CPA REVIEW SCHOOL OF THE PHILIPPINES AP 9002-1

Manila
AUDITING PROBLEMS
CPA Review
AUDIT OF LIABILITIES

PROBLEM NO. 1

PURUNTONG, INC. is a manufacturer and retailer of household furniture. Your audit of the
company’s financial statements for the year ended December 31, 2021, discloses the following
debt obligations of the company at the end of its reporting period. PURUNTONG’s financial
statements are authorized for issuance on March 6, 2022.

1. A P200,000 short-term obligation due on March 1, 2022. Its maturity could be extended to
March 1, 2024, provided PURUNTONG agrees to provide additional collateral. On February
12, 2022, an agreement is reached to extend the loan’s maturity to March 1, 2024.

2. A short-term obligation of P4,200,000 in the form of notes payable due February 5, 2022.
The company issued 80,000 ordinary shares for P40 per share on January 25, 2022. The
proceeds from the issuance, plus P1,000,000 cash, were used to fully settle the debt on
February 5, 2022.

3. A long-term obligation of P1,500,000 due on December 1, 2031. On November 10, 2021,

PURUNTONG breaches a covenant on its debt obligation and the loan becomes payable on
demand. An agreement is reached to provide a waiver of the breach on January 11, 2022.

4. A long-term obligation of P4,000,000. The loan is maturing over 8 years in the amount of
P500,000 per year. The loan is dated September 1, 2021, and the first maturity date is
September 1, 2022.

5. A debt obligation of P600,000 maturing on December 31, 2024. The debt is callable on
demand by the lender at any time.

QUESTIONS:

1. What amount of current liabilities should be reported on the December 31, 2021, statement
of financial position?
A. P7,000,000 B. P7,500,000 C. P6,400,000 D. P10,000,000

2. What amount of noncurrent liabilities should be reported on the December 31, 2021,
statement of financial position?
A. P4,000,000 B. P3,500,000 C. P4,100,000 D. P 0

PROBLEM NO. 2

In the audit process, the following data were obtained from the books of the BOOMTAYAYABOOM
COMPANY which uses a voucher system. All invoices are subject to terms 2/10, n/30 and are
entered net with the discount entered in Purchase Discounts column of the voucher register. The
accountant in charge of the books went on leave to attend to his family based in New Jersey. A
fresh accountancy graduate has been assigned to record the transactions. At year-end, the
substitute accountant finds that the unpaid vouchers do not agree with the Vouchers Payable
control account. You are called to adjust the matter.

A schedule of unpaid vouchers as of December 31, 2021, all of which are net of discount, is
presented to you.
Date Voucher No. Supplier Amount
Nov. 27 797 Dominguez Supply Co. P 78,400
Dec. 02 821 Gudoy Distributors 19,600
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11 829 Panutsa Sales 44,100

20 836 Mukasim Dealers 17,150
21 842 Bekenemen Merchandising 22,050
22 856 Halimaw Mercantile 80,850
31 865 Balakang Traders 78,400
P340,550

Vouchers Payable (control account)

Cash disbursements P1,309,500 Purchases journal P1,645,000
Purchase returns journal 36,750*

* Voucher Nos. 821 and 836 canceled as goods were returned in December.

Based on the above and the result of your audit, compute for the following as of December 31,
2021:

1. Adjusted balance of Vouchers Payable

A. P310,000 B. P306,750 C. P303,800 D. P344,250

2. Purchase discounts lost on unpaid vouchers

A. P6,200 B. P2,950 C. P3,700 D. P 0

3. Purchase discounts lost on paid vouchers

A. P28,750 B. P8,000 C. P5,050 D. P41,800

4. The adjusting entry or entries to correct the accounts will include

A. A debit to Purchase Discounts Lost of P11,250.
B. A debit to Purchase Discounts Lost of P5,050.
C. A credit to Vouchers Payable of P8,000.
D. A credit to Vouchers Payable of P11,250.

PROBLEM NO. 3
TOROTOT MUSIC EMPORIUM carries a wide variety of musical instruments, sound reproduction
equipment, recorded music, and sheet music. To promote the sale of its products, Torotot 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 power bank. Torotot pays P340 for each power bank and estimates that 60% of the coupons
given to customers will be redeemed. A total of 6,500 power banks used in the premium program
were purchased during the year and there were 1,200,000 coupons redeemed in 2021.

WARRANTIES
Musical instruments and sound reproduction equipment are sold with a 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 2021.

Torotot uses the accrual method to account for the warranty and premium costs for financial
reporting purposes. Torotot’s sales for 2021 totaled 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, 2021,
were as shown below:
Inventory of power banks P 399,500
Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000

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Based on the preceding information, determine the amounts that will be shown on the 2021
financial statements for the following:

1. Warranty expense
A. P1,640,000 B. P1,080,000 C. P800,000 D. P360,000

2. Estimated liability from warranties

A. P1,920,000 B. P1,080,000 C. P240,000 D. P800,000

3. Premium expense
A. P1,836,000 B. P840,000 C. P756,000 D. P2,189,500

4. Inventory of power banks

A. P399,500 B. P569,500 C. P2,210,000 D. P739,500

5. Estimated premium claims outstanding

A. P364,000 B. P840,000 C. P756,000 D. P672,000

PROBLEM NO. 4

LARIO COMPANY issued 10-year bonds on January 1, 2021. The company’s year-end is
December 31, and financial statements are prepared annually. The amortization and interest
schedule below reflects the bond issuance and the subsequent interest payments and charges.

AMORTIZATION SCHEDULE

Interest Interest Amount Carrying

Date Paid Expense Unamortized Value
01/01/21 -- -- P28,253 P471,747
12/31/21 P 55,000 P 56,610 26,643 473,357
12/31/22 55,000 56,803 24,840 475,160
12/31/23 55,000 57,019 22,821 477,179
12/31/24 55,000 57,261 20,560 479,440
12/31/25 55,000 57,533 18,027 481,973
12/31/26 55,000 57,837 15,190 484,810
12/31/27 55,000 58,177 12,013 487,987
12/31/28 55,000 58,558 8,455 491,545
12/31/29 55,000 58,985 4,470 495,530
12/31/30 55,000 59,470* -- 500,000
* Adjustment due to rounding.

Questions:

1. The bonds were issued at

A. A premium
B. A discount
C. Face value
D. Par value

2. What amortization method is used in the amortization schedule presented?

A. Straight-line method
B. Bonds outstanding method
C. Effective interest method
D. Declining balance method

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3. What is the nominal (stated) interest rate of the bonds issued on January 1, 2018?
A. 11%
B. 12%
C. 10%
D. 6%

4. What is the effective interest rate of the bonds issued on January 1, 2018?
A. 11%
B. 12%
C. 10%
D. 6%

5. On the basis of the schedule presented, what is the journal entry to record the issuance of
the bonds on January 1, 2018?
A. Cash 500,000
Bonds payable 500,000
B. Cash 471,747
Interest expense 28,253
Bonds payable 500,000
C. Cash 500,000
Premium on bonds payable 28,253
Bonds payable 471,747
D. Cash 471,747
Discount on bonds payable 28,253
Bonds payable 500,000
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