on December 31, 2022 is payable semi-annually every
December 31 and June 30. Each P1,000 face value bonds is convertible to 30, P30 par value
ordinary shares.

On December 31, 2020, P2M face value bonds were converted to ordinary shares.

Requirements:
1. What is the correct interest expense on the serial notes payable for 2020?

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a. 400,000 c. 500,000
b. 450,000 d. 550,000

2. What is the retroactive adjustment to retained earnings beginning as a result of your audit of
the 10% bonds payable?
a. None c. 198,728
b. 154,626 d. 255,898

3. What is the gain or loss on the retirement of half of the bonds payable on September 30?
a. 190,548 c. 78,048
b. 60,187 d. 34,452

4. What is the equity component of the 9% convertible bonds payable?

a. None c. 70,919
b. 99,474 d. 101,514

5. How much is credited to the share premium account as a result of the conversion of P2M out of
P4M convertible bonds?
a. 215,297 c. 250,757
b. 266,054 d. 301,514

6. What is the correct carrying value of remaining bonds as of December 31, 2020?
a. None c. 1,964,540
b. 2,000,000 d. 1,946,450

7. You are auditing the December 31, 2020, accounts payable balance of one of your firm’s
divisions. The division controller’s office has provided you with a schedule listing the creditors and
the amount owed to each at December 31, 2020. Which of the following audit procedures would be
your best choice for determining that no individual account payable has been omitted from the
schedule?
a. Send confirmation requests to a randomly selected sample of creditors listed on
the schedule.
b. Send confirmation requests to creditors that are listed on the schedule but not
listed on the corresponding December 31, 2019, schedule.
c. Examine support for selected January 2020 payments to creditors, ascertaining
that those relating to 2021 are not on the schedule.
d. Send confirmation requests to creditors that are listed on the December 31,
2019 schedule but not listed on the December 31, 2020, schedule.

PROBLEM 9:
You were assigned to audit the various current liability accounts of Towsdie Corp., a washing machine
manufacturer, for the year ended December 31, 2020. Upon your request, the following schedule was
furnished to you by the accountant:

Accounts payable P1,250,000

Estimated warranties payable 980,000
Estimated premiums payable 1,400,000
Accrued salaries payable 1,032,056
Provision for litigation cases 3,000,000

Audit notes:
a. The accounts payable include a P240,000 purchase in transit as of December 31 from a
supplier under FOB Destination term and a P90,000 debit balance with a supplier resulting
from an overpayment.

b. The estimated warranties payable balance was the accrued amount in the previous year. It is
the company’s policy to carry a three-year warranty on its products against manufacturers
defects. Based on past experience, 60% of units sold are ultimately returned for repairs and
that warranty costs per unit is at P300. During the current year 12,000 units were sold.
Actual warranty cost incurred during the year which was charged to warranty expense was at
P1,910,000.

c. The company also has an on-going promotional program whereby each washing machine sold
comes with 5 coupons. 25 coupons plus P2,000 shall entitle the customer/distributor a dryer
which originally costs P6,000. The dryers can be redeemed 2 years after receipt of the
coupons from purchases. The company estimates that 40% of the coupons issued with the
washing machines sold will ultimately be presented for the premiums redemption. The
balance in the estimated premiums payable account is the accrued liability in the prior year.

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The beginning inventory of dryers was at 300 units. During the year additional 1,000 dryers
were acquired. An inventory of the remaining dryers on hand at year-end places the count at
240 units. The redemption of premiums for the current year were appropriately recorded by
the company.

d. During 2020, Towsdie was sued by a competitor for P5,000,000 infringement suit of a
trademark. Based on the legal counsel’s advise, Towsdie accrued the sum of P3,000,000 as
a provision. On February 15, 2021, the Supreme Court decided in favor of the party alleging
the infringement and ordered the defendant to pay the aggrieved party a sum of P3,500,000.
The financial statements of Towsdie were approved by the BOD for issue on April 15, 2021.

e. The accrued salaries payable include P500,000 liability for compensated absences accrued in
the previous year and a P532,056, 10% current year bonus to key officers computed based
on an unadjusted net income of P8,132,857 after bonus and after tax (30%)

2,500 days unused vacation leaves from 2019 were forwarded to 2020, from which 1,500
days were exercised. By the end of the current year, additional 3,000 days current year
leaves were unused by the employees. Unused leaves can be carried over 2 years, thereafter
it shall expire. The company also estimates, as per past experience, that only 80% of the
unused leaves will ultimately be exercised. Salary rate in 2019 was at 250 per day while
salary rate in 2020 is at P275 per day. Payment of salaries including exercise of leaves were
appropriately debited to current year salaries expense.

Requirements:
1. What is the correct estimated warranties payable as of December 31, 2020?
a. 1,130,000 c. 1,200,000
b. 1,190,000 d. 1,230,000

2. What is the correct estimated premiums payable as of December 31, 2020?

a. 960,000 c. 1,000,000
b. 990,000 d. 1,120,000

3. How much is the correct provision from litigation cases as of December 31, 2020?
a. None c. 3,250,000
b. 3,000,000 d. 3,500,000

4. What is the adjusted liability for compensated absences to be included in the accrued salaries
as of December 31, 2020?
a. 825,000 c. 1,080,000
b. 880,000 d. 1,100,000

5. What is the correct accrued bonus to be included in the accrued salaries payable as of
December 31, 2020?
a. 500,000 c. 714,286
b. 551,546 d. 764,286

6. What is the correct net income in 2020?

a. 5,000,000 c. 7,142,860
b. 5,515,460 d. 7,642,860

PROBLEM 10:
The following is an excerpt of Freeday Inc.’s trial balance as of December 31, 2020:
10% Notes payable - Bank, 5 years P3,000,000
12% Bonds payable, 5 years 5,000,000
9% Bonds payable, 3 years 2,000,000

Additional information
a. The Notes payable – Bank which was dated April 1, 2016 pays interest annually every April 1.
As of December 31, 2020, Freeday Inc. has the right to refinance the said loan by issuing
Bonds the proceeds shall be used to settle the obligation. On March 1, 2021 the company
issued P4,000,000 Bonds at face value and used one-half of the proceeds to settle the notes
on April 1, 2021. The balance of the maturing obligation was settled out of working capital.
The 2020 financial statement were approved for issuance by the BOD on April 15, 2021,

b. The 12% bonds payable was issued on January 1, 2019 when the prevailing market rate for
bonds was at 10%. The company recorded the transaction as a debit to cash for the bond
proceeds, credit to the bonds payable account at face value, charging any difference to

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interest expense. Interest on the bonds is payable annually every December 31. Interest
payments were recorded to the appropriate interest expense account.

c. The 9% bonds payable which were issued at P2,948,685, is a serial bonds dated January 1,
2020 and matures at P1,000,000 every December 31, starting 2020. Interest based on the
outstanding balance of the bonds are paid annually every December 31. The prevailing
market rate of interest on the issuance date was at 10%. The issuance was recorded as a
debit to cash for the proceeds, credit to bonds payable at face value with the difference being
charged to interest expense. The first principal and interest collection was recorded correctly
at the end of the year.

Requirements:
1. How much from the 10% Notes payable should be presented as non-current liability as of
December 31, 2020?
a. None c. 2,000,000
b. 1,000,000 d. 3,000,000

2. What is the correct carrying value of the 12% Bonds payable as of December 31, 2020?
a. 5,379,079 c. 5,248,685
b. 5,316,987 d. 5,173,554

3. What is the retroactive adjustment to retained earnings beginning as a result of your audit of
the 12% Bonds payable?
a. 220,921 debit c. 310,777 debit
b. 220,921 credit d. 310,777 credit

4. What is the correct carrying value of the 9% Serial Bonds Payable as of December 31, 2020?
a. 2,948,685 c. 1,973,554
b. 1,948,685 d. 990,909

5. What is the correct interest expense on the 9% Serial Bonds Payable in 2021?
a. 270,000 c. 197,355
b. 294,869 d. 297,355

6. A preliminary survey of the purchasing function indicates the following:

I. Department managers initiate purchase requests, which must be approved by the plant
superintendent.
II. Purchase orders are typed by the purchasing department by using the prenumbered and
controlled forms.
III. Buyers regularly update the official vendor listing as new sources of supply become known.
IV. Rush orders can be placed with a vendor by telephone but must be followed by a written
purchase order before delivery can be accepted.
V. Vendor invoice payment requests must be accompanied by a purchase order and a
receiving report.

One possible fault of this system is that

a. Purchases can be made at prices higher than normal from a vendor controlled by
a buyer.
b. Unnecessary supplies can be purchased by department managers.
c. Payment can be made for supplies not received.
d. Payment can be made for supplies received but not ordered by the purchasing
department.

PROBLEM 11:
As an inducement to enter a lease, Lee Corp., a lessor, grants Dayag Inc., a leaseholder, six months of
free rent under a three-year lease on its building which has a 10 –year useful life. The lease is
effective on March 31, 2019 and provides for an annual rental of P360,000 payable in advance. The
implicit lease rate known to both parties is at 10%.

Requirements:
1. What amount should Lee Corp. report as an asset in its December 31, statement of financial
position?
a. 225,000 c. 180,000
b. 45,000 d. 55,000

2. What amount should Dayag Inc., recognized as a Liability as at March 31, 2019?
a. None c. 624,793
b. 720,000 d. 804,793

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PROBLEM 12:
Ube Company owns an office building having a 10-year useful life and normally charges tenants
P3,000 per square meter per year for the office space. Because the occupancy rate is low, Ube
Company lease 100 sq. m to Rita Company at P2,000 per square meter for the first two years of a four
year operating lease. Rent for remaining years will be at the P3,000 rate. Rita Company moved into
the building on January 1, 2019, and paid the first year’s rent in advance. Rita also paid P80,000 in
lease bonus. The implicit lease rate known to both parties is at 10%.

Requirements:
1. What is Rita Company’s interest expense for 2019?
a. 85,415 c. 93,515
b. 65,515 d. 80,332

2. What is Rita Company’s depreciation expense for 2019?

a. 233,787 c. 85,515
b. 213,787 d. 93,515

PROBLEM 13:
On January 2, 2019, Harith Company entered into a five-year lease requiring payments of P220,000
each lease year at the beginning of each year. The periodic payments include P20,000 in periodic
repairs and maintenance to be done by the lessor. Harith Company’s incremental borrowing rate is
12%, while the lessor’s implicit interest rate, known to Harith Company, is 10%. The estimated
residual value of the asset after five year lease term is at P40,000 while after its 10 year useful life is
at P20,000.

1. What is the carrying value of the right of use asset on the books of Harith Company as of
December 31, 2019?
a. 633,973 c. 667,178
b. 750,576 d. 543,220

2. What is the carrying value of the lease liability as of December 31, 2019?
a. 560,769 c. 667,178
b. 750,576 d. 697,370

3. Assuming that Harith Company guaranteed the residual value of the asset, what is the interest
expense in 2019?
a. 65,881 c. 85,881
b. 70,812 d. 98,312

4. Assuming that Harith Company guaranteed the residual value of the asset and that by the end
of 2019 the estimated residual value did not change, what is the depreciation expense in
2019?
a. 163,762 c. 171,762
b. 167,762 d. 85,810

PROBLEM 14:
Guenevere Company leased a new machine from Leslie Co. on Jan. 1, 2019, under a lease with the
following information:
Annual rental payable at beginning of each lease year 400,000
Lease term 10 year
Useful life of machine 12 years
Implicit interest rate 14%

Guenevere Company has the option to purchase the machine on Jan. 1, 2029, by paying
P200,000 which is equal to the assets estimated residual value after 10 years. The asset
has an estimated residual value of P100,000 after 12 years. Assuming that it was certain
the Guenevere Company will exercise its purchase option at the end of the lease term:

1. What is the depreciation expense on the books of Guenevere Company in 2019?

a. 284,550 c. 242,250
b. 222,123 d. 201,875

2. What is the carrying value of the lease liability as of December 31, 2020?
a. 1,785,434 c. 2,035,394
b. 2,185,434 d. 2,111,312

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3. Assuming that Guevevere Company is not certain regarding the exercise of the purchase
option, what is the depreciation expense in 2019?
a. 237,855 c. 198,212
b. 167,762 d. 242,250

PROBLEM 15:
The accountant of Try Corp. presented to you the following information in line with your audit of Try
Corp.’s income tax related balances:

Pre-tax financial income P10,000,000

Estimated litigation loss which is tax deductible
upon settlement in the future 600,000
Installment sale which will be recognized as taxable
income as received over the next two years 1,200,000
Unearned rental income 300,000
Dividend income 500,000
Life insurance expense 300,000
Income tax rate is constant at 33% for all years.

Required:
1. What is the total tax expense for the year?
a. 3,234,000 b. 3,300,000 c. 3,135,000 d. 3,036,000

2. What is the current tax expense for the year?

a. 3,234,000 b. 3,300,000 c. 3,135,000 d. 3,036,000

3. How much is the deferred tax asset as of December 31, 2018?

a. 297,000 b. 396,000 c. 495,000 d. 49,000

4. How much is the deferred tax liability as of December 31, 2018?

a. 297,000 b. 396,000 c. 495,000 d. 49,000

5. If future tax rate is expected to increase to 35%, what is the total tax expense?
a. 3,430,000 b. 3,240,000 c. 3,320,000 d. 3,330,000

PROBLEM 16:
The accountant of Cosine Corp. presented to you the following information in line with your audit of
Cosine Corp.’s income tax related balances:

Pre-tax financial income P12,000,000

Non-taxable income 1,200,000
Non-deductible expenses 400,000
Provision for warranties which are tax deductible
upon settlement in the future 600,000
Prepaid advertising expenses which are tax
deductible upon payment in the current period 500,000
Excess tax depreciation over financial depreciation 400,000

The current tax rate is at 32% but is expected to increase in the following year to 33%.

Required:
1. What is the current tax expense for the year?
a. 3,587,000 b. 3,488,000 c. 3,584,000 d. 3,596,000

2. How much is the deferred tax asset as of December 31, 2018?

a. 198,000 b. 192,000 c. 288,000 d. 297,000

3. How much is the deferred tax liability as of December 31, 2018?

a. 198,000 b. 192,000 c. 288,000 d. 297,000

4. What is the total tax expense for the year?

a. 3,587,000 b. 3,488,000 c. 3,584,000 d. 3,596,000

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PROBLEM 17:
The following information relate to the defined benefit pension plan of Bonchon Corp. in relation to
your audit of the company’s post-retirement benefit related accounts:

Present value of benefit obligation, January 1 P3,000,000

Fair value of plan asset, January 1 2,800,000
Contribution during the year 210,000
Current service cost 160,000
Benefits paid during the year 300,000
Present value of benefits obligation, December 31 3,482,000
Fair value of plan asset, December 31 2,984,000
Discount rate 6%

Required:
1. What is the total employee benefit cost for the year?
a. 160,000 b. 172,000 c. 336,000 d. 508,000

2. What amount of employee benefit cost should be reported in the profit or loss?
a. 160,000 b. 172,000 c. 336,000 d. 508,000

3. What is the net remeasurement gain or loss to be reported in the other comprehensive income
or loss?
a. 160,000 b. 172,000 c. 336,000 d. 508,000

4. What is the balance of the prepaid or accrued pension as of December 31, 2018?
a. Prepaid pension P200,000 c. Accrued pension P200,000
b. Accrued pension P498,000 d. Prepaid pension P498,000

PROBLEM 18:
In connection with your audit of Dee Corp.’s post-retirement benefits related accounts, the accountant
of Dee Corp. provided you the following information for the year ended December 31, 2018:

Fair value of plan asset, January 1 P7,000,000

Present value of benefit obligation, January 1 7,500,000
Current service cost 1,400,000
Actual return on plan asset 840,000
Contribution to the plan 1,200,000
Benefits paid to retirees at scheduled retirement 1,500,000
Decrease in the present value of benefit obligation
due to changes in actuarial assumptions 200,000
Present value of additional defined benefit
obligations settled 500,000
Settlement price of the additional defined benefit obligation 400,000
Discount rate 10%

Required:
1. What is the total amount of employee benefit cost (pension cost)?
a. 1,350,000 b. 1,450,000 c. 1,690,000 d. 1,010,000

2. What amount of employee benefit cost should be reported in the profit or loss?
a. 1,350,000 b. 1,450,000 c. 1,690,000 d. 1,010,000

3. What is the net remeasurement gain or loss to be reported in the other comprehensive income
or loss?
a. 100,000 b. 150,000 c. 200,000 d. 340,000

4. What is the fair value of the plan asset as of December 31, 2018?
a. 7,000,000 b. 7,140,000 c. 7,540,000 d. 8,200,000

5. What is the present value of the benefit obligation as of December 31, 2018?
a. 7,450,000 b. 7,650,000 c. 7,950,000 d. 9,650,000

6. What is the balance of the prepaid or accrued pension as of December 31, 2018?
a. Prepaid pension P310,000 c. Prepaid pension P650,000
b. Accrued pension P310,000 d. Accrued pension P650,000

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