Quiz 2 Audit of Liabilities

For numbers 1-4

In conjunction with your firm’s examination of the financial statements of Batur, Inc. as of December 31,
2020, you obtained the information from the company’s accounting records as shown below:

Feb 1 Batur purchased an office equipment amounting to ₱360,000 from Matti Corp., paying ₱60,000
in cash and signing a one-year 12% note for the balance of the purchase price.
May 9 The company purchased goods from Clappers Inc. for ₱510,000 subject to cash discount
terms of 2/10, n/30. The company records purchases and accounts payable at gross amounts.
The invoice was paid on May 25.
Jul 1 Batur borrowed ₱240,000 from Manila Bank by signing a ₱276,000 noninterest-
bearing note due one year from July 1.
Nov 1 The company’s board of directors declared a ₱900,000 cash dividend that was payable
on December 15 to shareholders of record on November 30.

1. What is the journal entry to record the transaction on February 1?

a. Truck 120,000
Cash 12,000
Note payable 108,000
b. Office Equipment 120,000
Cash 12,000
Note payable 108,000
c. Truck 360,000
Cash 60,000
Accounts payable 300,000
d. Office Equipment 360,000
Cash 60,000
Note payable 300,000

2. What is the journal entry to record the transaction on May 25?

a. Purchases 147,000
Accounts payable 147,000
b. Accounts payable 147,000
Purchase discounts lost 3,000
Cash 150,000
c. No journal entry
d. Accounts payable 510,000
Cash 510,000

3. What is the journal entry to record the transaction on July 1?

a. Cash 240,000
Discount on note payable 36,000
Note payable 267,000
b. Cash 240,000
Premium on note payable 36,000
Note payable 267,000
c. Cash 240,000
 Discount on note payable 36,000
Note payable 276,000
d. No journal entry

4. What is the journal entry to record the transaction on November 30?

a. No journal entry
b. Retained earnings 900,000
Dividends payable 900,000
c. Dividends payable 900,000
Cash 900,000
d. Retained earnings 900,000
Cash 900,000

For numbers 5-9

Atimonan Corporation is selling audio and video appliances. The company’s fiscal year ends on March
31. The following information relates to the obligations of the company as of March 31, 2014:

Notes payable
Atimonan 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 P 408,000 on March 31,
2014.

Due Date Amount

April 31, 2014 P 720,000
July 31, 2014 1,080,000
September 1, 2014 540,000
February 1, 2015 540,000
April 1, 2015 – March 31, 2016 3,240,000
P 6,120,000
Estimated warranties
Atimonan has a one-year product warranty on some selected items. The estimated warranty liability on
sales made during the 2012 – 2013 fiscal year and still outstanding as of March 31, 2013, amounted to P
302,400. The warranty costs on sales made from April 1, 2013 to March 31, 2014, are estimated at P
756,000. The actual warranty costs incurred during 2013 – 2014 fiscal year are as follows:

Warranty claims honored on 2012 – 2013 sales P 302,400

Warranty claims honored on 2013 – 2014 sales 342,000
Total P 644,400

Trade payables
Accounts payable for supplies, goods, and service purchases on open account amount to P 672,000 as of
March 31, 2014.

Dividends
On March 10, 2014, Atimonan’s board of directors declared a cash dividend of P0.30 per ordinary share
and a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2014 to
shareholders on record at the close of business on March 31, 2014. As of March 31, 2014, Atimonan has
6 million, P2 par value, ordinary shares issued and outstanding.

Bonds payable
Atimonan issued P 6,000,000, 12% bonds, on October 1, 2008 at 96. The bonds will mature on October
1, 2018. Interest is paid semi-annually on October 1 and April 1. Atimonan uses the straight-line method
to amortize bond discount.

Based on the foregoing information, determine the adjusted balances of the following as of March 31,
2014:
5. Estimated warranty payable
a. P 414,000 c. P 302,400
b. P 756,000 d. P 1,058,40

Warranty payable, 3/31/05P 302,400

Add warranty expense accrued during2005-2006 756,000

Total 1,058,400

Less payments during 2005-2006 644,400

Warranty payable, 3/31/06 P 414,000

6. Unamortized bond discount

a. P 132,000 c. P 240,000
b. P 108,000 d. P 120,000

Bond discount, 10/1/00 (P6,000,000 x .04) P240,000

Discount Amortization, 10/1/00 to 3/31/06 132,000
(P240,000 x 5.5/10)
Bond discount, 3/31/06 P108,000

7. Bond interest payable

a. P 360,000 c. P 180,000
b. P 300,000 d. P 0

Bond interest payable, 10/1/05 to 3/31/06

(P6,000,000 x 12% x 6/12) P360,000

8. Total current liabilities

a. P 7,734,000 c. P 6,534,000
b. P 6,126,000 d. P 4,734,000
Notes payable - current (maturing up to3/31/07) P2,880,000

Accrued interest payable – Notes payable 408,000

Estimated warranty payable (see no. 1) 414,000

Accounts payable 672,000

Cash dividends payable (6 million shares xP0.30) 1,800,000

Accrued interest payable – Bonds payable 360,000

Total current liabilities P6,534,000

9. Total noncurrent liabilities

a. P 9,240,000
b. P 9,132,000
c. P 9,108,000
d. P 9,000,000

Notes payable – noncurrent P 3,240,000

Bonds payable, net of discount of P108,000 5,892,000

Total noncurrent liabilities P 9,132,000

For numbers 10-14

OLSON MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. To promote the sale of its products, Olson uses two
promotion techniques - premiums and warranties.

PREMIUMS
The premium is offered on the recorded and sheet music. Customers receive a coupon for each P10
spent on, recorded music and sheet music. Customers may exchange 200 coupons and P200 for a CD
player. Olson pays P340 for each CD player and estimates that 60% of the coupons given to customers
will be redeemed. A total of 6,500 CD players used in the premium program were purchased during the
year and there were
1,200,000 coupons redeemed in 2014.

WARRANTIES
Musical instruments and sound reproduction eauipment are sold with, one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales,
Replacement parts and labor for warranty work totaled P1,640,000 during 2014.

Olson uses the accrual method to account for the warranty and premium costs for financial reporting
purposes. Olson's sales for 2014 total P72,000,000 - P54,000,000 from musical instruments and sound
reproduction equipment and P18,000,000 from recorded music and sheet music. The balances in the
accounts related to warranties and premiums on January 1, 2014, were as shown below:

Inventory of premium CD players P 399,500

Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000
Based on the preceding information, determine the amounts that will be
shown on the 2014 financial statements for the following:

10. Warranty expense

a. P1,640,000
b. P1,080,000
c. P240,000
d. P800,000

Sales of musical instruments and sound P54,000,0000

reproduction equipment

Estimated warranty cost x 2%

Warranty expense for 2014 P 1,080,000

11. Estimated liability from warranties

a. P1,920,000
b. P1,080,000
c. P800,000
d. P360,000

Estimated liability from warranties, Jan. 1, 2014 P1,360,000

Add: 2014 warranty expense (see no. 1) 1,080,000

Total 2,440,000

Less: Actual warranty costs during 2014 1,640,000

Estimated liability from warranties, Dec. 31, 2014 P 800,000

12. Premium expense

a. P1,836,000
b. P756,000
c. P840,000
d. P2,189,500

Coupons issued (18,000,000/P10) 1,800,000

Multiply by estimated redemption rate x 60%

Estimated number of coupons to be redeemed 1,080,000

Divide by exchange rate (200 coupons for a CD player) ÷ 200

Estimated number of CD players to be issued 5,400

Multiply by net cost of a CD player (P340 - P200) x 140

Premium expense for 2014 756,000

 13. Inventory of premium CD players
a. P399,500
b. P2,210,000
c. P569,500
d. P739,500

Inventory of premium CD players P399,500

Add: Premium CD players purchased

during 2014 (P340 x 6,500) 2,210,000

Total 2,609,500

Less: Premium CD players distributed to customers

during 2014 (1,200,000/200 = 6,000 x P340) 2,040,000

Inventory of premium CD players, Dec 31, 2014 P 569,500

14. Estimated premium claims outstanding

a. P364,000
b. P756,000
c. P840,000
d. P672,000

Estimated premium claims outstanding, Jan. 1,2014 P448,000

Add: 2014 premium expense (see no. 3) 756,000

Total 1,204,000

Less: 2014 actual redemptions

(1,200,000/200 = 6,000 x P140) 840,000

Estimated premium claims outstanding, Dec 31, 2014 P 364,000

For numbers 15-17

You are engaged to audit the December 31, 2014, financial statements of MILANI COMPANY, a
manufacturer of household appliances. Your audit disclosed the following situations.
1. In June 2014, the company began producing and selling a new line of dishwasher. By the end of
the year, it had sold 120,000 to various dealers for P15,000 each. The product was sold under a
1-year warranty, and the company estimates warranty costs to be P750 per
dishwasher. Milani had paid out P30 million in warranty expenses as of December: 31, 2014,
which is also the amount shown as warranty expense in its income statement for the current
year.
 2. In response to your letter of audit inquiry, Milan's lawyer informed you that the company is
involved in a lawsuit for violating environmental laws regulating hazardous waste. Although the
litigation is pending, Milan's lawyer is certain that Milani will most probably have to pay cleanup
costs and fines of P5,500,000. Milani neither accrued
nor disclosed this loss in the financial statements.

3. Milani is the defendant in a patent Infringement suit by Megan Yang over Milan's use of a
hydraulic compressor in several of its manufactured appliances. Milan's lawyer informed you
that if the suit goes against your audit client, the loss may be as much as P10 million. However,
the lawyer believes that the loss of this suit is only possible. Milan did not in any way disclose
this pending litigation in its financial statements.

15. What amount of warranty expense should be shown on Milani's income statement for the year
ended December 31, 2014?
a. P30,000,000
b. P60,000,000
c. PO
d. P90,000,000

Warranty expense on Milani income statement =

Warranty cost per dishwasher = P750

x Total dishwasher sold  x 120,000 

= P90000000

16. What amount of warranty liability should be shown on Milani's

statement of financial position as of December 31, 2014?
a. P60,000,000
b. P30,000,000
c. P90,000,000
Unit sold 120,000

(*) Warranty cost per Unit 750

Warranty Liability before recognizing 90,000,000

expense

(-) Warranty expense 30,000,000

Warranty Liability balance 60,000,000

17. What amount of lawsuit liability should be reported as a provision on Milan's December 31,
2014, statement of financial position?
a. P10,000,000
b. P15,500,000
c. P5,500,000
d. PO
For questions 18-22
The following information relates to Alabat Company as of December 31. 2020. Answer the following
questions relating to each of the independent situations as requested.
18. Beginning 2020, Alabat Company began marketing a new beer called "Red Colt." To help
promote the product, the management is offering a special beer mug to each customer for
every 20 specially marked bottle caps of Red Colt. Alabat estimates that out of the 300,000
bottles of Red Colt sold during 2020, only 50% of the marked bottle caps will be redeemed. For
the year 2020, 8,000 mugs were ordered by the company at a total cost of P360,000. A total of
4,500 mugs were already distributed to customers. What is the amount of the liability that
Alabat Company should report on its December 31, 2020 statement of financial position?
a. P135,000
b. P337,500
c. P202,500
d. P360,000

Total estimated mugs to be issued

[(300,000 x 50%)/20] 7,500

Less mugs issued 4,500

Balance 3,000

Multiply by premium cost (P360,000/8,000) 45

Estimated premium liability, 12/31/10 P135,000

19. On January 2, 2018, Alabat Company introduced a new line of products that carry a three-year
warranty against factory defects. Estimated warranty costs related to peso sales are as follows:
1% of sales in the year of sale, 2% in the year after sales and 3% in the
second year after sale.

Sales and actual warranty expenditures for the period 2018 to 2020
were as follows:
Sales Actual Warranty Expenditures
2018 P100,000 P 750
2019 250,000 3,750
2020 350,000 11,250
P700,000 P15,750

What amount should Alabat report as warranty expense in 2020?

a. P 3.500
b. P11,500
c. P11.250
d. P21,000

Warranty expense for 2010 (P350,000 x 6%) P21,000

20. During 2020, Alabat Company guaranteed a supplier's P500,000 loan from a bank. On October 1,
2020, Alabat was notified that the supplier had defaulted on the loan and filed for bankruptcy
 protection. Counsel believes Alabat will probably have to pay between P250,000 and P450,000
under its guarantee. As a result of the supplier’s bankruptcy, Alabat entered into a contract in
December 2020 to retool its machines so that Alabat could accept part from other suppliers.
Retooling costs are estimated to be P300,000. What amount should Alabat report as a liability in
its December 31, 2020, statement of financial position?
a. P250,000
b. P350,000
c. P450,000
d. P650,000

Provision for guarantee, 12/31/10

[(P250,000 + P450,000) / 2] P350,000

21. A court case decided on 21 December 2020 awarded damages against Alabat.
The judge has announced that the amount of damages will be set at a future date, expected to
be in March 2021. Alabat has received advice from its lawyers that the amount of the damages
could be anything between P20,000 and P7,000,000. As of December 31, 2020, how much
should be recognized in the statement of financial position regarding this court case?
a. P20,000
b. P7,000,000
c. P3,510,000
d. PO

22. Alabat's directors decided on 3 November 2020 to restructure the company's operations as
follows:

a. Factory T would be closed down and put on the market for sale.
b. 100 employees working in Factory T would be retrenched effective 30 November 2020
and would be paid their accumulated entitlements plus 3 months' wages.
c. The remaining 20 employees working in Factory T would be transferred to Factory X,
which would continue operating
d. 5 head-office staff would be retrenched effective 31 December 2020 and would be paid
their accumulated entitlements plus 3 months' wages.

As at 31 December 2020 the following transactions and events had occurred:

 Factory T was shut down on 30 November 2020. An offer of P80M had been received for
Factory T; however there was no binding sales agreement.
 The 100 employees had been retrenched, had left and their accumulated entitlements had
been paid, however an amount of P1,520,000, representing a portion of the 3 months'
wages for the retrenched employees, had still not been paid.
 Costs of P460,000 were expected to be incurred in transferring the 20 employees to their
new work in Factory X. The transfer will occur on 15 January 2021.
 Four of the five head-office staff had been retrenched, had left and their accumulated
entitlements, including the 3 months' wages, had been paid. However one employee, D.
Terminator, remained on to complete administrative tasks relating to the closure of Factory
T and the transfer of staff to Factory X. D. Terminator was expected to stay until 31 January
2021. Terminator's salary for January would be P80,000 and his retrenchment package
would be P260,000, all of which would be paid on the day he left. He estimated that he
 would spend 60% of his time administering the closure of Factory T, 30% of his time
administering the transfer of staff to Factory X and the remaining 10% on general
administration.

Calculate the amount of the restructuring provision to be recognized in Alabat's financial

statements as at 31 December 2020.
a. P116,000
b. P93,000
c. P1,828.000
d. P89,000

Unpaid salaries salaries of retrenched employees P1,520,000

D. Terminator’s retrenchment package 260,000

D. Terminator’s salary related to administration of the closure

(P80,000 x x 60%) 48,000

P1,828,00

For numbers 23-27

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 P57,600,000- P43,200,000 from

musical instrument and sound reproduction equipment and P14,400,000 from recorded music and sheet
music. Replacement parts and labor for warranty work totaled P1,312,000 during 2020. A total of 52,000
AM/FM radio used in the premium program were purchased during the year and there were 9,600,000
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 premium on January 1, 2020,
were as shown below:

Inventory of Premium AM/FM radio P 319,600

Estimated Premium Claims Outstanding 358,400
Estimated Liability from Warranties 1,088,000

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:

23. Warranty expense

 a. P864,000
b. P1,152,000
c. P1.312,000
d. P640,000

Warranty expense (P43,200,000 x 2%) P864,000

24. Estimated liability from warranties

a. P 864,000
b. P1,312,000
c. P1,088,000
d. P640,000

Estimated liability from warranties, 1/1/10 P1,088,000

Add: Warranty expense for 2010 864,000

Total 1,952,000

Less: Actual expenditures for 2010 1,312,000

Estimated liability from warranties, 12/31/10 640,000

25. Premium expense

a. P604,800
b. P1,468,800
c. P864,000
d. P1,008,000

Premium expense [(14,400,000 x 60%)/ 200 x P14] P604,800

26. Inventory of AM/FM radio

a. P375,600
b. P319,600
c. P618,800
d. P455,600

Inventory of premium, 1/1/10 P 319,600

Add: Premium purchases (52,000 x P34) 1,768,000

Total premium available 2,087,600

Less: Premiums issued (9,600,000/200 x P34) 1,632,000

Inventory of premium, 12/31/10 455,600

27. Estimated liability for premiums

a. P604,800
b. P291,200
c. P507,600
d. P358,400
Estimated premium claims outstanding, 1/1/10 P358,400

Add: Premium expense for 2010 604,800

Total 963,200

Less: Premiums issued (P 9,600,000/200 x P14) 672,000

Estimated premium claims outstanding, 12/31/10 291,200

28. The objective of the Philippine Accountancy Act of 2004 includes:

a. The standardization and regulation of accounting education
b. The examination for registration of certified public accountants
c. The supervision, control and regulation of the practice of accountancy in the Philippines
d. All of the above

29. The following statements relate to the Board of Accountancy. Which statement is correct?
a. The Board consists of a Chairman and six members.
b. The chairman and members are appointed by the President of the Philippines upon
recommendation of PICPA.
c. The Professional Regulation Commission may remove from the Board any member whose
certificate to practice has been removed or suspended.
d. Majority of the board members shall as much as possible be in public practice.

30. Which of the following is not one of the qualifications of the members of the Board of
Accountancy?
a. Must be a natural-born CPA and a resident of the Philippines.
b. Must be a duly Certified Public Accountant with at least ten years of experience in practice
of accountancy.
c. Must be of good moral character.
d. Must not have been convicted of crimes involving moral turpitude.

31. The auditing standard setting body created by the PRC is known as
a. Financial Reporting Standards Council (FRSC)
b. Auditing Standards and Practices Council (ASPC)
c. Accounting Standards Council (ASC)
d. Auditing and Assurance Standards Council (AASC)

32. Which of the following is correct about AASC?

a. The AASC shall be composed of a chairman and six members.
b. The chairman and members of the AASC shall be appointed by the president of the
Philippines from a list of three recommendees ranked by the Commission from the list of 5
nominees for each position submitted by APO.
c. The chairman and members of the AASC shall have a term of three years renewable for
another term.
d. The AASC shall elect a Vice-Chairman from among its members for a term of one year.
33. The sector that is most represented in the AASC is the
a. Commerce and Industry
b. Academe
c. Government
d. Public Practice

34. Which of the following statements about Accounting Standard Setting Council is false?
a. The accounting standard setting body is to be known as Financial Reporting Standards
Council (FRSC).
b. The accounting standard setting body shall be composed of a chairman and fourteen
members.
c. The chairman and members of the standard setting council shall be appointed by the
Commission upon the recommendation of the Board in coordination with APO.
d. The public accounting practice is the sector that is most represented in the accounting
standard setting council.

35. Which of the following government regulatory agencies is not represented in the AASC?
a. Securities and Exchange Commission
b. Bureau of Internal Revenue
c. Bangko Sentral ng Pilipinas
d. Board of Accountancy