547 CHAPTER 7 Audit of Liahilities AUDIT PROGRAM FOR ACCOUNTS PAYABLE Audit Objectives: . To determine that: 1. Accounts payable represent amounts currently payable goods and services as to trade creditors for purchases of at the end of the reporting period. 2. Accounts payable have been properly recorded: erly. described and classified 3. A ccounts payable are. prop sade and adequate disclosures have bee!548 PLOWOUTENIONO: AUDITING PRB, iy Audit Procedures: Obtain a list of accounts payable from the Subsidiary ledger, and: : © Check its footing. : : © Check if the list reconciles with the general ledger trol account. ae ‘ aia individual balances to the subsidiary ledger, Test accuracy of balances in the subsidiary ledger, «Adjust non-trade accounts erroneously included jg suppliers’ accounts. i Investigate and reclassify significant debit balances, Confirm accuracy of individual balances appearing in the subsidiary Jedger by requesting statements of accounts from suppliers, and: Reconcile suppliers’ statements of accounts with dient records and investigate any discrepancy. « If suppliers do not respond with the requests, perform extended procedures, like: > Reviewing payments after year-end. > Checking supporting documents. > Discussing the account with appropriate officer. . Review correspondence with suppliers for possible adjustments. 4. Test propriety of cutoff: . Examine purchases recorded and supplies! deliveries made 2 week before and after the end cnarn pr 7 AUDIT OF LIABILITIES the reporting period and ‘ purchases were recorded in the, pues whether the « Investigate large amounts of s shortly after the end of the repacting petind . Ascertain whether some payables are secured with as ured with asser pledges. . Compare payments after the reporting date with year- end schedule of accounts payable. . Review propriety of financial statement Presentation and adequacy of disclosures. . Perform analytical review procedures. Obtain accounts payable representation letter. AUDIT PROGRAM FOR NONCURRENT LIABILITIES Audit Objectives: To determine: 1, Authorization of liabilities incurred. 2. Validity of recorded liabilities. 3 4. Recognition and recording of significant liabilities. | Compliance with terms, restrictions, conditions, and other requirements of debt agreements. Spee 549CPADURRITONIEVIRE. AUDITING PROBL, S 550 ae CHAPTER 7 AUDIT OF LIABILITIES 551 or mortgaged and other guarant, 5. ete ie sane liabilities are identified, “ 2, Foot and cross-foot the schedule, a 7 6 Accuracy of tame and other charges relateq to 3, Verify accuracy of the schedule, noncurrent liabilities. 7, Propriety of financial statement presentation ang As a gene aes . ' ; lo tain copies or excerpts of debt instru adequacy of disclosures trace data to the schedule, sees Audit Procedures: As to principal amount outstanding: ake pera ding: a e Trace beginning balances to last ‘s is 4. Obtain schedule/s of noncurrent liabilities, indicating: papers, or in an initial audit, oun ge e ee ee beginning balances by: to. nat a 5 . Dosen or nature of the noncurrent liabilities, 2 keraes to debt instruments and Prior year’s . Creditor/s - > Tracing to beginning ledger balances © Original principal amount * Trace proceeds to cash receipts records for new © Interest rate liabilities incurred in the current year. © Collateral and/or guarantees : * Trace payments to cash disbursements records. and ¢ Terms, restrictions, conditions, and requirements canceled checks, imposed by the creditors * Vouch to supporting documents the renewals in the As to principal amount outstanding: ¢ Beginning-of-the-year balance « Additions during the year ¢ Repayments or renewals during the year Balance at year-end : As to interest: ‘© Accrued or prepaid at the beginning of the year © Amount incurred during the year © Payments during the year * Accrued or prepaid at year-end Current year, © Agree working paper ending balinces with the general ledger accounts. As to interest: * Trace beginning balances to last year’s working Papers, or in an initial audit: > Establish accuracy by an independent computation based on debt instruments. > Trace to beginning ledger balances. Recompute the interest: > IncurredCLOMUATONRENENER: AUDITING ROL 552 > Accrued Prepaid aa ice to cash records and Canceleg . checks. 4, Verify authorizations by reference to minutes of the board of directors’ meetings. Confirm directly with the creditors or trustees the following: | . Principal amount still outstanding Interest rates ¢ Interest accrued « Collateral and/or guarantees wa 6. Determine client’s compliance with loan agreements, 7. Account for the used and unused debt instruments like bond certificates and promissory notes. 8. Ascertain proper cancelation of paid or retired debt instruments. 9. Recompute the accuracy of any discount or premium amortization. of 10. Reconcile interest payments with recorded liabilities. 11. Verify propriety of financial statement presentation and adequacy of disclosures. n 7 AUDIT OF UABILITIES cHAPTE 553 prosiew 7-1 Te ay ebb capa BOOMERANG, INC. is a manufacture, furniture. Your audit of the company’ year ended December 31, 2018, discloses the following debt obligations of the company at the end of its Teporting period, Boomerang’s financial statements are authorized for issuance on March 6, 2019. T and retailer of household s financial statements for the 1, A P150,000 short-term obligation due on March 1, 2019. Its maturity could be. extended to March 1, , 2021, Provided Boomerang agrees to provide additional collateral. On Febru; 12, 2019, an agreement is reached to extend the loan’s Maturity to March 1, 2021, 2. A short-term obligation of P3,600,000 in the form of notes payable due February 5, 2019. The company issued 75,000 ordinary shares for P36 per share on January 25, 2019. The proceeds from the issuance, plus P900,000 cash, were used to fully settle the debt on February 5, 2019, 3. Along-term obligation of P2,500,000 due December 1, 2028. On November 10, 2018, Boomerang breaches a covenant on Its debt obligation and the loan becomes payable on demand. An eereement is reached to provide a waiver of the breach on December 11, 2018, “ Along-term obligation of P4,000,000. The loan is maturing over 4 years in the amount of P1,000,000 per year. The loan is dated september 1, 2018, and the first maturity date is September 1, 019, . ' Adebt obligation of P1,000,000 maturing on December 31, 2021. debt is callable on demand by the lender at any time.CHOTA AUDITING PR, 554 = rent liabilities should be reporte, what amount 0 xatement of nancial position? December 31,2028, C. P4,750,000 A. 8,250.0 D. P3,750,000 B, P5,750,000 current liabilities should be reported ong e f nol . 2 eat 2018, statement of financial position? d : ON the hi C. P6,500,000 A. P5,500,000 B. P3,000,000 D. P7,500,000 socoTion 7-1 Current Noncurrent: 1 P 150,000 2 3,600,000 3 2,500,000 4 4,000,000 3,000,000 5. 1,000,000 Aer 5.750.000 am 1. Current liabilities 7 Answer: B 2. Noncurrent liabilities Answer: A ee.0om LEW 7-2 Current Liabilities The data below are from the records of ALMANOR, INC * December 31, 2018: 0 ‘Accounts payable E Bi Cash balance, ABC Bank weno Cash overdraft with XYZ Bank 25,000 Customers’ accounts with credit balances 7 AUDIT OF LIABILITIES cHarTeR : 555 jdends in arrears on Preference shares Piployees’ incoine tax payable ao stimated warranty payable : oar Estimated premium claims outstanding site income tax payable 400,000 Notes payable (issued in 2018 maturing in 20 semi- " annual installments beginning on April 1,2019) 4,900,000 salaries payable 400,000 The amount to be shown as total current liabilities on Almanor’s statement of financial position at December 31, 2018, is A. P2,225,000 C. P2,625,000 B. 2,025,000 D. P2,145,000 SOLUTION 7-2 oo Cash overdraft (XYZ Bank) : P 80,000 Notes payable due in 2019 (P4 million + 20 x 2) 400,000 Accounts payable 680,000 Salaries payable 400,000 Employees’ income tax payable 100,000 Income tax payable . 400,000 Estimated warranty payable 50,000 Estimated premium claims outstanding 90,000 Customers’ accounts with credit balances — 25,000 Total current liabilities 2.225.000 Answer: A PROBLEM 7-3 Recording Purchases SAIMAA CORP. records its purchases at gross amounts but wishes to e discounts. Discounts Inge to recording purchases net of purchas purchases recorded from January. 1, 2018, to December 31, 2018,COATUMNITONREVINTE AUDITING 56 PROBL. 5 4 80,000. Of this amount, P6,000 Is still avattable fn totale te i ance. The balances in Saimaa’s account ie accounts oe December 31, 2018, before conversion yet e : and for tht Purchases P 4,000,009 Purchase discounts 322.000 ‘Accounts payable 200,000 chase discounts lost to be recognized is : Toe amount C. P32,000 nro D. P40,000 2. The accounts payable balance should be reduced by “A. P3000 C. P32,000 B. P80,000 D. P40,000 ,. The purchases account should be reduced by 3 A 732000 C. P40,000 B, P80,000 D. P8,000 4, The entry to record the conversion is A. Accounts payable 80,000 “Purchases 80,000 B. Purchase discounts lost 32,000 Purchases 32,000 C. Purchase discounts lost 40,000 Purchase discounts 32,000 Accounts payable 8,000 Purchases 80,000 D. Purchase discounts lost 32,000 Accounts payable 8,000 ‘ d Purchases 40,000 SOLUTION 7-3 eee sa a a 1, Discounts on 2018 purchases * pao,otd Less: Discounts taken 32,000 7 AUDIT OF LIABILITIES CHAPTER 5 : 57 Discounts still available in the accounts payable batance purchase discounts lost ~B.009 ~10,000 Answer: D 2, The accounts payable should be reported net of dise lable at the end of the reporting period whi est eee Porting period which amounts to Answer: 3, Under the net method, purchases are re ted regardless of whether the discounts are taken oy we scouts, are taken or not. purchases account should be reduced by pgo,ogo, "ence, the Answer: B 4. The entry to record the conversion is: Purchase discounts lost 40,000 Purchase discounts 3200 Accounts payable 8,000 «Purchases - 80,000 Answer: C PROBLEM 7-4 Accrued Expenses ANGLIN CORPORATI Year-end accruals fo advertising bill was 27800 for adverti Sradvertisements ON must determine the December 31, 2013, r advertising and rent expenses. A P50,00 received January 10, 2019, comprising costs of isements in December 2018 issues, and P12,500 in January 2919 issues of the newspaper. li ranges effective December 16, 2017, calls for fixed rent of ™ontht Per month, payable one month from the effective date and Y thereafter, In addition, rent equal to 5% of net sales overtek OMEMITONEVINEE: AUDITING PRORLg 558 : le on januai Jendar year is payabl ny 3 000000 Fryer sales for 2018 were P7,500,000. of ty follow ued liabilities that should be reported Whats ne to erase of financial position as at De; or et Corpor " 2018? < p97500 2 00 D. P110,000 B. P72, SOLETION 7-4 ‘ P37,509 Advertising ; S , rt, Dec. 16-31 (P120,000 x 2) 60.00 Fred er OP 7,500,000 — PE,000,000 = P1,500,000 x5%) _ 7500 Total By Answer: B PROBLER 7-5 Bonus Computation Ana Rosa, president of the APOPKA COMPANY, has a bons arrangement with the company under which she receives 10% be net income (after deducting taxes and bonuses) each year. For 5 current year, the net income before deducting either the Ee for income taxes or the bonus is P4,650,000. The bonusis deduct for tax purposes, and the tax rate is 30%. 1. Determine the amount of Ana Rosa's bonus. yea 2. Compute the appropriate provision for income tax for ti} HH 3. Prepare the entry to record the bonus (which will be P following year). DIT OF LIABILITIES ueren 70 559 Tiak 7-5 a (B = Bonus; T = Tax) 10% (P4,650,000 - B - T) 30% (P4,650,000 ~ 8) 1,395,000 - .308 10% (4,650,000 ~ & ~ (1,395,000 - 308) 10% (4,650,000 - B- 1,395,000 + .308) 465,000 — .1B ~ 139,500 + .038 325,500 - .07B 325,500 325,500/1.07 P304.206 Boowoainn 1.071 oo 30% (P4,650,000 — B) 30% (P4,650,000 — P304,206) 30% x P4,345,794 P1303,738 daaa oun 3, Bonus expense 304,206 Bonus payable PROBLEM 7-6 304,206 PUKAKI COMPANY sold 700,000, boxes of “puto mix” under a new sales promotional program. Each box contains one coupon, which if submitted with P40, entitles the Customer to a kitchen knife. Pukaki Pays P60 per knife and P5 for handling and shipping. Pukaki estimates that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed during 2018. How much should Pukaki report as liability for unredeemed coupons at December 31, 20187 P6,000,000 . P9,600,000- C. P15,600,000 D. P12,250,000ineARENRE: AUDITING PRG py 60 “Es sorgtlaw 7-6 ee 709, oxes of "puto mix” sold 2 tion rate te Redenpors redeemable — 250,000) ; canons to be redeemed (490,000 — 250, ae pene niffe (P65 - P40) as Net cost per kitchen Kr Liability for unredeemed coupons Answer: A PROBLEM 7-7 Premiums in packages of ts products, PLACID, INC. includes coupons that may be presented at retail stores to obtain discounts on other Placid products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Placid honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Placid estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to.coupons issued by Placid during 2018 is as follows: Consumer expiration date Dec. 31, 2015 Total payments to retailers as of Dec. 31, 2018 P165,000 Liability for unredeemed coupons as of Dec. 31, 2018. 99,000 hat is the total face amount of coupons issued by Placid, Inc. in 2 A. P440,000 B. P400,000 C. P600,000 | D. P264,000 7 =AUDIT OF LIABILITIES ae 561 soLuTion 7-7 lity for unredeemed coupons, Dec. 31, 2018 ae ota payments to retailers P 99,000 | cost : 185.000 hie Handling charges (P264,000 - [P264,000/110%) 264,000 To be redeem 524.000 pivide by redemption rate 20,000, Total face amount of coupons issued : am Answer: Bo” * 5 PROBLEM 7-8 Liability for Returnable Containers delivered and receives a refund for each container returned within two years after the year of delivery. Omega accounts for the containers not returned within the time limit as being sold at the deposit amount. Information for 2018 is as follows: Containers held by customers at December 31, 2017, from deliveries in: 2016 85,000 = 2017 240.000 325,000 Containers delivered in 2018 430,000 Containers returned in 2018 from deliveries in: 2016 57,500 2017 = 140,000 2018 157.000 354,500 1. How much re af for 20187 evenue from container sales should be recognized A. P127,500 7,500 B. P267's09 C. P2751 D. P85,000RCANMATONEENEWE: AUDITING pp 0) 562 BL otal amount of Omega Company's liability, oy What is the 0°" rs at December 31, 20187 2 s ae : Cc.” P267,500 5. 400,500 D. P430,000 yorien 7-8 1. Containers held by customers at Dec. 31, 2017, * "from deliveries in 2016 ae Less: Containers returned in 2018 from deliveries in 2016 Revenue from container sales 2500 Answer: C % 2. ability for returnable containers, Dec. 31, 2017 P325,200 ‘Add: Deliveries in 2018 “2000 Total ne Less: 2018 container returns 354,500 2018 container sales (see no. 1) “27/500 382 ability for returnable containers, Dec. 31, 2018 Baz Answer: & PROBLEM 7-9 Various Transactions Involving Current Liabi Described below are certain transactions of ASHBY COMPANY: Feb. 2 The company Corp. fe purchased goods from Happy Cor 150,000 subject to cash discount terms of 2/10. 2/3 The company records purchases and accounts payeb net amounts after cash discounts. ‘The invoice was P® February 25, Harter 7 aunt GF LIABILITIES 563 1 The company purchased a truck for p19, 000 f; ,000 fror Motors Corp., paying P12,000 4 ym Broom year, 12% note forthe balance ofthe macy ee & on- e price. April The company borrowed P240,000 signing a 276,000 noninterest-benre eat Bank by from May 1. 18 Note due one year May 1 The company’s board of directo cash dividend that was payable on Sey oom shareholders of recoré on August31,, Pe" 10 t Aug 1 1. Prepare all the Journal entries necessary transactions described above. Cao, Feo the 2. Assume that Ashby Company’s financial year ends on De 31 and that no adjusting entries relative to the rane aoe above have been recorded. Prepare any adjusting jou eats concerning interest that are necessary to present fair finereaa statements at December 31. Ee LUTIGN 7-9 heute eae Oa ee 1, JOURNAL ENTRIES Feb, 2 Purchases Accounts payable (P150,000 x98%) 147,000 147,000 - Feb, 25 Accounts payable 147,000 rupees discounts lost (P150,000 x 2%). 3,000 sl 150,000 April 1 Trucks 120,000 Cash 12,000 Note payable 108,000_ LTUNATERRNIOE:. AUDITING "RODL 564 240,000 wy: i ea anton note payable 36,000 Note payable 276,009 i 900,000 ined earings f Aug, 1 ROE nds payable 900,009 2, ADJUSTING ENTRIES December 31 1. Interest expense 970 Interest payable 9,720° (P105,000 x 12% x 9/12) 2, Interest expense 24,000 Discount on-notes payable 24,000 (P36,000 x 8/12) PREBLER 7-10 Warranties Answer the Presented below are two independent situations. questions at the end of each situation. Situation 1 BARRADO CO, a machinery dealer, sells a machine for P22,200 under a 1-year warranty contract that requires the company! replace all defective parts and to provide the necessary repair labor at no cost to the customers. With sales being made evetl throughout the year, Barrado sells for cash 600 machines in 2018 (half of the warranty expense is incurred in 2018, half In 2019). S the basis of past experience, the 1-year warranty costs are estimat AUDIT OF LIABILITIES owrren7 565 510 parts and P60 labor. Assume that in 2018, these P to be s are Incurred exactly as estimated, warranty cost 4. What amount of warranty expense would be charged against * 9919 revenue? P702,900 p, P351,000 C P153,000 D. P396,000 What amount of warranty liability would appear on 2 ecember 31, 2018, statement of financial position? oe Cc P702,000 A PO B. P153,000 D. P351,069 situation 2 DP, INC. a dealer of household appliances, sells washing machines at an average price of P8100. The company also offers to each customer a Separate 3-year warranty contract for ‘810 that requires the company to provide periodic maintenance services and to replace defective parts. During 2018, DP sold 300 washing machines and 270 warranty contracts for cash. The company estimates that the warranty costs are P180 for parts and P360 for labor. Assume sales occurred on December 31, 2018 D?’s policy is to recognize income from the warranties on a straight-line basis. In 2019, DP incurred actual costs relative to 2018 warranty sales of P18,000 for parts and P36,000 for labor. 1, What liability relative to these transactions would appear on the December 31, 2018, statement of financial position and how Would it be classified? Current ‘Noncurrent A P145,800 *P72,900 B. P72,900 72,900 . P72,900 P 145,800 : PO P218,700‘CPA KANIRATION REVIEWER: AUDITING PROBLY 566 me t of warranty expense would be shown 2. what amour ded December 31, 2 2B Mame statement FOr EYER 000 ON the incom A, P1R000 D. P54,000 BP \hat liability relative to the 2018 warranties would appea, ra whet rember 31, 2019, statement of financial position and jgy would it be classified? it A P145,800 P72,900 B. P72,900 P72,900 c 72,900 P145,800 D. P145,800 PO SELUTION 7-10 ee ‘Situation 1 Z 1, 2018 warranty expense (P1,170* x 600) 702.000 * P51O parts + P660 labor Answer: B 2. Warranty liability, Dec. 31, 2018(P1,170 x 600 x ¥2) 351,000 Answer: D ‘Situation 2 1. Unearned warranty revenue: Current (P810 x 270 x 1/3) P7220 Nonourrent (P810 x 270 x 2/3) ‘P145.800 Answer: © 2. Parts p18,000 Labor 36,900 ‘Total warranty expense : poo Answer: D 7 AUDIT OF LIABILITIES carter 567 2 na Ty Noncurrent (P810 x 270 x 1/3) Ba Answer: B proplew 7-11 Accounting for Warranties and Premiums 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 2018. 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 2018, g Olson uses the accrual method to account for the warranty and Premium costs for financial reporting purposes. Olson's sales for 2018 totaled P72,000,000—P54,000,000 from musical instruments and sound reproduction equipment and P18,000,000 from recorded568 sie and sheet music. The balances in the accounts rela mu warranties an Inventory of premium CD players Estimated premium claims outstant Estimated liability from warranties P 399,509 ine 448,009 1,360,009 Based on the preceding information, determine the amounts will be shown on the 2016 financial statements for the following. 1. Warranty expense A. P1,640,000 €. P800,000 B. 1,080,000 D. P360,000 2. Estimated liability from warranties ‘A. Pi,920,000 Cc. P240,000 B, P1,080,000 D. P800,000 3. Premium expense A. P1,836,000 C. P75.000 B. P840,000. D. P2,135,500 4, Inventory of premium CD players A. P399,500 C. P2,210,000 B. P569,500 D. P739,500 5. Estimated premium ciaims outstanding A. P364,000 C. P756,000 B. P840,000 D. P672,000 SOLUTION 7-11 1, Sales of musica! instruments and Sound reproduction equipmer 54,000,000 Estimated warranty ome . ae Warranty expense for 2018 P.080.000 Answer: B CAOCAMMTENITON AUDITING PRO Ms 'd premiums on January 1, 2018, were as shown bein? \UDIT OF LIABILITIES a7 A 569 cHarTel mated liability from warranties, Jan. 1, 2018 2. Fig: 2018 warranty expense (see no. 1) ee 1 bas Actual warranty costs during 2018 tan Estimated liability from warranties, Dec. 31, 2018 2.800.009 Answer: D Coupons issued (P18,000,000/P10) 1,80 3 Multiply by estimated redemption rate are Estimated number of coupons to be redeemed 1,080,000 Divide by exchange rate (200 coupons for a CD player) | +209 Estimated number of CD players to be Issued 5,400 Multiply by net cost of a CD player (P340 - P20) xP149 Premium expense for 2018” 2756.00 Answer: C 4, Inventory of premium CD players P 399,500 ‘Add: Premium CD players purchased during 2018 (P340 x 6,500) 2.210.000 Total 2,609,500 Less: Premium CD players distributed to customers : during 2018 (1,200,000/200 = 6,000 x P340) 2,040,000 Inventory of premium CD players, Dec. 31, 2018 569,500 Answer: B 5. Estimated premium claims outstanding, Jan. 1, 2018 P 448,000 Add: 2018 premium expense (see no. 3) 256,000 Total 1,204,000 Less: 2018 actual redemptions S (1,200,000/200 = 6,000 x P140) £49,000 imated premium claims outstanding, Dec. 31, 2018 2364,000 Answer: KPADMAIAARMINEE AUDITING PRG, 570 Ly peepee 7-12 ‘Accounting for Nonintere: earing Toe scomber 31, 2018, BAIKAL COMPANY acquired a pig 0 Oe onl Seller Company by issuing a P1,200,009 ah ce full on December 31, 2022. Baikal’s credit rating pph® gs borrow funds from its several lines of credit at 10%, Th equipment is expected to have a 5-year life and a P150,000 fi caus, The present vaiue of 1 at 10% for 4 periods is 0.68301, 1. Whetis the equipment’s book value on December 31, 20207 A. PS51,767 ©. P491,767 B. P620,000 D. 341,767 2. What is the carrying value of the note at December 31, 2020? A. P1,090,903 C. P1,200,000 B. P991,730 D. P829,612 SOLETIOR 7-12 1. Cost of equipment (P1,200,000 x 0.68301) 819,612 Less: Accumulated depreciation, Dec. 31, 2020 (P819,612 - P150,000 = P669,612 x 2/5) 28 Book value, Dec. 31, 2020 BL Answer: A 2. Carrying value of note payable at Dec. 31, 2020 (see discount amortization schedule below) Answer: B 7 AUDIT OF LIABILITIES CHAPTER 571 SCHEDULE OF DISCOUNT AMORTIZATION Discount pus oe eee st 12.31. - 1.31.19 P81,961! nis 1231.20 90,157 ore 12.31.21 99,173 10200 12.31.22 109,0973 10g 1 pBLO6L = PB19,612 x 10% 2 po01.573 = P819,612 + P81,961 3 p4 adjustment due to rounding pRopLe 7-13 Accounting for Noninterest-bearing Note (Payable in Installments) OHRID COMPANY purchased machinery on December 31, 2018, paying P80,000 down and agreeing to pay the balance in four equal installments of P60,000 payable each December 31. Implicit in the purchase price is an assumed interest of 12%. The following data are abstracted from the present value tables: Present value of 1 at 12% for 4 periods 0.63552 Present value of an ordinary annuity of 1 at 12% for 4 periods 3.03735, 1 What is the cost of the machinery purchased on December 31, 8? A. P233,083 C. P262,241 B. P320,000 D, P290,842 2 How much interest expense should be reported in Obrid's ‘income statement for the year ended December 31, 20197 A. P38,131 C. P17,293 8. 21,869 D. 42,707572 3, Whatis the carrying value of oe ae ante 20207 e aD D. P101,403 seLeTion 7-13 . Down payment : Prsent value of installment payments (P60,000 x 3.03735) Cost of machinery 182.24 Answer: C Interest expense for 2019 (see amortization schedule) Answer: B Palas 3. Carrying value of note at Dec. 31, 2020 (see amortization schedule) PAL 403 Answer: D SCH"DULE OF NOTE DISCOUNT AMORTIZATION Discount Carrying ic Val Date Payment Amortization 12.31.18 182,241 12.31.19 60,000 P21,8691 144,110? 12.31.20 60,000 17,293 101,403 12.31.21 60,000 12,168 53,571 1231.22 60,000 6,429 0 ; P2L.269 = P182,241 x 12% 164,110 = P182,241 - P60,000 + P21,869 couMUTEREIOEE AUDITING PROBLEg AUDIT OF LIABILITIES a7 573 cHAPTE! proplew 7-14 ee a Notes Payable 18, BALATON CORP. issued n October 1, 20: r ued a PS00,000, 12-m 12% note to ABC Company in payment of account. On the eacaae the company borrowed P1,000,090 from the Asian Bank by signing a 42-month, noninterest-bearing, P1,120,000 note. 1. Prepare adjusting journal entries at December 31, 2018, ~ 9. what is the total/net liability to be reported in the December 31, 2018, statement of financial position for: a. the interest-bearing note? pb. the noninterest-bearing note? SOLBTION 7-14 1. ADJUSTING JOURNAL ENTRIES December 31, 2018 a. Interest expense 15,000 Interest payable 15,000 (P500,000 x 12% x 3/12) : b. Interest expense : 30,000 Discount on notes payable 30,000 (P120,000 x 3/12) 2. a. Note payable 500,000 Interest payable —15,000 Total 515.000 b. Note payable 1,120,000 : Discount on note payable (P120,000 — P30,000) 20,000 Canying value 1,030,000certain transactions of TUNIS COMPANy, Described below are i ion bought a truck for 400,000 §, il 1, the corporation 00 fo On eral Motors Company, paying P40,000 in cash and signings oe yea 12% note for the balance of the purchase price, one-year corporation borrowed P800,000 from Prudent 2 oe y saline 4. ?920,000 noninterest-bearing note die ie year from May 1. Prepare any adjusting journal entries to present fair financig * statements at December 31. L SOLUTION 7-15 ee ADJUSTING JOURNAL ENTRIES December 31 32,400 1. Interest expense 32, Interest payable 32,400 (P360,000 x 12% x 9/12) 80,000 2. Interest expense Discount on notes payable (P120,000 x 8/12) PROBLEM 7-16 ‘Analyzing Various Transactions Involving Liabilities jal In conjunction with your firm's examination of the fnaity statements of BATUR, INC. as of December 31, 2018, you ©! 1 12/188 12-200 Supplies, shipped FOB destination, AUDIT OF LIABILITIES curren 7 oF information from the company’s Voucher regist ivsrk paper below. ister shown in the tom Entry Vouchor Wer pate Reference Description Amount Account Charged 1215/18; received 1217/18 ” P45,009 ‘Supplies on hand 2 121848 12-203 Auto insurance, 1215/18- 1215/19 20009 Prepaid insurance 3 122418 12-208 Repairs services; received 12/20/18 19,000 Repairs & maintenance 4 1222618 12-212 Merchandise, shipped FOB shipping Point, 12/20/18; received 1274/18 123.000 tnvenay 5 122118 12-210 Payrol, 127/18 - 12218 (12 working days) 6 12/218 12-234 Subscription to industry magazine for 2019 69,000 Salaries and wages 5,000 Dues & subscriptions expense 7 12/28/18 12-236 Utilities for December 2018 24,000 Utities expense 8 12/28/18 12-241 Merchandise, shipped FOB destination, 12/24/18; received 129 111,500 Inventory 9 1228/18 12-242 Merchandise, shipped FOB destination, 12/24/18; received 219 84,000 Inventory 10. 1219 1-1 Legal services; received 12/28/18 ‘46,000 Legal and professional fees expense 1 12g 1-2 Medical service: S for employees : _ for December 2018 25,000 Medical expenses 12 N89 1-3 Merchandise, shipped FOB shipping point, 12/29/18; received wang 55,000 Inventory 13 MONS 44 Pare, 12118 11519 (12 working days in total, 4 working days in January 2019) 72,000 Salaries and wages sors 146 Merchandise, sped FOB shying Point, 1/2/19; received 1/6/19 64,000 Inventoryeek UMIMATEMATNIER, AUDITING p 576 ROBLE yg ner 7 aubiT OF LIABILITIES fo 577 15 siang 1-8 Morenandis sige FOB Ao ination, 1/3/19, unt essed 1079 38,000 Inventory 3 eee ventory 111,500 111,500 19 Maintenance services: rable ‘ 1 wang | (18 ue ona 9,000 Repais & macnn, 4 Accounts ory 84,000 k oan, 84,000 17 viata 10 — nas 30,000 Interest expense 5. Leal aa Oe fees expense 46,000 4 Manufacturing equipment, installed 46,000 10 tng 14 Mandar 254,000 Machinery &ecpner 6 Medical expenses seine 1g 1nsng 112 Dividend declared, 12/16/18 160,000 Dividends payable ‘Accounts payable 25,000 7, Inventory 55,000 Accrued liabilities as of December 31, 2018, were as follows: ‘Accounts payable i aa Accrued payroll P 48,000 g, Machinery and equipment 254,000 ‘Accrued interest payable 26.666 ‘Accounts payable sev 160,000 : ce _ eae pepe 7-17 ‘The accrued payroll and accrued interest payable were reverse effective January 1, 2019. Provisions You are engaged to audit the December 31, 2 L, 2018, fi if statements of MILANI COMPANY, a manufacturer of outa Required: bove and prepare journal entries to adjust appliances. Your audit disclosed the following situations. Review the data given al the accounts on December 31, 2018. “Assume that the company follows FOB terms for recording inventory purchases. 1. In june 2018, th . In June 2018, the company began producing and selling a ne, Se graseety By the end of the year, ithad sold 120,000 to jen lealers for P15,000 each. The product was sold under a fe Bran and the company estimates warranty costs to be F750, per dishwasher. Milani had paid out P30 million in ity expenses as of December 31, 2018, which is also the SOLUTION 7-16 Raia etn ty at inert need ae ADJUSTING JOURNAL ENTRIES a 31, 2018 eis ae fas warranty expense in its income statement for |. Insurance expense . 917 Prepaid insurance oi In re (P22,000 x 0.5/12) infor meine to your letter of audit inquiry, Milani’s lawyer 2. Prepaid dues and subscriptions 5,000 Violating you that the company is involved in a lawsuit for " 5,000 Although environmental laws regulating hazardous . waste. igh the litigation is pending, Milani’s lawyer is certain that Dues and subscriptions expense.COADARNATIONRINIMEE AUDITING PR 578 OBL: robably have to pay cleanup costs and Fines of Milani will most P! ither accrued nor disclosed this loss inth ie p5,500,000- Milani nell financial statements. ‘lant is the defendant in a patent infringement suit by Me, aie i EMants use of a hydraulic compressor in several of it manufactured appliances. Milani's lawyer informed you that : the suit goes against your audit client, the loss may be as Tuch a5 P10 million, However, the lawyer believes that the loss of this suit is only possible. Milani did not in any way disclose this pending litigation in its financial statements. 1. What amount of warranty expense should be shown on Milan's income statement for the year ended December 31, 20187 A. P30,000,000 C. P60,000,000 B. PO D. P90,000,000 2. What amount of warranty liability should be shown on Milan's statement of financial position as of December 31, 2018? A. P60,000,000 C. P30,000,000 B. P90,000,000 D. PO What amount of lawsuit liability should be reported asa provision on Milani’s December 31, 2018, statement of financial » position? A. P10,000,000 C. P15,500,000 B. P5,500,000 DiPor SGLETION 7-17 $$ 1, Warranty expense (P750 x 120,000) p90,000.000 Answer: D 2 We ii nee ea (P30,000,000 - P30, 000,000) preR 7 AUDIT OF LIABILITIES on 579 3.500.009 3 Environmental cleanup liability Answer: B BLEM 7-18 a Loss Contingency On November 1, 2018, 69 passengers on No, 143 were injured upon landing when petetonied a runway. Personal injury suits for damages totaling 710,000,006 were filed on January 12, 2019, against the airline by 21 tone passengers. The airline carries no insurance, Legal’co ane studied each suit and advised Canyon that it can reaonahiy exyeet to pay 70% of the damages claimed. The financial statements fc year ended December 31, 2018, were authorized for ae February 12, 2019, During the past decade, the company bas experienced at least one accident per incurred damages of P4,100,000. ee ree. 1, Prepare the journal entry that should b 31, 2018, to recognize the loss. sare tiie) . What liability due to the risk of loss fro m lack of insurance coverage should Canyon Airlines record or disclose? November 1, 2018, accident) cee teen SOLUTION 7-18 Sues GOCE UN ON eh ae : : fost roe uninsured accident 7,000,000 lability for uninsured accident 7,000,000 {P 10,000,000 x 70%)PADHEMUTINITIEE AUDITING PROBL Ay, T OF LIABILITIES 580 «gaara 7 AUD 581 sould be accrued because the Cuse sabe canton Ss the end of the reporting: period ary for ok place in Jenuey. before the financial statements for this Igation OCT is both probable and reasonably estimable, year have been authorized for issue, unfavorable ou : ; '1 of this year, the total i . ‘gions, Contingent Liabilitles, and Conti s of December 3 Current liabilities t Under PAS gal be * cognized when: INgent, 1 Morte in the company’s statement of financial Position aes Assets, 2 be : ligation (legal or constructive) 00,000 C. P450,000 has a present obligation ( ) as A. P100, , a an art ast ever : B. P250,000 D. Pizs,000 ble that an outflow of resources embodying economie b te oo be required to settle the obligation; and 2, Asof December 31 of this year, the total noncurrent liabilities to cc. areliable estimate can be made of the amount of the Obligation, be reported in the company’s statement of financial’ Position 2. The company is not required to establish a lability for risk of jog, should be fn rae coger eto te | PO D. pasoaea SOLUTION 7-19 PROBLEH 7-19 = eee ‘currently Maturing Debt Expected to be Refinanced : ten i Pig9ano NAMEKUS COMPANY has the following three loans payable Total current liabilities ae scheduled to be repaid in February of next year. The company's ‘Answer: C accounting year ends on December 31. 2. Nencurrent labintes Answer: B po a. The company intends to repay Loan 1 for P100,000 when it 2 comes due in February. In the following October, the company Under PAS 1: intends to get a new loan for P80,000 from the same bank. = Presentation of Financial Statements, an enti Gtefies Its financial abilities as curent when they are due to ™ a within 12 months after the end of the reporting period, even i i original term was for a period longer than 12 months; and . i agreement to refinance, or to reschedule Payments, on a pele basis is completed after the end of the reporting oe and before the financial statements are authorized for . The company intends to-refinance Loan.2 for P150,000 when t comes due in February. The refinancing agreement, for 180,000, will be signed in April, after the financial statements for this year have been authorized for issue. ©, The company intends to refinance Loan 3 for P200,000 befor comes due in February. The actual refinancing, for P1750CROMNITONIMINT: AUDITING PROM, + if the refinancing on a long-term pve that te epoting period and the dae’ re authorized for issue, such event qualifies for nonadjusting event in accordance with PAS 10, The following items are based on the financial statements of CARMEL COMPANY. Current assets P 750,000 Short-term loan payable 600,000 Total liabilities 3,000,000 Currént ratio 15 Debt-to-equity ratio 15 Carmel Company has arranged with its bank to refinance its short- term loan when it becomes due in 3 months. The new loan will have aterm of 5 years. 1. Compute the following: a. Total current liabilities b. Total shareholders’ equity c. Total noncurrent liabilities 2. As the auditor of Carmel Company, how would you very the validity of the short-term loan refinancing? SOLUTION 7-20 Current assets 1. a. Current ratio oo Current liabilities HAPTER 7 AUDIT OF LIABILITIES ci 583 15 ‘ P750,000 Current llabilities Current liabilities = = —P750,000/1.5 = P500,000 s Debt ity ratio = Total liabilities o Total equity LS i 3,000,000 _ Totalequity Total equity = P3,000,000/1.5 = — 2,000,009 c. Total liabilities Less: Current liabilities ayy Noncurrent liabilities 2,500,000 2, The.refinancing should occur on or before the end of the reportit 3 . th period. The refinancing agreement should be examined to cet that the refinancing has actually taken place, PROBLEM 7-21 Debt Restructuring: Equity Swap ae Co. owes P10,000,000 to Boom Bank.: Unpaid interest on Aegan has been accrued in the amount of P100,000. Because canna 3 Is in financial trouble, Boom Bank agrees to accept from the 8 000 'y 160,000 ordinary shares (P10 par) that have a fair value of "00,000, in full settlement of the P10,000 loan obligation.quan NG RODLy 584 ich gain on extinguishment of debt should dng ‘ y much g2 x | * wenize inits books? Co, 2, What entry should be SS ? restructures orien 7-21 P 10,000,009 y payable 1000 * cd eet 10,100, Camying amount of liabilty 100,000 ue of ordinary 8,000,009 ra Nan extinguishment of debt 2,300,009 i 10,000,000 » ol terest payable 100,000 Ordinary shares 1,600,000 Share premium ~ Ordinary shares 6,400,000 Gain on extinguishment of debt 2,100,000 PROBLEM 7-22 Debt Restructuring: Modification of Terms BONTONG CO. is having financial difficulty and therefore has = Thrift Bank to restructure its 5% P9 million note outstanding , " present note has 5 years remaining with an accrued interest ia . due immediately amounting to P450,000. The note was issue ba face value. To assist Bontong Co., Thrift Bank agrees to not the loan. It agrees to reduce the principal balance due to ae tes and interest rate to 4%. The accrued interest of P450,000is se outright. Given Bontong’s current financial condition, the ™ Tate of Interest for its debt would actually be 12%. “EI UDIT OF LIABILITIES a CHAPTER 7A 585 ow much gain on extinguishment of debt should B * recognize in its books? fontong Co, 2, What entry should be made by Bonton; "restructure? TION 7-22 8 Co. for the debt 4, Present value of old liability: Prince ues 9,000,000 Accrued interes! present value of ew labilty at 5% rates “222 F9:450,000 Principal (P7,250,000 x 0.7835) 5,680,375 Interest (P7,250,000 x 4% = 290,000 x 4.33) 1,255,700 cs Paragraph 3.3.2 of PFRS 9 states that a substantial modification of the terms of an existing financial liability shall be accounted for as an extinguishment of the original financial liability and the recognition of ‘anew financial liability, Under Application Guidance B3,3.6 of PFRS 9, the terms are substantially different if the discounted present value of the cash flows under the new Including any fees pald net of any fees received and discounted using the original effective interest rate, is atleast 10 per cent different from the discounted Present value of the remaining cash flows of the original financial liability. The present value of the new debt is about 27% of the old debt (2,513,925 /P9,450,000) which exceeds the 10% threshold. Hence, 3 6aln will be recognized on the date of restructuring. 1 Present value of old liail Principal ae 9,000,000. . Accrued interest 450,000 9,450,000pooasosTen OO: AUDITING PROWL Ey, ing 12% market interest rate); itty (ust of new liability ( x 7 20 000x03879) 4,113,650 rine (67,250,000 « 7° 1,045,450 wo,000x 3.05) sane 5.159.109 gan ono ighment of 4.290.999 pie - old 9,000,000 Di mt on nate payable ~ new oaed 7,250 le - new 1220, toner vecinguishment of debt saan note payable P7,250, a tage Benew note payable at 12% oe ‘market rate of 5.159.100 piscount on new note payable 2.090.909 PROBLEM 7-23 _—————————" Fiassification of Dax Classification of Debt ‘At December 31, 2018, KISU COMPANY’s liabilities include the following: 1. P10 million of 10% notes financing agreement contains a coven: maintain current assets at least equal to 200% of its current liabilities. As of December 31, 2018, Kisu has breached this loan covenant. On February 10, 2019, before Kisu's financil statements are authorized for issue, Kisu obtained a period of grace from Mayumi Bank until January, 31, 2020, having convinced the bank that the company's normal 3 to 1 ratio established during are due on March 31, 2023. The ant that requires Kisu to current assets to current liabil oe : ities will be ret 2. P15 million of noncancelabl cf le 12% bonds were {issued at value on September 30,1997, The bonds mature on AUgUSt3” he i re rer 7 auoit OF ABILITIES. 587 unl , Kisu expects to have sufficient cash available to rede: Oy onds at maturity. aoe p20 million of 10% bonds were Issued at face value oxi June 30, mu the bonds mature on June 30, 2628, but bondholders have the option to call (demand payment on) the bonds on June 30, 2019. However, the call option Is not expected to be exercised, given prevailing market conditions. what portion of Kisu Company's debt should be reported as 2 noncurrent liability? P10 million B. P30 million” sovoTien 7-23 _—_——— ‘All of the above liabilities should be reported 2s current Habilities in Kisu's statement of financial position as of December 31, 2018, for the following reasons: A 1, P10 million notes — The period of grace wes given by the bank only after Kisu’s reporting date. As of December 31,2018, Kisu does not have an unconditional right to defer settlement of Its Babity for at least 12 months from the end of the reporting period. 2. P45 million bonds — These are payable In the succeeding year. AS ptisiend of the reporting period, no long-term refinancing hes made by Kisu. ‘ s 20 milton callable bonds - Because these bonds are calsbie by ea ear tthe | alcoeeding year,’ Rasy! dost wt Te the end of right to defer its settlement beyond 12 months from be cated, the reporting period, even if the debt Is not expected to Answer: D C P20 million D. POcA OHUAATANENENEE, AUDITING PROBS, 588 7-24 jes, Provisions, and Events qj Contingencies Tw” Reporting rate . COMPANY, is involved in the Situatig Your audit aa a accounting year ends on December 3° oe i franca statements are authorized for issue on March 2018, 20,2017. ii ing from a disput : ved in a lawsuit resulting pute with a cae On [ebay 28, 2019, judgment was rendered Gua in the amount of P20 million. Chala plans to appeal the jedgment and is unable to predict its outcome tho cameenect believes that it will not have a material adverse effect on the company. ril 25, 2019, the Bureau of Internal Revenue (BIR) is in the [ vos of examining Chala’s tax returns for 2016 and 2017, but has not proposed a deficiency assessment, Management feels an assessment is reasonably possible, and if an assessment is made, an- unfavorable settlement of up w #5 million is reasonably possible, 3. On January 5, 2019, inventory purchased FOB shipping point from a foreign country was detained at that’ country’s border because of political unrest. The shipment is vaiued at P1 million. Chala's lawyers have’stated that it is probable that Chala will be able to obtain the shipment. 4. On November 1, 2018, a lawsuit was filed by a disgruntled customer who discovered a safety hazard in one of Chala’s best- selling products. Chala's lawyers feel it is probable that the Company will be ltable for P500,000, pen 7 AUDIT OF LIABILITIES cHAl : 589 ecember 5, 2018, Chala ‘initiated a. lawsutt’’se , ae in damages froma a patent infritigément. king Pi ermine the appropriate . means’ of rep, el orting each situati prepare any necessary journal entries on December 31,2018, a sooTion 7-24 — ee a No accrual of the P20 million loss would be m: : be appealed and the outcome is uncertain, be appropriate. fade. The judgment will A note disclosure would Neither accrual nor disclosure would have to be made, ‘The BIR ” daim is as yet unasserted, and an assessment is not probable. No adjustment or disclosure is required because the Possibility of loss is remote. eS . The toss is both probable and reasonably estimable, Thus, the felated obligation: is not a contingent liabllity but should be recognized as a provision as- mandated by PAS 37. The entry to recognize the provision is as follows: Loss - litigation Uability — litigation 1. The situation involves a contingent asset because the company is the plaintiff in the lawsuit. Under PAS 37, a contingent asset’ shall Not be recognized because this may result to recognition of income that may never be realized. A contingent asset is only disclosed fn it fs probable. However, when the realization of income is Virtually certain, the related asset is no longer a contingent asset 8nd its recognition becomes appropriate. 500,000 500,000CAOHMTNETONE AUDITING Pao, 590 puupue 7-25 ee Tras of Raa Sa issued 10-year bonds on January 1, 204, Lario COMPANY - is December 31, and financial statement mortization and interest schedule beloe ee the bond issuance and the subsequent interest payment, a ee AMORTIZATION SCHEDULE Interest ‘Interest. Amount =— Carrying Date Paid Expense | Value 01/01/18 = = 28,253 PA71,747 12/31/18 P 55,000 P 56,610 26,643. 473,357 12/31/19 55,000 56,803 24,840 475.160 12/31/20 55,000 57,019 22,821 477,179 12/31/21 55,000 «57,261 20,560 479,440 12/31/22 55,000 57,533 18,027 481,973 12/31/23 55,000 57,837 15,190 484,810 12/31/24 55,000 58,177 12,013 487,987 12/31/25 55,000 58,558 8,455 491,545, 12/31/26 55,000 58,985 4,470 495,530 12/31/27 55,000 59,470* : = 500,000 * Adjustment due to rounding. 1, The bonds were issued at s A. Apremium C. Face value B., Adiscount D. Par value i 2. What amortization method is used in the amortization schedule presented? od A. Straight-line method C. Effective Interest ma ed B. Bonds outstanding method D. Declining balance met uate 7 AUDIT OF LIABILITIES 591 is the nominal (stated) interest rate of + nua 12018? Me bond sued on A. 11% C 10% B. 12% D. 6% at is the effective interest rate of the bonds issu } 7018? ed on January A. 11% C. 10% B. 12% _ D. 6% On the basis of the schedule presented, what is the journal entry * to record the issuance of the bonds on January 1, 20187 A. Cash 500,000 Bonds payable 500,000 B. Gash 471,747 Interest expense 28,253 Bonds payable 500,000 C. Cash 7 500,000 Premium on bonds payable 28,253 Bonds payable : 471,747 D.: Cash 471,747 Discount on bonds payable 28,253 Bonds payable 500,000 SOLUTION 7-25 1, The bonds were sold at a discount of P28,253. The issue price (P471,747) Is less than the- maturity value (or face value) of 500,000 on December 31, 2027. Answer; B 2 The amortization schedule presents an increasing interest charge ‘which characterizes the effective interest method of amortizing bondAMEN AUDITING pp, 592 : : Under the straight-line, Method, the ju o SSH PT 825.0 (52 CMP blog eet 53/10) nee oon of discount (P28,2 0 Amortization of P5253 “Total Answer: C 3.. Stated or nominal interest rate (P55,000/P500,000) 1% Answer: 4, Effective interest rate (P56,610/P471,747) aw Answeri B 471,747, : Desount on bonds payable 28,253 * Bonds payable : 500,000 «Answer: D. PROBLEM 7-26 . Classifying Liabilities ELEANOR CORP. has been producing quality disposable diapers for more than two decades. The company’s fiscal year runs from April! to March 31.. The following information relates to the. obligations Eleanor as of March 31, 2018, BONDS PAYABLE 6. She isp Eleanor issued P10,000,000 of 10% bonds ow July ee prevailing market rate of interest for:these bonds was ot date of issue. The bonds will mature on July 1, 2026. Inte AUDIT OF LIABILITIES conse 7 593 annually on July 1 and January 1. Eleanor uses the effective semi rate method to amortize bond premium or discount, interest ‘The following present value factors are taken from the Present value tables: present value of 1 at 12% for 10 periods 033917 present value of 1 at 6% for 20 periods 0.31180 Present value of an ordinary annuity of 1 at 12% for 10 periods 5.65022 present value of an ordinary annuity of 1 at 6% for 20 periods 11,46992 NOTES PAYABLE Eleanor has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule below. The total unpaid interest for all of these notes amounts to 600,000 on March 31, 2018. April 1, 2018 400,000 July 1, 2018 600,000 October 1, 2018 300,000 January 1, 2019 300,000 April 1,2019 - March 31,2020 1,200,000 April 1,2020 - March 31,2021 1,000,000 April 1,2021 - March 31,2022 1,400,000 April 1,2022 - March 31,2023 800,000 April 1, 2023 - ° March 31, 2024 1,000,000 27,000,000 ESTIMATED WARRANTIES Eleanor ity m2 has a one-year product warranty on some selected items In Product line, The estimated warranty lability on sales madePP HMUTARENORE: AUDITING Poa, 594 d still outstandin, 6-2017 fiscal year an | during ted 17 7180,000, The warranty costs on sat try 31, 2017, 1 1, 2017, through March 31, 2018, are esting : from no The actual warranty costs incurred during the a P2018 fiscal year are aS follows: : rerranty claims honored on 2016-2017 sales Freq a ae honored on 2017-2018 sales 100 Total warranty claims honored OTHER INFORMATION 1, TRADE PAYABLES > ‘Accounts payable for supplies, goods and services purchased open account amount to P740,000 as of March 31,2018, PAYROLL RELATED ITEMS Accrued salaries and wages 300,000 Withholding taxes payable 94,000 Other payroll deductions 10.009 Total 244.000 . MISCELLANEOUS ACCRUALS Other accruals not separately classified amount to P150,000« of March 31, 2018. DIVIDENDS On March 15, 2018, Eleanor’s board of directors declared ace# dividend of P0.20 per ordinary share and a 10% share dividend. Both dividends were to be distributed on April 12, 2018, a shareholders of record at the close of business on M i ma Data regarding Eleanor. ordinary share capltal a* follows; HAPTER 7 AUDIT OF LIABILITIES 595 Par value Number of shares issued and outstanding Prt 000, res Market values of ordinary shares: March 15, 2018 March 31, 2018 sre ale April 12, 2018 2250 per share |. How much was received by Eleanoi Z say 120167 by Eleanor from the sale ofthe bonds on A. P8,852,960 C. P10,500, B, ‘P10,000,000 D rien 2, What fs the current portion of Eleanor’s not aa tes payable at March A. P2,800,000 B. P1,600,000 C. P1,300,000 D. 3,800,000 3, The balance of the estimated warranties payable at March 31, * 2018, ts . ; “A. P342,000 B. P18,000 C. P520,000 D. P180,000 4. On March 31, 2018, Eleanor’s statement of financial position would report total current liabilities of A. 5,286,000 C. P5,336,000 B. P4,386,000 D. P5,642,000 5. On March 31, 2018, Eleanor’s statement of financial position x report total noncurrent liabilities of y, £14399350 C. 14,370,783 4,352,217 D. P14252,9607-26 of principal (P10, 4, Present value Cee (P10, ‘a0 x 5% = P500,000 x 11.46992) Issue price/Proceeds Answer: A Notes payable ~ current portion: il 1, 2018 - yy 1, 2018 October 1, 2018 January 1, 2019 Total Answer; B 3. Estimated warranties payable: Balance, April 1, 2017 ‘Add: Warranty expense for current year Total Less: Actual warranty costs Balance, March 31, 2018 Answer: A 4. Notes payable - current portion (see no. 2) Estimated warranties payable (see no. 3) ‘Accounts payable Payroll-related accruals and deductions withheld Miscellaneous accruals Cash dividends payable Accrued interest on: Bonds payable (P10,000,000 x 10% x 3/12) Notes payable i: 5 Total current liabilities Answer: A.’ 000,000 x 0.31180) CAOUIMITENRIMEE: AUDITING pp Obi an P3,118,)) 000 150,000 1,200 250,000 CHAPTER 7 AUDIT OF LIABILITIES 597 5, AMORTIZATION SCHEDULE (PARTIAL) Interest Interest Discount camying i Paid 07/01/16 ee ie =i, 12/31/16 P500,000° P531,178 —p31,17g ace ‘07/01/17 500,000 $33,048 33,048 Baty'tae 12/31/17 500,000 535,031 35,031 8,952,217 07/01/18 500,000 537,133 37,133 8,989,350 Bonds payable Carrying value, Jan. 1, 2018 8,952,217 Add: Discount amortization, Jan. 1 ~ Mar. 31 (P37,133x 3/6) __16.566 P 8,970,783 Notes payable — noncurrent portion: (P7j000,000— P1,600,000 currerit portion) Total noncurrent liabilities Answer: C —5.400,000 PL4.370.783 PROBLEM 7-27 Bond Redemption Prior to Maturity Date The following data were obtained from the initial audit of -HANSTEEN COMPANY: 15%, 10-year, Bonds Payable, dated January 1, 2017 Cash proceeds from issue on January 1, 2017, of 1,000, P1,000 bonds. The market rate of interest on the date of issue. was 129%, P1,172,044 P1,172,044CPADUMWUTANIEVENER: AUDITING pp Og 598 Bond ineest pense P 75,000 : : P cashpal inh 75,000 see aid ; sil 12/31/18 75,000 2255009 Accrued Interest on Bonds P75,000 p 755009 Balance, 1/1/18 Accrual, 12/31/18 75,000 150,009 Treasury Bonds Redemption price and interest to date on 200 bonds permanently . retired on-Dec. 31, 2018 P265,000 P265,000 Based on the preceding information, determine the, 2 following: 1. Carrying value of bonds payable at December 31, 2018 "A. P831,110 C. P4,151,583 B. P800,000 D. P921,266 2, Loss on bond redemption A. P4,683 C. P15,000 B. P19,683 D, P34,683 3. Accrued interest on bonds at December 31, 2018 A. P75,000 ~ C., P60,000 B. P135,000 D. P52,500 4. Bond interest expense for the year ended December 31, 2018 A. P150,000 C. P69,745 B. Pi39,174 D. P160,826 CHAPTER 7 aul DIT OF LIABILITIES souuTion 7-27 —— _ AMORTIZATION SCHEDULE (PARTIAL) Interest —_ Interest Premium Paid Expense Amortization 01/01/17 aa ea ~ 07/01/17 P75,000 70,323 P4,677 01/01/18 75,000 70,042 4,958 07/01/18 - 75,000 69,745 5,255 01/01/19 75,000 69,429 5571 Carrying value of bonds, Dec. 31, 2018 (P1,151,583 x 800/1,000) _ Answer: D . Cash paid si Less: Interest (P200,000 x 15% x 6/12) Redemption price Canying value of bonds redeemed (P1,151,583 x 200/1,000) Loss on bond redemption Answer: B . Accrued interest, Dec. 31, 2018 -(P800,000 x 15% x 6/12) Answer: C _Interest expense for the year ended Dec. 31, 2018 (see amortization schedule): Jan. 1=July 1 July 1— Dec. 31 Total “Answer: B 599 Canying N P1,172,044 1,167,367 1,162,409 1,157,154 1,151,583 P221.266 265,000 15,000 250,000 P. 69,745 — 69,429 P139.174600 conunnaranneninst: AUDITING PROBL Ey4 PROBLEM 7-28 Bond Redemption Prior to Maturity Dat The long-term debt section of ELMO COMPANY's statement of 2017, included 9% bonds financial position as of December 31, payable of P400,000, less unamortized discount of P32,000. Further examination revealed that these bonds were issued to yield 10%, The amortization of the bond discount was recorded using the rest was paid on January 1 and July 1 effective interest method. Inte! of each year. On July 1, 2018, Elmo retired the bonds at 105 before maturity. What is the amount of loss to be recognized on the retirement of bonds? A. P52,400 C, P51,600 B. P20,000 D. PO SOLUTION 7-28 Effective Interest (P400,000 - P32,000 = P368,000 x 10% x %) P18,400 Nominal interest (P400,000 x 9% x ¥2) 18,000 Discount amortization, Jan. 1, 2018 - July 1, 2018 400 Retirement price (P400,000 x 105%) 420,000 Carrying value of bonds: Face value 400,000 Less: Unamortized discount (P32,000 ~ P400) 31,600 368.400 Loss on retirement of bonds 51,500 Answer: © AUDIT OF LIABILITIES ‘ (warreR 7 601 -29 proLel 7-2 Bond Refunding MBE CORP. had outstanding P6,000,000 of 11% bo mALOnt payable July 31 and January 31) due n 10 years. On ee f yesued P2,000.000 Of 10%, 15-year bonds (interest payable July 1 and january 1) at 97. A portion of the proceeds was used to call the 11% bonds at 403 on August 1. Unamortized bond discount and | e cost applicable to the 11% bonds, were P240,000 and P60,000, respectively: . Required: Prepare. journal entries to record the following: a sale of ‘the new issue b. retirement of the old issue uTieu. 7-29 ited AS SEE Lae ee ® oe on bonds payable 8,730,000 (P9,000,000 x 3%) 270,000 Bonds payable 9,000,000 b. ‘Bonds payable Loss on redemption of bonds so Cash (P6,000,000 x 103%) fi 6,180,000 Discount on bonds payable "2 40,000 namortized bond Issue costs: 60,000 Redemption price . Canying value of bonds redeemed: P6,180,000 Face value e 6,000,000 Unamortized bond discount (240,000) ized bond Issue costs £60,000) 5,700,000 480,000 Loss on redemptionon buunTION RENNER: AUDITING PROBL Ey. rreR 7 AupIT OF LIABILITIES 603 602 9 ntry to record the bond conversion on December 31, Eee eee : ad Hrclude credit to share premium-ssuance of ale, Convertible 2,289,893 » P2,593,661 Debt Issue & 52,400,000 D. PO DIAS COMPANY Issued 3-year, 4,000 convertible per bond. Interest Is to be ald On January 1, 2018, oupon rate of 6%. Each bond is bonds at face value of P1,000 annually in arrears at the stated c convertible, at the holder’s option, into 200 P2 par value ording shares at any time up to maturity. On the date of Issuance, the te for similar debt without the + value of principal (P4,000,000x 0.7218) _P3,088,720 sen! x ot value of interest payments prevailing market Interest ra! Mate, i raster conversion privilege was 9%. On the same , price of Pre one ‘ordinary stare: ‘was P3. The bonds were converted on December (P4,000,000 x 6% = P240,000 x 2.53130) 31,2019. Liability component of convertible debt P3,696,232 ‘The following present value factors are obtained from the present Answer: B value tables: oe 2 Proceeds P4, Present value of 1 for 3 periods 083962 07218 2, Proce¢tiabilty component (see no. 1) 000,000 Present value of an ordinary annulty of 1 Equity component of convertible debt oer 768 2.67301 2.53130 ‘aa | for 3 periods Present value of an annuity due of 1 for 3 periods 2.83339 = 2.75911 3. AMORTIZATION SCHEDULE Interest —_ Interest Discount Carrying The liability component of the convertible debt is Date Paid Expense Amortization Value 4s ‘A. P4,000,000 G, P1,600,000 B. P3,696,232 D. 3,730,242 ovouie a = Spa eoeae 12/31/18 240,000 P332,661 92,661. «3,788; - 2. The.equity component of the convertible debt is 12/31/19 240,000 © 341,000 - 101,000 aS A. P303,768 C. P1,600,000 12/31/20 240,000 350,107* 110,107 4,000,000 B. 'P1,973,621 D. P2,400,000 * Adjustment due to rounding. 3, The interest expense to be reported on Dias Company's ince Interest expense for 2019 (see amortization schedule) 341,000 Answer: D ” statement for the year ended December 31, 2019, Is A. P101,000 . C. P240,000 B. P110,107 : D, P341,000604 2019 value of bonds, Dec. 31, 4 ee mtization schedule) tege P3203 ‘Add: Share premium — conversion privleg a | consideration risa Pa value of ordinary shares [P2 x (4,000 x 200)] Share premium ~ issuance P2593 65 The entry to record the bond conversion is: Bonds payable : 4.900000 Share premium — conversion privilege es ¥ Bond discount (P4,000,000 - P3,889,893) tiny Ordinary shares (P2 x 800,000 shares) 160099 Share premium ~ issuance aoe Answer: C i is ial Instrument that has A convertible bond is a compound financial liability and equity components. Such components should be dassified separately on an entity’s statement of financial posttio, ‘The separation is made at the time the instrument Is issued and is not subsequently revised. ment evidences a residual interest in the assets of an caaty ake dotudng all-of its liabilities. Thus, when the inital ‘carrying amount of @ compound financial instrument is allocated to its equity and liability components, the equity component Is assigned the residual amount after deducting from the fair value, of the instrument as a whole (i.e., the net proceeds from the Issue) the amount separately determined for the liability component. In the case of convertible bonds, the amount allocated to the an Component is the fair value of the bonds without the convers Privilege. In the absence of the fair value without the or privilege, the sum of the present value of the face amount of bonds and the present value of future interest payments oi using the effective interest rate is assigned to the | ‘component. PRERMINTONREMEREE: AUDITING PROB ag )F LIABILITIES cuarer 7 AUDIT O 605 version date, the carrying value of the bonds conve is oneasure the ordinary shares issued. No gain or bee recognized. peopled 7-31 Deferred Tax Liability BYASI, INC. began operating on January 1, 2018. At the end of the first year of operations, Eyasi reported P7,500,000 income before income taxes on its income Statement but only P700,000 taxable income on its tax return. Analysis of the P6,800,000 difference revealed that P6,200,000 was a permanent difference and P600,000 was a temporary difference related to a current asset. At the end of 2019, the accumulated temporary tax liability difference related to future years is P1,100,000. The enacted tax rate is 30% for 2018 and 2019. 1. The journal entry to adjust the deferred tax liability at the end of 2019 should include a A. Debit to Deferred tax liability of P150,000 B. Credit to Deferred tax liability of P150,000 C. Debit to Deferred tax asset of P150,000 D. Credit to Deferred tax liability of P330,000 2. Assume that at the end of 2019, the accumulated temporary tax liability difference related to future years is P550,000. What Journal entry should be made to adjust the deferred tax liability at the end of 20197 A. Income tax expense 165,000 Deferred tax liability 165,000 B. Deferred tax asset " 15,000 Income tax benefit 15,000 © Deferred tax Nability 15,000 Income tax expense 15,000 . Deferred tax liability 15,000 Deferred tax asset 15,000606 capaumransoninte AUDITING PROBL, SOLUTION 7-31 1. Deferred tax liability, Dec. 31, 2019 (P1,100,000 x 30%) 018 P330,000 Deferred tax liability, Dec. 31, 2! (P600,000x 30%) 180,009 Increase in deferred tax liability PA5D.099 Journal entry: Income tax expense 150,000 Deferred tax liability 150,000 Answer: B 2. Deferred tax liability, Dec. 31, 2019 (P550,000 x 30%) : 165,000 Deferred tax liability, Dec. 31, 2018 (P600,000x 30%) 180,000 Decrease in deferred tax liability PC15.000) Journal entry: Deferred tax liability 15,000 Income tax expense 15000 Answer: C PROBLEM 7-32 Deferred Income Tax Asset and Liabilty ‘At December 31, 2017, GALILEE CORPORATION had a tempor difference (related to depreciation) and reported a related def tax liability of P60,000 on its statement of financial position December 31, 2018, Galilee has four temporary differences. * analysis of these reveals the following: Vy a 7 AuDIT OPLIABILITIES 607 oh , Future Taxable (Deductible) Amounts orary Difference sie Temp’ ; straight-line depreciation for 2018 ©2019 Year 4, Use offirig purposes and accelerated depreciation for tax purposes 160,000 220,000 P760,000 t collected in advance; recognized z when earned for accounting purposes cal when received for tax purposes (380,000) a us expenses accrued when . Maire for accounting purposes; incugnized for tax purposes when pald (20,000) “ es ;ition of gain on installment [ sees during the period of sale for Sccounting purposes and during the period of collection for tax purposes 276,000 _210,000 a {P34,000) 430.000 P760.000° Assume that the company has income taxes of P435,000 due per the tax return for 2018, 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 Galiliee’s statement of financial position at December 31, 2018? A. P114,000 C. P141,000 B. P514,800 D. P27,000 M What amount of deferred tax liability should be shown on Galiliee’s statement of financial position at December 31, 2018? A. P342,000 C. P141,000 B. P456,000 D. P487,800 : piemuch is Galiliee’s pretax accounting income for 2018? Hae C. P1,450,000 siete D. 2,606,000apuinnontean AUDITING PROBL. 608 4. How much is Galilee’s net income for 2018? A. P1,971,000 c 72,406,000 B. P1,684,200 D. P1,450,001 SOLUTION 7-32 1. Deferred tax asset, December 31, 2018 (see computation below) 141.009 Answer: C jail 018 2. Deferred tax liability, December 31, 2 (see computation below) ‘487,800 Answer: D COMPUTATION OF DEFERRED TAX ASSET AND LIABILITY Future Taxable Tax Deferred Tax ‘Temporary Difference ible nt Lay Asset pa Depreciati 1,140,000 2,000 : pei ae (380,000) 30% 114,000 Accrued expenses (90,000) 30% 27,000 Installment sale 486,000 30% 145,800 Totals Prai.o00 Bazan 3, Taxable income (P435,000/30%) 1,450,000 Excess depreciation for tax (P160,000 + P220,000 + 'P760,000 ~ P200,000*) waa Excess rent income per tax (380,000) Excess expenses per books 4 (30,000) Excess income per books for installment sale (276,000 + P210,000) 495,000 2,405,000 Pretax accounting income * Beginning cumulative temporary difference related to deprectin (200,000 = P60,000/30%) Answer: B 7 aupiT OF LIABILITIES [ 609 ER cH jiabilty, Dec. 31, 2018 (see computation) 487,800 4, peterred ey jabilty, Jan. 1, 2018 : oe tax expense for 2018 wail 000 fe tax asset, Dec. 31, 2018 (see computation) a veteres x asset, Jan. 1, 2018 piston oeered tax benefit for 2018 come before income taxes eee Income tax expense: aos Current 7 g00 - P141,000) tppeso0 = c7e1ea Deferred (P427; let income . Answer: B P1.684,200 Alternative computation accounting income a5 O00 Less: Income tax (P2,406,000 x 30%) Net income 721,800 PROBLEM 7-33 ee Deferred Income Tax Asset and Liability The following data pertain to the CARROLL COMPANY. 1. At December 31, 2018, the company has a P900,000 liability reported for estimated litigation claims. This P900,000 balance represents amounts that have been charged to income but are not tax deductible until they are paid. The company expects to pay the claims and thus have tax-deductible amounts in the future in the following manner: Year Payments 2021 P150,000 2022 690,000 2028 60,000 200,000610 IT OF LIABILITIES eaugusmTeximnet: AUDITING PROD paver 7 avol oll's pretax accounting income for 2018 is «depreciation methods for a . The company uses ees Ponsequently, at Decent 4, ©273,900,000 C. P2,874,000 ative temporary difference due B 900,000 D. P2,400,000 reporting and tax 2018, the company has a cumul 0,000. This P2,400,000 cy oll's net income for 2018 is iable property of P2400 aeons Se ce is to result in taxable amounts in future 5, carr 0 C ears in the following manner: A P2,730,00 . P1,230,000 x Amount B. P3,630,000 D. P4,350,000 : aa P 480,000 id 480,000 prion 7-33 2021 480,000 480,000 2022 i red tax liability, December 31, 2018 2023 ean 41, Pet 480,000 x 5 x 30%) ‘Answer: A 3, The income tax rate is 30%. 4, Taxable income for 2018 is P2,400,000. The company expects to 2. Deferred tax asset, December 31, 2018 income for the next five years. (P300,000 x 30%) Answer: A ” financial position at December 31, 2018, is . The deferred tax asset to be reported in Carroll's statement of . The amount of current income tax payable to be 31,2018,1s report taxable i No temporary differences existed at the end of 2017, 3, Taxable income for 2018 Tax rate Income tax payable for 2018 (current) Answer: D ‘The deferred tax liabllity to be reported in Carrol's statement of C. P450,000 A. P720,000 D. P270,000 B. P480,000 4, Taxable income for 2018 ik Future taxable temporary difference - depreciation Future deductible temporary difference ~ litigation Pretax accounting iricome for 2018 Answer: A financial position at December 31, 2018, is A. P270,000 C. P450,000 B. P150,000 D. P720,000 5. Pretax accounting income (see no. 4) Income tax expense: # Current (see no. 3) P720,000 Deferred (P720,000! — P270,0002) 450,000 Net income reported ia Carroll's statement of financial position at December A. P630,000 C. P540,000 B. P546,000 D, P720,000 611 2,400,000 — 30% 2.720.000 2,400,000 2,400,000 3,900,000cpg egg RENNER: AUDITING PROBL, S 612 1 Deferred tax liability, December 31, bee P7206 Deferred tax fabilty, January 3, 20! Pray Deferred tax expense for 201 2 Deferred tax asset, December 3 2018 can Deferred tax asset, January 1, 2018 ae Deferred tax beneft for 2018 Answer: A P210.009 Deferred Income Tax Asset and Liability of operations, has the followin KAMPESCA, INC, in its first year alue and tax base of its assets and differences between the carrying V liabilities at the end of 2018: je Tax Base Equipment (net) 800,000 P680,000 400,000 0 Estimated warranty liability Kampesca estimates that the warrant 2019. ty liability will be settled in sult in taxable amounts as ‘The difference in equipment (net) will re shown below: 2019 40,000 2020 60,000 2021 20,000 The company has taxable income of P1,040,000 for 2018. ‘The income tax rate is 30%. 1. What amount of deferred tax liability should be reported ia Kampesca’s statement of financial. position at December 31, 20187 A. P36,000 Cc. P24,000 B. P30,000 D. P84,000 ae IT OF LIABILITIES 613 nave 7 aud! amount of deferred tax asset should be reported in at 2 wmpesca’s statement of financial position at December 31, 018? % 4. P156,000 . P120,000 Bz PO D. P84,000 the amount of income tax bl 3, What is ae payable (current) to be ‘orted in Kampesca’s ‘statement of financi December 31, 2018? nclal position at 228,000 C. P312,000 : B. 396,000 D. P156,000 4, What is the total income tax expense for 20187 ‘A. 228,000 C. P192,000 B, P396,000 D. P348,000 TION 7-34 $ rr Deter e800 + P20, 2018 1,000 + PE0,000 + P20,000 = P120,000x 30%) 36.000 Answer: A } 2} eh oa eee 31, 2018 1,000 x 120.000 Answer: C 3, Taxabl Tea bt income for 2018 P1,040,000 Income tax payable for 2018 ‘P.312,000 Answer: C 4. Current fax expense for 2018 (S08 00, 3) 312,000 Deferred tax expense for 2018 36,000 Deere tx benef fo 2018 120,000) Income tax expense for 2018 2.226.000 Answer: AHenini: AUDITING 614 crower ING PROBL. PROBLEM 7-35 2017, LEMAN CO. signs a 10-year noncance, 31, 2017, Be rage building from Storage Company stains to this lease agreement; On Decembe! lease agreement to lease @ stol ‘The following information Pe! equal rental payments of P720,099 Th nt requires ee eae 2017. beginning on December 31, 2 The fair value of the building on December 31, 2017, is 4,400,000. 3, The building has an estimated economic life of 12 years, with an unguaranteed residual value of P100,000. Leman depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. 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’ 6. related to taxes on the property. ‘The following present value factors are for 10 periods at 12% annual interest rate: 6.32825 Present value of an annuity.due of 1 Present value of an ordinary annuity of 1 5.65022 Present value of 1 032197 ‘er 7 AUDIT OF LIABILITIES cuarTl 615 t amount should be capitali: L wie italized as the cost ofthe right of use |. P4,556,340 C 4,432,197 B, P4400,000 D PO What amount should be included in the 2 of Leman’s statement of financial postion ate section 720,000 c. 'P695.205 31, 20187 B. P414,477 D. p20818 . What amount should be included in the non section of Leman's statement of finan current liabilities 31, 2018? cial postion at December A. P3453,975 B. P3,173,157 “What is the total lease-related expenses to be reported in » C. P5,562,360 D. PO 4. Leman’s income statement fo! vema ir the year ended December 31, A. P909,270 Cc Pit B. P879,182 D. pisanos. 7-85 eee 1, Present value of minimum lease payments: (P720,000 ~ P24,705 [executory costs] x 6.32825) 4.400.000 Answer: B 2 Lease liability, : : (P695,295 panaryy (current portion) * Answer; D 3. Lease liability, Dec. 31, 2018 (noncurrent portion) 3.173.157 Answer: B616 LEASE AMORTIZATION SCHEDULE (PARTIAL) Annual terest Payment ce en Unpaid Balance of a 12/31/17 P695,295 a 3704705 12/31/18 695,295 pig 34S3.975 12/31/19 695,295 fi 6 4, LEASE-RELATED EXPENSES FOR 2011 terest expense (see amortization schedule) Pass ot = prope c0 000/10 years) 4,705 Depreciation expense (P4,400, Total am Answer: A pupummntoivi: AUDITING PROBL pyr, 617 CHAPTER 8 Audit of Shareholders’ Equity AUDIT PROGRAM FOR SHAREHOLDERS’ EQUITY Audit Objectives: To determine: 1. Proper © authorization shareholders’ equity accounts. 2. Proper accounting treatment of transactions involving shareholders’ equity. 3. Compliance with legal requirements related to corporate capitalization, of transactions involving