ReSA The Review School of Accountancy Tel. No. 725-9807 & 734-3989 AUDITING PROBLEMS IRENEO/ESPENILLA EXPENDITURE AND DISBURSEMENT CYCLE: AUDIT OF TRADE LIABILITIES. FINANCING CYCLE: AUDIT OF NON-TRADE LIABILITIES PROBLEM 1: You were provided the following information relative to your audit of the financial statements of Victoria Company as at December 31, 2016: Cash baiance at Frat Philippine Bank Cash overdraft at Second Philippine Bank — Accounts receivable, net of P26,500 credit balance Estimated expenses of meeting warranties on merc Estimated damages on unsatisfactory performance on a contract ‘Accounts payable, net of P20,250 debit balance Deferred serial bonds of P500,000, issued at par, payabie In semi installments of P50,000, due April 1 and Octobe!’ 1 of each year; the last payment shall be in October 2022. These serisl bonds bear a 10% interest that is pald semiannually every April 1 and October 1 Ordinary shares at par to be distributed as a 1osule oF a Sha declaration ‘Dividends in arrears on preference shares income tax payable —— Deferred asset, net of a deferred tax ial next year Reserve for contingencies a 1. At year-end, how much should be presented as cusrent liabilities? 2. How much is the total of the non-current liabilities? PROBLEM 2: At December 31, 2016, Pat Co.'s liabilities include the following listed below. Patrick's December 31, 2016 year-end financial statements were issued on March 15, 2017 10%, P2 million Notes Payable due on March 31, 2021. A debt covenant requires Pat Co. to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2016, Pat Co. is in violation of this covenant. On December 31, 2016, Pat Co. obtained a waiver until june 2017, from Golden Bank, having convinced the bank that the company’s normal current ratio of 2:1 will be reestablished during the first half of 2017. b. P9 million of non-cancelable 13% bonds issued at face value on September 30, 2012. The bonds mature on August 31, 2017. Sufficient cash is expected to be available to retire the bonds at maturity. c. P15 million of 10% bonds Issued for P15 million on June 30, 2012. The bonds mature on June 30, 2022, but bondholders have the option of calling (they can ‘demand payment ) the bonds on June 30, 2017. It is probable that the bondholder will be exercising their option on the said date 4. 7 million short-term commercial papers. On December 31, 2016, Pat Co. intends to refinance the commercial paper by Issuing long-term debt. However, because of the existence of excess cash from working capital, P3 million of these liabilities was liquidated in February 2017. On March 1 2017, Pat Co. issued P9 million of long-term bonds, P3 million of which was used to replenish the working capital used to pay P3 million in February, 2017; P4 million to pay the remaining balance of the commercial paper due within the year, and the remaining P2 million for acquisition of new equipment. How much from the items above (a ~ d) should be presented as current (excluding any accrued interest)? PROBLEM 3: During 2015, Cory Company introduced a new line of machines that carries a two-year warranty against manufacturer's defects. Based on industry experience, the estimated warranty cost percentages related to peso sales are as follows: Year of sale 4% Year after sale 6% Sales and actual warranty expenditures for 2015 and 2016 were as followsReSA: The Review School of Accountancy Page 2 of 8 Year [Sales | Actual warranty expenditures 2015 ~P7,000,000 i 54,000 { 2016 I 1,400,009 ‘89,000 1. How much is the warranty expense to be recog:.ived in 2015 and 2016; respectively? 2. What is the estimated warranty liability as of December 31, 2015 and 2016, respectively? t: Pancake Inc. has initiated gromotional program whereby each box of pancake mix contain , which if submitted with P40, entitles the customer to a frying pan. Pancake Inc. pays P90 for each frying pan and incurs additional P19 for handling and shipping costs upon redemption. The following information are deemed relevant: 2015 2016, ‘Number of boxes sold 440,000 | 180,000 Selling price per box ce [— P70. P75. Number of frying pans purchase 52,000, 65,000 Inventory of frying pans at year end | 11,000 12,500 ‘The company estimates that 40% of the coupons issued from boxes sold will be presented for the Premium redemption. Coupons are redeemable ~ithin one year from the date of purchase of the related pancake mix. 1. How much is the total premium expense to be reported in 2015 and 2036, respectively. 2. How much is the total premiums liabilities to be reported at the end of 2015 and 2016, respectively. PROBLEM S: Bake Food Corporation (BFC) issues coupons to consumers which may be presented on. or before their expiration date at retail food stores in order to obtain discounts on certain products Produced by BFC. Retail food stores are rein:bursea equal to the face value of the coupons redeemed, plus 10% of coupon face value as compensation for handling costs. BFC honors requests for coupon redemptions by retail food stores received up to three months after the consumer expiration date. In BFC’s experience, 60% of the coupons issued ultimately are redeemed. Information with respect to the ‘two series of coupons issued by BFC during 2016 cre as follows: i Series A Series B ‘Consumer expiration date June 30, 2016 Dec_31, 2016 Total face value of coupons issued = 250,000 500,000 “Total payments to retailers as of 12/31/2016 | ___148,500 275,800} How much is the promotional expense to be recognized in 20167 2. How much is the liabilities for unredeemed coupons as of December 31, 20167 PROBLEM 6: In your examination of the financial staternents of Sikatuna Financing Company(SFC), you Jearmed that it grants its president a bonus. Said bonus is composed of a basic amount equivalent to 10% of the company's net income before deducting the bonus but after deducting the corporate income tax. In addition, the basic bonus will be increased by the company’s tax savings because the total amount of bonus is deductible in computing the company’s taxable income. (The tax savings is the difference between the Income taxes the ccmpany would have paid had there been no bonus and the income taxes the company now pays with the bonus). SFC registered a net income of P800,000 in 2016 before the deductions of both the bonus and the corporate income tax at 30%. 1. The 2016 bonus is: 2. The 2016 income tax is: 3. The total tax savings to be added to the bastc bonus is. 4. The income for 2016 after deducting the president’s bonus and the corporate income tax is: PROBLEM 7: Jay Corp. allows each employee to eam a 15-day paid vacation each year. Unused vacation can be carried over the next year; thereafter it shall expire. The company has 30 employees {assumed have been employed throughout 2015 and 2016. By the end of 2015, an average of 12 Vacation days per employee had deen exercised. The unused vacation days, based on current salary rates amounting to P36,000 were carried aver the following year. The company expects that the unused compensated absences will be exercised by the employees the following year. By the end of 2016, an average of 11 vacation days per employee had been exercised. Salary rates increased by 10% in 2016. Total wages paid in 2015 and 2016 were P2,700,000 and P2,740,000, respectively 1. The 2015 and 2016 sataries expenses are. 2. The 2015 and 2016 accrued salaries for for compensated absences are: AUDITING PROBLEMS :ReSA: The Review School of Accountancy Page 3 of 8 PROBLEM 8 Laurel Company had the following od balances in the kabulity portion of its unaudited balance sheet as af December 31, 2018 Accrued warranty expense PO Accrued compensated absences 297,500 Accrued bonus ° Audit notes The company commenced its two-year warranty program during the current year it estimated that warranty costs shall be approximately P125 in parts and labor per unit returned. The Company further estimate that 2/3 of the units sald shall be returned during the warranty period and shall materialized as follows 40% on the year of sale 60% on the year following the year of sale. The company sold 3,000 units of product covered by the said warranty in 2016. Moreover, actual warranty costs incurred amounted to P98,000 which the company charged to warranty expense b. The Accrued compensated absences refers to the balance of the liability accrued in the prior year for unavailed sick leaves and vacation leaves of the company’s employees. Company records shows the following information. Sick leaves Vacation leaves 2015 leaves carried forward to 2016 500 days 350 days 2015 leaves used/availed in 2018 350 250 2016 leaves to be carried forward to 20 300 200 Additional information + Employees are entitled to accuinulate unused sick and vacation leaves up to 2 years from date of grant + Prior year leaves availed during the current year were charged to current year salaries and wages. + Average daily salaries in 2015 and 2016 amounted to P350 and P00, respectively c. The company provides incentive bonus to ‘ts key officers based on the net income after bonus. The company is yet to accrue liatuity for the said bonus at year end. The company’s unadjusted fet income amounted to P1,427,500 Additional information: ‘a. Bonus rate is at 15% D. Income tax rate is 35% Required: 1. What is the correct estimated liability for warranties at the end of 2016? 2. What is the correct balance of the accrued compensated absences account? 3. What is the correct balance of the accrued bonus account? 4. What is the correct net income after tax? )BLEM 9: Determine the implication of the following mdependent cases to the December 31, 2016 financial statements as per PAS 37, Provisions, Centingent Liabiites, and Contingent Assets. case 1 On December 5, 2016, an employee filed 4 P3,000,000 lawsuit against FS Company for damages suffered when one of FS’ equipment malfunctioned in August of 2016. In your inquiry of FS Company's Tegal counsel, the legal counsel expects the company will lose the lawsuit and estimates the loss to be between 500,000 and P1,500,000. The employee has offered to settle the lawsuit out of court for 1,200,000, but FS Company will not agree to the settlement case 2 FS Company guaranteed a loan of F2,000,000 of one of its key officers from a bank in 2016. By the time the financial statement of FS company were approved for issuance by the its BOD, it is clear that the key officer is in financial difficulties and it 1s prabable that FS company will meet the guarantee Case 3 ‘On December 20, 2016, an explosion occurred at FS Company's plant causing extensive property damages to adjacent areas, Although no claims had yet been asserted against FS Company by Apri 15, 2017, FS Company's management and counsel believes that it 's probable that the company will be liable for damages, and that P2 5M would be reasonable estimate of its lability. The legal counsel further opines that the tetal liability may possibly be up to P5M given the extent of the damages to the neighboring areas. FS Company's P10M comprehensive public liability policy has a PIM deductibie clause Case 4 On January 12, 2017, a fire at the production ares of FS company damaged a number of adjacent buildings. FS Company's insurance policy does sot cover damages to property of others The adjacent AUDITING PROBLEMS