Applied Auditing Joseph J.

Mendoza II, CPA

Seatwork 3- Liabilities 1st Sem, SY2019-2020

Name:_________________________________ Date:_____________
I.
In the audit of the JHS Corporation’s financial statements at December 31, 2019, the
chief accountant of the said corporation provided the following information:
Notes payable:
Arising from purchase of goods 304,000
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security, P400,000 due
on June 30, 2020; P100,000 due on Dec. 31, 2020 500,000
Arising from advances by officers, due June 30, 2020 50,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2021 500,000
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000

On March 1, 2020, the P400,000 note payable was replaced by an 18-month note for
the same amount. Heats is considering similar action on the P100,000 note payable due
on December 31, 2020. The 2019 financial statements were issued on March 31, 2020.

On December 1, 2019, a former employee filed a lawsuit seeking P200,000 for unlawful
dismissal. Heats’ attorneys believe that the suit is without merit. No court date has been
set.

On January 15, 2020, the BIR assessed Heats an additional income tax of P300,000 for
the 2017 tax year. Heats’ attorneys and tax accountants have stated that it is likely that
the BIR will agree to a P200,000 settlement.

REQUIRED:
Based on the above and the result of your audit, provide for the following as of
December 31, 2019:
1. Total current liabilities
2. Total noncurrent liabilities
3. Total liabilities

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Applied Auditing Joseph J. Mendoza II, CPA
Seatwork 3- Liabilities 1st Sem, SY2019-2020
II.
The following information relates to AMS Company’s obligations as of December 31,
2019. For each of the numbered items, provide the amount if any, that should be
reported as current liability in AMS’s December 31, 2019 balance sheet.

1. Accounts payable:
Accounts payable per general ledger control amounted to P5,440,000, net of P240,000
debit balances in suppliers’ accounts. The unpaid voucher file included the following
items that not had been recorded as of December 31, 2019:
a) A Company – P224,000 merchandise shipped on December 31, 2019, FOB
destination; received on January 10, 2020.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2019, FOB shipping
point; received on January 16, 2020.
c) C Super Services – P144,000 janitorial services for the three-month period ending
January 31, 2020.
d) MERALCO – P67,200 electric bill covering the period December 16, 2019 to
January 15, 2020.

On December 28, 2019, a supplier authorized AMS to return goods billed at P160,000
and shipped on December 20, 2019. The goods were returned by AMS on December
28, 2019, but the P160,000 credit memo was not received until January 6, 2020.

2. Payroll:
Items related to AMS’s payroll as of December 31, 2019 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000

3. Litigation:
In May, 2019, AMS became involved in a litigation. The suit is being contested, but
AMS’s lawyer believes it is possible that AMS may be held liable for damages
estimated in the range between P2,000,000 and P3,000,000, and no amount is a better
estimate of potential liability than any other amount.

4. Bonus obligation:
AMS Company’s president gets an annual bonus of 10% of net income after bonus
and income tax. Assume the tax rate of 30% and the correct income before bonus and
tax is P9,600,000. (Ignore the effects of other given items on net income.)

5. Note payable:
A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on
December 31, 2019. The note is dated October 1, 2018, bears interest at 18%, and is
payable in three equal annual installment of P800,000. The first interest and principal
payment was made on October 1, 2019.

6. Purchase commitment:
During 2019, AMS entered in a noncancellable commitment to purchase 320,000 units
of inventory at fixed price of P5 per unit, delivery to be made in 2020. On December
31, 2019, the purchase price of this inventory item had fallen to P4.40 per unit. The
goods covered by the purchase contract were delivered on January 28, 2020.

7. Deferred taxes:
On December 31, 2019, AMS’s deferred income tax account has a 2019 ending credit
balance of P772,800, consisting of the following items:

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Applied Auditing Joseph J. Mendoza II, CPA
Seatwork 3- Liabilities 1st Sem, SY2019-2020

Caused by temporary differences in accounting Deferred tax

For gross profit on installment sales P376,000 Cr.
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr
P772,800 Cr.

8. Product warranty:
AMS has a one year product warranty on selected items in its product line. The
estimated warranty liability on sales made during 2018, which was outstanding as of
December 31, 2018, amounted to P416,000. The warranty costs on sales made in
2019 are estimated at P1,504,000. Actual warranty costs incurred during the current
2019 fiscal year are as follows:
Warranty claims honored on 2018 sales P 416,000
Warranty claims honored on 2019 sales 992,000
Total warranty claims honored P1,408,000

9. Premiums:
To increase sales, AMS Company inaugurated a promotional campaign on June 30,
2019. AMS placed a coupon redeemable for a premium in each package of product
sold. Each premium costs P100. A premium is offered to customers who send in 5
coupons and a remittance of P30. The distribution cost per premium is P20. AMS
estimated that only 60% of the coupons issued will be redeemed. For the six months
ended December 31, 2019, the following is available:
Packages of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000

10. Due to Five Six Finance company:

AMS’s accounting records show that as of December 31, 2019, P1,280,000 was due
to Five Six Finance Company for advances made against P1,600,000 of trade accounts
receivable assigned to the finance company with recourse.

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