Professional Documents
Culture Documents
MODULE 10 - Audit of Current Liabilities With Discussion
MODULE 10 - Audit of Current Liabilities With Discussion
Straight Problem 1
Classification of Liabilities
Dallas Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The
following information relates to the obligations of the company as of March 31, 2020:
Notes Payable
Dallas has signed several notes with financial institutions (from borrowings). The maturities of these notes are given
below. The total unpaid interest for all of these notes amounts to P 340,000 on March 31, 2020.
John John:
Estimated liabilities belong to provisions.
Estimated Warranties (Warranty Payable or Warranty Liabilities)
Dallas has a one-year product warranty on some selected items. The estimated warranty liability on sales made
during the 2018 – 2019 (Prior FY) fiscal year and still outstanding as of March 31, 2019, amounted to P 252,000. The
warranty costs on sales made from April 1, 2019 to March 31, 2020 (current FY), are estimated at P 630,000. The
actual warranty costs incurred during 2019 – 2020 fiscal year are as follows:
Bonds Payable
Dallas issued P 5,000,000, 12% bonds, on October 1, 2014 at 96. The bonds will mature on October 1, 2024.
Interest is paid semi-annually on October 1 and April 1. Dallas uses the straight line method to amortize bond
discount.
QUESTIONS:
Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2020:
Warranty Payable
Warranty liability, March 31, 2019, beginning 252,000
Warranty expense, April 1, 2019 to Mach 31, 2020 630,000
Total outstanding warranty payable 882,000
Actual expenditures from April 1, 2019 to March 31, 2020:
From 2018 - 2019 sales -252,000 252,000
From 2019 – 2020 sales -285,000 285,000
Warranty liability, March 31, 2020 345,000 537,000
. Total current liabilities (Trade and Other Payables, Provisions and LTL current portion)
A. P 6,445,000
B. P 5,105,000
C. P 5,445,000
D. P 3,945,000
SOLUTION:
Notes Payable:
April 31, 2020 700,000
July 31, 2020 900,000
February 1, 2021 800,000 2,400,000 Borrowings
Interest payable on notes 340,000 Non-trade or other payable
Warranty payable (See number 1) 345,000 Provision
Trade / Accounts payables 560,000 Trade Payable
Cash Dividend Payable (P 5,000,000 x .30 per share 1,500,000 Non-trade or other payable
Interest on bonds payable (P 5,000,000 x 12% x 6/12) 300,000 Non-trade or other payable
Total current liabilities 5,445,000
. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion
of
A. Existence
B. Presentation and disclosure
C. Completeness
D. Valuation
. Which of the following procedures is least likely to be performed before the balance sheet date?
A. Observation of inventory
B. Testing of internal control over cash
C. Search for unrecorded liabilities
D. Confirmation of receivables
. Unrecorded liabilities are most likely to be found during the review of which of the following documents?
A. Unpaid bills
B. Bills of lading
C. Shipping records
D. Unmatched sales invoices
. An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is
to obtain evidence concerning management’s assertions about
A. Existence or occurrence
B. Presentation and disclosure
C. Valuation or allocation
D. Completeness
John John:
ACCOUNTING PERIOD (fy):
April 1, 2017 - March 31, 2018
April 1, 2018 - March 31, 2019
March 31. The April 1, 2019 - March 31, 2020 (Current year -under audit)
John John:
of these notes are given INTEREST PAYABLE, P 340,000
2020. This is CL but NON-TRADE LIABILITY.
John John:
To classiffy as CL, it is payable from March 31,
2020 (cut-off date) to March 31, 2021. Twelve
months from SFP date of 3/31/2020.
John John:
Upon sale, accrue the warranty expense by estimate based on sales
during the accounting period (accrual basis; matching principle):
belong to provisions.
Warranty Expense xxx
bility on sales made
Warranty Payable xxx
unted to P 252,000. The (Sales x % = Warranty expense/liab.)
d at P 630,000. The
Upon availment of warranty, the entry is:
Warranty Payable xxx
Cash/ Supplies xxx
John John:
TWO TYPES OF DIVIDEND WERE DECLARED:
1) Cash Divided
Retained Earnings 1,500,000
560,000 as of March Cash Dividend Payable 1,500,000
(0.30 x P 5,000,000)
2) Share Dividend
Retained Earnings 500,000
share and a 10%
Share Dividend Payable 500,000
areholders on record at (P 5,000,000 x 10%)
value, ordinary shares
NOTES:
Share Dividend Payable is the same as Share Dividend Distributable. This
is reported as shareholders' equity and not as liability.
October 1, 2024.
o amortize bond
John John:
Bonds Payable will mature in 2024 - Noncurrent liability
John John:
Warranty Expense 630,000
Warranty Payable 630,000
eginning balance
or the current year
John John:
Warranty Payable 252,000
Cash 252,000
John John:
Warranty Payable 285,000
Cash 285,000
Warranty Payable
252,000
630,000
882,000
345,000
rade Payable
Non-trade or other payable
Non-trade or other payable
Borrowings
- Current
700,000
900,000
800,000
2,400,000
hn:
n October 1 2014
date is October 1, 2024
10 years or 120 months (10 years x 12 months/year)
management’s assertion
g documents?
Straight Problem 2
Classification of Liabilities
Beloved Company reported the following information on December 31, 2020:
Additional information:
A. The loan payable is payable semi-annually for P 500,000 starting June 30, 2021
B. The loan of Jordan guaranteed by Beloved Company has the possibility that Jordan will be held liable
for the guarantee.
C. The bank overdraft is part of the cash management of Beloved Company.
Required:
Compute the following:
. Total current liabilities as of December 31, 2020
. Total noncurrent liabilities as of December 31, 2020
. Total liabilities as of December 31, 2020
SOLUTION:
LIABILITIES
Given Current Noncurrent Total
Accounts Payable 1,000,000 1,000,000
Advances to Employees 45,000
Bank Overdraft 10,000
Bonds Payable 5,000,000 5,000,000
Cash Dividend Payable 100,000 100,000
Cash Surrender Value of Life Insurance 75,000
Deferred Tax Liability 15,000 15,000
Discount on Bonds Payable 500,000 -500,000
Income Tax Payable 250,000 250,000
Loan of Jordan guaranteed by Beloved Company 500,000
Loan Payable 2,500,000 1,000,000 1,500,000
Patent 50,000
Shares Dividends Payable 150,000
Unearned Rent Income 300,000 300,000
Total Liabilities, 12/31/2020 2,650,000 6,015,000 8,665,000
NO. 1 NO. 2 NO. 3
Note 1:
The bank overdraft, which is part of cash management, is offset to any bank balance with positive balance
as provided under PAS 7.
e held liable
REMARKS
Receivable
Part of the cash management of Beloved Company. See Note 1 below
If the problem is silent, noncurrent liability
Non-trade payable (other payable)
Noncurrent asset - Investment
Straight Problem 3
Reclassification Entries for Accounts Payable
In conjunction with your December 31, 2020 annual audit of the financial statements of Sulayman Machine Works,
you have obtained and examined the December 31, 2020, accounts payable trial balance. Your examination of this
trial balance disclosed the following open vouchers:
. Voucher 761, containing a P 380,000 credit to Accounts Payable. This voucher covered a cash transfer to the
factory payroll bank account for the pay period ended December 28, 2020. The payroll cash transfer was made
January 3, 2021, and payroll checks covering this pay period were distributed to factory employees on January 4,
2021.
.
Voucher 778, containing a P 180,000 credit to Accounts Payable. The P 180,000 credit covered the principal and
interest due on a ten year installment loan. The loan was granted to Sulayman Machine Works on January 1,
2020. Terms of the loan agreement call for ten equal annual installment payments of P 100,000, each plus
interest at 8%. Principal and interest payments are due January 5, 2021 to 2030. The voucher indicated that the
Loan Payable and Interest Expense accounts had been properly charged (DEBIT).
. Voucher 741, containing a credit to Accounts Payable of P 50,000. This voucher covered an invoice from
Sikatuna Business Equipment Company for a new computer machine. The computer machine was installed
December 10, 2020, and the Office Equipment account was properly charged.
. Voucher 775, containing a credit to Accounts Payable in the amount of P 65,840. This voucher covered income
taxes withheld from employees during December 2020.
. Voucher 779, containing a credit to Accounts Payable of P 41,460. This credit covered the total interest and
principal due on a 180-day P 40,000 note payable to the Acme Company. Charges to the Note Payable and
Interest Expense had been properly handled.
.
Voucher 751, containing a P 200,000 charge to Accounts Payable. This voucher represented a P 200,000
advance payment to Pandayan Heavy Machine Tool Company for a special order of ten gearboxes. These
gearboxes were to be used to produce ten custom machines ordered from Sulayman by Urduja Company, early
in December 2020. The P 200,000 Sulayman check was mailed to Pandayan Heavy Machine Tool Company on
January 2, 2021.
Instructions:
Prepare any necessary reclassification entries for items 1 to 6.
SOLUTION:
GIVEN INFORMATION
. Voucher 761, containing a P 380,000 credit to Accounts Payable. This voucher covered a cash transfer to the
factory payroll bank account for the pay period ended December 28, 2020. The payroll cash transfer was made
January 3, 2021, and payroll checks covering this pay period were distributed to factory employees on January 4,
2021.
.
Voucher 778, containing a P 180,000 credit to Accounts Payable. The P 180,000 credit covered the principal and
interest due on a ten year installment loan. The loan was granted to Sulayman Machine Works on January 1,
2020. Terms of the loan agreement call for ten equal annual installment payments of P 100,000, each plus
interest at 8%. Principal and interest payments are due January 5, 2021 to 2030. The voucher indicated that the
Loan Payable and Interest Expense accounts had been properly charged (DEBIT).
Voucher 778, containing a P 180,000 credit to Accounts Payable. The P 180,000 credit covered the principal and
interest due on a ten year installment loan. The loan was granted to Sulayman Machine Works on January 1,
2020. Terms of the loan agreement call for ten equal annual installment payments of P 100,000, each plus
interest at 8%. Principal and interest payments are due January 5, 2021 to 2030. The voucher indicated that the
Loan Payable and Interest Expense accounts had been properly charged (DEBIT).
. Voucher 741, containing a credit to Accounts Payable of P 50,000. This voucher covered an invoice from
Sikatuna Business Equipment Company for a new computer machine. The computer machine was installed
December 10, 2020, and the Office Equipment account was properly charged (DEBIT).
. Voucher 775, containing a credit to Accounts Payable in the amount of P 65,840. This voucher covered income
taxes withheld from employees during December 2020.
. Voucher 779, containing a credit to Accounts Payable of P 41,460. This credit covered the total interest and
principal due on a 180-day P 40,000 note payable to the Acme Company. Charges (DEBIT) to the Note Payable
and Interest Expense had been properly handled.
.
Voucher 751, containing a P 200,000 charge (DEBIT) to Accounts Payable. This voucher represented a P
200,000 advance payment to Pandayan Heavy Machine Tool Company for a special order of ten gearboxes.
These gearboxes were to be used to produce ten custom machines ordered from Sulayman by Urduja Company,
early in December 2020. The P 200,000 Sulayman check was mailed to Pandayan Heavy Machine Tool
Company on January 2, 2021. (Undelivered Check)
man Machine Works,
ur examination of this Accounts Payable
Debit Credit
a cash transfer to the Item 5 Voucher 751 200,000 380,000 Item 1 Voucher 761
ash transfer was made 180,000 Item 2 Voucher 778
mployees on January 4, 50,000 Item 3 Voucher 741
65,840 Item 4 Voucher 775
41,460 Item 5 Voucher 779
overed the principal and
Works on January 1, AJE 1 380,000 200,000 AJE
00,000, each plus AJE 2 180,000
ucher indicated that the AJE 3 65,480
AJE 4 41,460
an invoice from
chine was installed
(AJE NO. 2)
31 Accounts Payable 180,000
overed the principal and
Works on January 1, Loan Payable 100,000
00,000, each plus Interest Payable (P 100,000 x 10 x 8%) 80,000
ucher indicated that the
Item No. 2
an invoice from
chine was installed
(AJE NO. 3)
ucher covered income 31 Accounts Payable 65,480
Withholding Taxes Payable 65,480
Item No. 4
(AJE NO. 4)
e total interest and 31 Accounts Payable 41,460
BIT) to the Note Payable Notes Payable 40,000
Interest Payable (P 41,460 - P 40,000) 1,460
Item No. 5
(AJE NO. 5)
31 Cash 200,000
r represented a P
er of ten gearboxes. Accounts Payable 200,000
man by Urduja Company, Item No. 6
y Machine Tool
Notes:
Item No. 3 is properly classified as Accounts Payable. The transaction was about
acquisition on credit of office equipment (computer machine).
STRAIGHT PROBLEMS
Straight Problem 4
Warranties and Premium
Dolores Music Emporium carries a wide variety of music promotion techniques – warranties and premiums – to attract
customers.
Musical instruments and sound equipment are sold in a one year warranty replacement of parts and labor. The
estimated warranty costs, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on
recorded music and sheet music. Customers may exchange 200 coupons and P 20 for an AM/FM radio. Dolores pays
P 34 for each radio and estimates that 60% of the coupon given to customers will be redeemed.
Dolores’s total sales of 2020 were P 57,600,000 – P 43,200,000 from musical instruments and sound reproduction
equipment and P 14,400,000 from recorded music and sheet music. Replacement labor and parts for warranty work
totaled P 1,312,000 during 2020. A total of 52,000 AM/FM radio used in the program were purchased during the year
and there were 9,600,000 coupons redeemed in 2020.
The accrual method is used by Dolores to account for warranty and premium costs for financial reporting purposes.
The balance in the accounts related to warranties and premiums on January 1, 2020 were as shown below:
Required:
Based on the above and the result of your audit, determine the amounts that will be shown on the 2020 financial
statements for the following:
. Warranty Expense
. Estimated liability for warranties
. Premium Expense
. Inventory of AM/FM radio (Premium)
. Estimated liability for premiums
SOLUTION:
. Warranty Expense
. Premium Expense
John John:
Accrual of warranty expense:
reporting purposes. Warranty expense 864,000
s shown below: Warranty Payable 864,000
(P 43,200,000 x 2%)
Warranty Payable
Debit Credit
John John:
Warranty Expense 864,000
Warranty Payable 864,000
864,000
1,088,000
1,312,000
John John:
Warranty Payable 1,312,000
Cash 1,312,000
1,312,000 1,952,000 John John:
Warranty Payable 1,312,000
640,000 Cash 1,312,000
John John:
Premium Expense 34
Premium 34
John John:
Cash 20
Premium Expense 20
John John:
One coupon for each peso spent
P 14,400,000/ 1 coupon each = 14,400,000 coupons issued
STRAIGHT PROBLEMS
Straight Problem 5
Test for Proper Cut-Off
In conjunction with your firm's examination of the financial statements of Carmina, Inc. as of December 31, 2020, you
obtained from the voucher register the information shown in the work paper below:
. 12.21.2020 12-210 Repair services; received 12.20.2020 19,000 Repairs & Maintenance
. 12.26.2020 12-226 Subscription to Tax Journals for 2021 5,000 Subscription Expense
The Accrued Payroll, Accrued Interest Payable, and Accrued Royalties Payable accounts were reversed effective
January 1, 2021.
Instructions:
Review the data given above and prepare adjusting journal entries to correct the accounts on December 31, 2020.
Assume that the company follows FOB terms for recording inventory purchases.
SOLUTION:
Item No. Account Names Debit Credit
01 Properly recorded
03 Properly recorded
04 Properly recorded
05 Properly recorded
07 Properly recorded
09 Properly recorded
12 Inventory 55,000
Vouchers Payable 55,000
13 Properly recorded
(Accrued in 2020 - Accrued Payroll, P 48,000)
(P 72,000 / 12 days x 8 days for year 2020 = P 48,000)
14 Properly recorded
15 Properly recorded
(Accrued in 2020 - Accrued Royalties Payable, P 39,000)
16 Properly recorded
17 Properly recorded
20 Properly recorded
(Accrued in 2020 - Dividends Payable, P 160,000)
SUPPORTING ANALYSIS:
No. Entry Date Voucher Ref. Description Amount Account Charged
. 12.18.2020 12-200
Supplies, purchased FOB destination,
12.15.2020; received 12.17.2020 15,000 Supplies on Hand
Analysis:
The title passed to the entity on 12/17/2020.
Properly recorded:
Supplies on Hand 15,000
Vouchers Payable 15000
Analysis:
Properly recorded:
Prepaid Insurance 24,000
Vouchers Payable 24,000
. 12.21.2020 12-210 Repair services; received 12.20.2020 19,000 Repairs & Maintenance
Analysis:
Properly recorded:
Repairs and Maintenance 19,000
Vouchers Payable 19000
Analysis:
The title passed to the entity on 12/20/2020.
Properly recorded:
Inventory 12,300
Vouchers Payable 12,300
Analysis:
Properly recorded: 69,000
Salaries and Wages 69,000
Vouchers Payable
. 12.26.2020 12-226 Subscription to Tax Journals for 2021 5,000 Subscription Expense
Analysis:
Entry made in 2020:
Subscription Expense 5,000
Vouchers Payable 5,000
Analysis:
Properly recorded
Utilities Expense 24,000
Vouchers Payable 24000
Analysis:
Entry made in 2020
Inventory 115,000
Vouchers Payable 115,000
Analysis:
The title passed to the entity on 12/26/2020.
Properly recorded
Inventory 84,000
Vouchers Payable 84,000
Analysis:
Entry made in 2020:
No entry
Analysis:
The title passed to the entity on 12/29/2020.
Entry made in 2020:
No entry
Analysis:
Already accrued in 2020.
P 72,000 / 12 days x 8 days in year 2020 = P 48,000
Salaries and Wages 48,000
Accrued Payroll 48,000
Analysis:
No title passed to the entity in year 2020.
Properly not recorded in year 2020.
Recorded only on 01/06/2020
Analysis:
Entry made in 2020
Manufacturing Costs 39,000
Accrued Royalties Payable 39,000
Analysis:
No title passed to the entity in year 2020.
Properly not recorded in year 2020.
Recorded only on 01/10/2020
Analysis:
No expense transaction in year 2020
Properly not recorded in year 2020.
Recorded only on 01/09/2020
Analysis:
Entry made in 2020
No Entry
Analysis:
Entry made in 2020
Dividends/Retained Earnings 160,000
Dividends Payable 160,000
Supplies on Hand
04 Properly recorded
09 Properly recorded
12 Inventory 55,000
Vouchers Payable
13 Properly recorded
(Accrued in 2020 - Accrued Payroll, P 48,000)
Salaries and Wages (P 72,000 / 12 days x 8 days for year 2020 = P 48,000)
14 Properly recorded
15 Properly recorded
Manufacturing Costs (Accrued in 2020 - Accrued Royalties Payable, P 39,000)
16 Properly recorded
17 Properly recorded
Repairs & Maintenance
18 Properly recorded
nterest Expense (Accrued in 2020 - Accrued Interest Payable, P 26,667)
October 10 to 31 = 22 days
November = 30 days
December = 31
Total days in year 2020 = 22 + 30 + 31 = 83 days
Interest expense in 2020 = P 30,000 x 83/90 = P 27,667
e reversed effective
Prepaid Insurance
Utilities Expense
egal Expense
Medical Expenses
nterest Expense
Machinery & Equipment
Dividends Payable
Credit
1,000
5,000
115,000
46,000
25,000
55,000
254,000
STRAIGHT PROBLEMS
Straight Problem 6
Unrecorded Liabilities
Prepare any necessary audit adjustments for the following audit findings of unrecorded transactions for the year
ended December 31, 2020:
A.
An invoice for an insurance premium in the amount of P 180,000 dated December 31, 2020. Effective date of
policy December 1, 2020 to November 30, 2023. Invoice unpaid at December 31, 2020 due to the invoice being
misplaced by the client. Premium was paid on January 10, 2021 and check cleared bank on January 12, 2020.
B. An invoice for 10,000 computer payroll checks in the amount of P 100,000 dated December 15, 2020. Checks
had been received, but audit inspection confirms that none had been used by December 31, 2020. Invoice paid
January 22, 2021.
C. An invoice for a 3-year service contract on the client's desktop and laptop computers in the amount of P 180,000,
dated December 1, 2020. Effective date of service contract, November 1, 2020 to October 31, 2023. The office
manager overlooked approving this invoice until the date of payment - January 10, 2021.
D. The audit of the client's SSS premiums for December 2020, revealed that the employer's share in the amount of
P 10,000 had not been recorded at December 31, 2020.
G. A non-interest bearing note to the president, in the amount of P 2,400,000, has been included in Accounts
Payable - Nontrade. After a discussion of this situation with the board of directors on January 10, 2021, it was
recorded in the minutes of that meeting, approval of the loan, but to be at an interest rate of 9%. The note was
dated November 1, 2020, and due on demand.
H. The review of the sales bonus plan of your client revealed that no entry had been made for bonuses due at
December 31, 2020. The provision of the plan stipulated the following:
Notes:
Effectivity date is December 1, 2020 but still unpaid until January 10, 2021
December 1, 2020 to November 30, 2023 is 3 years or 36 months
Expired portion is from December 1, 2020 to December 31, 2020 or one month
B. An invoice for 10,000 computer payroll checks in the amount of P 100,000 dated December 15, 2020. Checks
had been received, but audit inspection confirms that none had been used by December 31, 2020. Invoice paid
January 22, 2021.
Notes:
Acquired are blank computer payroll checks which are OFFICE SUPPLIES.
These are already received but unused at end of 2020 (all remain as asset).
AT December 31, 2020, these supplies are not yet paid.
C. An invoice for a 3-year service contract on the client's desktop and laptop computers in the amount of P 180,000,
dated December 1, 2020. Effective date of service contract, November 1, 2020 to October 31, 2023. The office
manager overlooked approving this invoice until the date of payment - January 10, 2021.
Notes:
Effectivity of the 3-year service contract is .November 1, 2020
Expired portion is two months (November and December for 2020).
The contract is still unpaid until January 10, 2021.
D. The audit of the client's SSS premiums for December 2020, revealed that the employer's share in the amount of
P 10,000 had not been recorded at December 31, 2020.
Date Account Names Debit Credit
2020
Dec. 31 SSS Premium Expense 10,000
SSS Premium Payable 10,000
E. The returns of your accounts payable verification letter from Maldita, Inc. indicated a balance due of P 12,000.
Comparison with the client's subsidiary ledger showed a balance of P 18,000. The difference was due to a client
error in debiting Maldito, Inc. for the P 6,000 paid to Maldita, Inc.
Supporting computation:
Based on excess profits: [(P 90,000,000 - P 25,000,000) x 10%] = P 6,500,000 (does not exceed)
Based on participants annual salaries: P 120,000,000 x 20% = P 24,000,000
G. A non-interest bearing note to the president, in the amount of P 2,400,000, has been included in Accounts
Payable - Nontrade. After a discussion of this situation with the board of directors on January 10, 2021, it was
recorded in the minutes of that meeting, approval of the loan, but to be at an interest rate of 9%. The note was
dated November 1, 2020, and due on demand.
Notes:
Interest Expense is from November 1 to December 31, 2020 or two months.
H. The review of the sales bonus plan of your client revealed that no entry had been made for bonuses due at
December 31, 2020. The provision of the plan stipulated the following:
No bonus on first P 25,000,000 sales
10% bonus on next P 50,000,000 sales
5% bonus on the next P 100,000,000 sales
2% on any sales in excess of P 175,000,000 sales
he amount of P 180,000,
r 31, 2023. The office
uded in Accounts
uary 10, 2021, it was
of 9%. The note was
or bonuses due at
20. Effective date of
ue to the invoice being
on January 12, 2020.
he amount of P 180,000,
r 31, 2023. The office
uded in Accounts
uary 10, 2021, it was
of 9%. The note was
or bonuses due at
MODULE 10
Audit of Current Liabilities and Related Accounts
E. Pre-Test No. 10 - Theory (15 PTS) and Problems (30 PTS - 15 Questions) - 45 POINTS
F. Post-Test No. 10 - Theory (20 PTS) and Problems (25 Questions - 2points each) - 70 POINTS
DISCUSSION
I. NATURE OF INVENTORY
STRAIGHT PROBLEMS
Straight Problem 1
Classification of Liabilities
Dallas Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The following
information relates to the obligations of the company as of March 31, 2021:
Notes Payable
Dallas has signed several notes with financial institutions. The maturities of these notes are given below. The total
unpaid interest for all of these notes amounts to P 340,000 on March 31, 2021.
Estimated Warranties
Dallas has a one-year product warranty on some selected items. The estimated warranty liability on sales made
during the 2018 – 2019fiscal year and still outstanding as of March 31, 2019, amounted to P 252,000. The warranty
costs on sales made from April 1, 2019 to March 31, 2020, are estimated at P 630,000. The actual warranty costs
incurred during 2019 – 2020 fiscal year are as follows:
Dallas has a one-year product warranty on some selected items. The estimated warranty liability on sales made
during the 2018 – 2019fiscal year and still outstanding as of March 31, 2019, amounted to P 252,000. The warranty
costs on sales made from April 1, 2019 to March 31, 2020, are estimated at P 630,000. The actual warranty costs
incurred during 2019 – 2020 fiscal year are as follows:
Trade Payables
Accounts payable for supplies, goods, and services purchases on open account amount to P 560,000 as of March 31,
2020.
Dividends
On March 10, 2020, Dallas’ board of directors declared a cash dividend of P 0.30 per ordinary share and a 10%
ordinary share dividend. Both dividends were to be distributed on April 5, 2020 to ordinary shareholders on record at
the close of business on March 31, 2020. As of March 31, 2020, Dallas has 5 million, P2 par value, ordinary shares
issued and outstanding.
Bonds Payable
Dallas issued P 5,000,000, 12% bonds, on October 1, 2014 at 96. The bonds will mature on October 1, 2024.
Interest is paid semi-annually on October 1 and April 1. Dallas uses the straight line method to amortize bond
discount.
QUESTIONS:
Based on the foregoing information, determine the adjusted balances of the following as of March 31, 2020:
SOLUTION:
Warranty liability, March 31, 2019 252,000
Warranty expense, April 1, 2019 to Mach 31, 2020 630,000
Actual expenditures from April 1, 2019 to March 31, 2020:
From 2018 - 2019 sales -252,000
From 2019 – 2020 sales -285,000
Warranty liability, March 31, 2020 345,000
SOLUTION:
Notes Payable:
April 31, 2020 700,000
July 31, 2020 900,000
February 1, 2021 800,000 2,400,000
Interest payable on notes 340,000
Warranty payable (See number 1) 345,000
Trade payables 560,000
Cash Dividend Payable (P 5,000,000 x .30 per share 1,500,000
Interest on bonds payable (P 5,000,000 x 12% x 6/12) 300,000
Total current liabilities 5,445,000
SOLUTION:
Trade and
Notes Payable: Other Pay. Provisions
April 31, 2020 700,000
July 31, 2020 900,000
February 1, 2021 800,000
Interest payable on notes 340,000 340,000
Warranty payable (See number 1) 345,000 345,000
Trade payables 560,000 560,000
Cash Dividend Payable (P 5,000,000 x .30 per share 1,500,000 1,500,000
Interest on bonds payable (P 5,000,000 x 12% x 6/12) 300,000 300,000
Total 2,700,000 345,000
SOLUTION:
Notes Payable – due April 30, 2021 1,200,000
Notes Payable – due June 30, 2021 1,500,000 2,700,000
. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion
of
A. Existence
B. Presentation and disclosure
C. Completeness
D. Valuation
. Which of the following procedures is least likely to be performed before the balance sheet date?
A. Observation of inventory
B. Testing of internal control over cash
C. Search for unrecorded liabilities
D. Confirmation of receivables
. Unrecorded liabilities are most likely to be found during the review of which of the following documents?
A. Unpaid bills
B. Bills of lading
C. Shipping records
D. Unmatched sales invoices
. An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is
to obtain evidence concerning management’s assertions about
A. Existence or occurrence
B. Presentation and disclosure
C. Valuation or allocation
D. Completeness
Straight Problem 2
Computation of current liabilities
Beloved Company reported the following information on December 31, 2020:
Additional information:
A. The loan payable is payable semi-annually for P 500,000 strating June 30, 2021
B. The loan of Jordan guaranteed by Beloved Company has the possibility that Jordan will be held liable for the
guarantee.
C. The bank overdraft is part of the cash management of Beloved Company.
Required:
Compute the following:
. Total current liabilities as of December 31, 2020
. Total noncurrent liabilities as of December 31, 2020
. Total liabilities as of December 31, 2020
SOLUTION:
LIABILITIES
Given Current Noncurrent Total
Accounts Payable 1,000,000 1,000,000
Advances to Employees 45,000
Bank Overdraft 10,000
Bonds Payable 5,000,000 5,000,000
Cash Dividend Payable 100,000 100,000
Cash Surrender Value of Life Insurance 75,000
Deferred Tax Liability 15,000 15,000
Discount on Bonds Payable 500,000 -500,000
Income Tax Payable 250,000 250,000
Loan of Jordan guaranteed by Beloved Company 500,000
Loan Payable 2,500,000 1,000,000 1,500,000
Patent 50,000
Shares Dividends Payable 150,000
Unearned Rent Income 300,000 300,000
Total Liabilities, 12/31/2020 2,650,000 6,015,000 8,665,000
Note 1:
The bank overdraft, which is part of cash management, is offset to any bank balance with positive balance as provided
under PAS 7.
Straight Problem 3
Reclassification Entries for Accounts Payable
In conjunction with your December 31, 2020 annual audit of the financial statements of Sulayman Machine Works, you
have obtained and examined the December 31, 2020, accounts payable trial balance. Your examination of this trial
balance disclosed the following open vouchers:
. Voucher 761, containing a P 380,000 credit to Accounts Payable. This voucher covered a cash transfer to the
factory payroll bank account for the pay period ended December 28, 2020. The payroll cash transfer was made
January 3, 2021, and payroll checks covering this pay period were distributed to factory employees on January 4,
2021.
.
Voucher 778, containing a P 180,000 credit to Accounts Payable. The P 180,000 credit covered the principal and
interest due on a ten year installment loan. The loan was granted to Sulayman Machine Works on January 1,
2020. Terms of the loan agreement call for ten equal annual installment payments of P 100,000, each plus
interest at 8%. Principal and interest payments are due January 5, 2021 to 2030. The voucher indicated that the
Loan Payable and Interest Expense accounts had been properly charged.
Voucher 778, containing a P 180,000 credit to Accounts Payable. The P 180,000 credit covered the principal and
interest due on a ten year installment loan. The loan was granted to Sulayman Machine Works on January 1,
2020. Terms of the loan agreement call for ten equal annual installment payments of P 100,000, each plus
interest at 8%. Principal and interest payments are due January 5, 2021 to 2030. The voucher indicated that the
Loan Payable and Interest Expense accounts had been properly charged.
. Voucher 741, containing a credit to Accounts Payable of P 50,000. This voucher covered an invoice from
Sikatuna Business Equipment Company for a new computer machine. The computer machine was installed
December 10, 2020, and the Office Equipment account was properly charged.
. Voucher 775, containing a credit to Accounts Payable in the amount of P 65,840. This voucher covered income
taxes withheld from employees during December 2020.
. Voucher 779, containing a credit to Accounts Payable of P 41,460. This credit covered the total interest and
principal due on a 180-day P 40,000 note payable to the Acme Company. Charges to the Note Payable and
Interest Expense had been properly handled.
.
Voucher 751, containing a P 200,000 charge to Accounts Payable. This voucher represented a P 200,000
advance payment to Pandayan Heavy Machine Tool Company for a special order of ten gearboxes. These
gearboxes were to be used to produce ten custom machines ordered from Sulayman by Urduja Company, early
in December 2020. The P 200,000 Sulayman check was mailed to Pandayan Heavy Machine Tool Company on
January 2, 2021.
Instructions:
Prepare any necessary reclassification entries for items 1 to 6.
SOLUTION:
(AJE NO. 2)
31 Accounts Payable 180,000
Loan Payable 100,000
Interest Payable 80,000
Item No. 2
(AJE NO. 3)
31 Accounts Payable 65,480
Withholdeing Taxes Payable 65,480
Item No. 4
(AJE NO. 4)
31 Accounts Payable 41,460
Notes Payable 40,000
Interest Payable 1,460
Item No. 5
(AJE NO. 5)
31 Cash 200,000
Accounts Payable 200,000
Notes:
Item No. 3 is properly classified as Accounts Payable. The transaction was about acquisition on credit of
office equipment (computer machine).
Straight Problem 4
Warranties and Premium
Dolores Music Emporium carries a wide variety of music promotion techniques – warranties and premiums – to attract
customers.
Musical instruments and sound equipment are sold in a one year warranty replacement of parts and labor. The
estimated warranty costs, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on
recorded music and sheet music. Customers may exchange 200 coupons and P 20 for an AM/FM radio. Dolores pays
P 34 for each radio and estimates that 60% of the coupon given to customers will be redeemed.
Dolores’s total sales of 2020 were P 57,600,000 – P 43,200,000 from musical instruments and sound reproduction
equipment and P 14,400,000 from recorded music and sheet music. Replacement labor and parts for warranty work
totaled P 1,312,000 during 2020. A total of 52,000 AM/FM radio used in the program were purchased during the year
and there were 9,600,000 coupons redeemed in 2020.
The accrual method is used by Dolores to account for warranty and premium costs for financial reporting purposes.
The balance in the accounts related to warranties and premiums on January 1, 2020 were as shown below:
Required:
Based on the above and the result of your audit, determine the amounts that will be shown on the 2020 financial
statements for the following:
. Warranty Expense
. Estimated liability for warranties
. Premium Expense
. Inventory of AM/FM radio
. Estimated liability for premiums
SOLUTION:
. Warranty Expense
. Premium Expense
Straight Problem 5
Test for Proper Cut-Off
In conjunction with your firm's examination of the financial statements of Carmina, Inc. as of December 31, 2020, you
obtained from the voucher register the information shown in the work paper below:
. 12.21.2020 12-210 Repair services; received 12.20.2020 19,000 Repairs & Maintenance
The Accrued Payroll, Accrued Interest Payable, and Accrued Royalties Payable accounts were reversed effective
January 1, 2021.
Instructions:
Review the data given above and prepare adjusting journal entries to correct the accounts on December 31, 2020.
Assume that the company follows FOB terms for recording inventory purchases.
SOLUTION:
Item No. Account Names Debit Credit
01 Properly recorded
03 Properly recorded
04 Properly recorded
05 Properly recorded
07 Properly recorded
09 Properly recorded
12 Inventory 55,000
Vouchers Payable 55,000
13 Properly recorded
(Accrued in 2020 - Accrued Payroll, P 48,000)
(P 72,000 / 12 days x 8 days for year 2020 = P 48,000)
14 Properly recorded
15 Properly recorded
(Accrued in 2020 - Accrued Royalties Payable, P 39,000)
16 Properly recorded
17 Properly recorded
20 Properly recorded
(Accrued in 2020 - Dividends Payable, P 160,000)
SUPPORTING ANALYSIS:
No. Entry Date Voucher Ref. Description Amount Account Charged
. 12.18.2020 12-200
Supplies, purchased FOB destination,
12.15.2020; received 12.17.2020 15,000 Supplies on Hand
Analysis:
The title passed to the entity on 12/17/2020.
Properly recorded:
Supplies on Hand 15,000
Vouchers Payable 15000
Analysis:
Properly recorded:
Prepaid Insurance 24,000
Vouchers Payable 24,000
. 12.21.2020 12-210 Repair services; received 12.20.2020 19,000 Repairs & Maintenance
Analysis:
Properly recorded:
Repairs and Maintenance 19,000
Vouchers Payable 19000
. 12.21.2020 12-212 Merchandise shipped FOB shipping
point, 12.20.2020; received,
12.24.2020 12,300 Inventory
Analysis:
The title passed to the entity on 12/20/2020.
Properly recorded:
Inventory 12,300
Vouchers Payable 12,300
Analysis:
Properly recorded: 69,000
Salaries and Wages 69,000
Vouchers Payable
. 12.26.2020 12-226 Subscription to Tax Journals for 2021 5,000 Subscription Expense
Analysis:
Entry made in 2020:
Subscription Expense 5,000
Vouchers Payable 5,000
Analysis:
Properly recorded
Utilities Expense 24,000
Vouchers Payable 24000
Analysis:
Entry made in 2020
Inventory 115,000
Vouchers Payable 115,000
Entry that should have been made in 2020:
No Entry
Analysis:
The title passed to the entity on 12/26/2020.
Properly recorded
Inventory 84,000
Vouchers Payable 84,000
Analysis:
Entry made in 2020:
No entry
Analysis:
Entry made in 2020:
No entry
Analysis:
Already accrued in 2020.
P 72,000 / 12 days x 8 days in year 2020 = P 48,000
Salaries and Wages 48,000
Accrued Payroll 48,000
Analysis:
No title passed to the entity in year 2020.
Properly not recorded in year 2020.
Recorded only on 01/06/2020
Analysis:
Entry made in 2020
Manufacturing Costs 39,000
Accrued Royalties Payable 39,000
Analysis:
No title passed to the entity in year 2020.
Properly not recorded in year 2020.
Recorded only on 01/10/2020
Analysis:
No expense transaction in year 2020
Properly not recorded in year 2020.
Recorded only on 01/09/2020
Analysis:
Entry made in 2020
Interest Expense 26,667
Accrued Interest Payable 26,667
(P 30,000 x 83/90)
Analysis:
Entry made in 2020
No Entry
Analysis:
Entry made in 2020
Dividends/Retained Earnings 160,000
Dividends Payable 160,000
Straight Problem 6
Unrecorded Liabilities
Prepare any necessary audit adjustments for the following audit findings of unrecorded transactions for the year
ended December 31, 2020:
A.
An invoice for an insurance premium in the amount of P 180,000 dated December 31, 2020. Effective date of
policy December 1, 2020 to November 30, 2023. Invoice unpaid at December 31, 2020 due to the invoice being
misplaced by the client. Premium was paid on January 10, 2021 and check cleared bank on January 12, 2020.
B. An invoice for 10,000 computer payroll checks in the amount of P 100,000 dated December 15, 2020. Checks
had been received, but audit inspection confirms that none had been used by December 31, 2020. Invoice paid
January 22, 2021.
C. An invoice for a 3-year service contract on the client's desktop and laptop computers in the amount of P 180,000,
dated December 1, 2020. Effective date of service contract, November 1, 2020 to October 31, 2023. The office
manager overlooked approving this invoice until the date of payment - January 10, 2021.
D. The audit of the client's SSS premiums for December 2020, revealed that the employer's share in the amount of
P 10,000 had not been recorded at December 31, 2020.
Date Account Names Debit Credit
2020
Dec. 31 SSS Premium Expense 10,000
SSS Premium Payable 10,000
E. The returns of your accounts payable verification letter from Maldita, Inc. indicated a balance due of P 12,000.
Comparison with the client's subsidiary ledger showed a balance of P 18,000. The difference was due to a client
error in debiting Maldito, Inc. for the P 6,000 paid to Maldita, Inc.
Supporting computation:
Based on excess profits: [(P 90,000,000 - P 25,000,000) x 10%] = P 6,500,000 (does not exceed)
Based on participants annual salaries: P 120,000,000 x 20% = P 24,000,000
G. A non-interest bearing note to the president, in the amount of P 2,400,000, has been included in Accounts
Payable - Nontrade. After a discussion of this situation with the board of directors on January 10, 2021, it was
recorded in the minutes of that meeting, approval of the loan, but to be at an interest rate of 9%. The note was
dated November 1, 2020, and due on demand.
H. The review of the sales bonus plan of your client revealed that no entry had been made for bonuses due at
December 31, 2020. The provision of the plan stipulated the following:
MCQ PROBLEM 1
Gemini Corporation presented to you the analysis of its liabilities as of December 31, 2020:
Additional information:
A. The accounts payable is also net of post-dated checks of P 100,000 issued to supplier.
B. The deferred tax liability is based on temporary differences that will be reversed in 2021.
Question 1:
What is the total amount of current liabilities in the statement of financial position as of December 31, 2020?
A. P 10,800,000
B. P 11,150,000
C. P 11,550,000
D. P 14,750,000
SOLUTION:
Accounts Payable
Unadjusted balance 8,000,000
Add: Creditors' debit balance 200,000
Post-dated check to suppliers 100,000 8,300,000
Accounts Receivable credit balances 1,000,000
Premium Payable 1,200,000
Accrued Operating Expenses 300,000
Total current liabilities, 12/31/2020 10,800,000
NOTES:
Classified as noncurrent liabilities:
Bonds Payable
Deferred Tax Liability
Mortgage Payable
Deferred Revenue
MCQ PROBLEM 2
King Mark Company has a 10%, P 5,000,000 loan payable as of December 31, 2020 that is maturing on July 1, 2021.
Interest on loan is payable every July 1 and December 31.
On February 1, 2021, King Mark Company entered into a financing agreement with a bank to refinance the loan on a
long-term basis. Both parties are financially capable of honoring the agreement's provisions. King Mark's financial
statements were authorized to issue on March 10, 2021.
Question 2:
How much is presented as current liability in relation to the loan in King Mark's 2020 year-end statement of financial
position?
A. P 5,000,000
B. P 500,000
C. P 250,000
D. Zero
SOLUTION:
The amount to be reported as current liabilities in 2020 is P 5,000,000 since the grace period was granted after the
reporting date.
MCQ PROBLEM 3
The accounts payable balance of Giovanni Corporation as of December 31, 2020 was P 24,000,000 before any
adjustments as follows:
A. On December 29, 2020, Razzini Company, a supplier, authorized Giovanni Corporation to return for full
credit goods shipped and billed at P 600,000 on December 15, 2020. The returned goods were shipped by
Giovanni Corporation on December 31, 2020. On January 6, 2021, a credit memo of P 600,000 was
received and recorded.
B. On December 16, 2020, goods shipped to Giovanni Corporation with an invoice cost of P 1,500,000 were
lost in transit. On January 16, 2021, Giovanni Corporation filed a P 1,500,000 claim against the common
carrier.
Question 3:
What should Giovanni Corporation report as accounts payable on December 31, 2020?
A. P 25,500,000
B P 24,900,000
C. P 23,400,000
D. P 22,500,000
SOLUTION:
Unadjusted Accounts Payable balance, 12/31/2022 24,000,000
Adjustments:
A. Purchase returns to Razzini Company -600,000
B. Goods sold lost in transit on 12/16/2020
(assumed it was FOB Destination) 1,500,000
Adjusted Accounts Payable balance, 12/31/2022 24,900,000
MCQ PROBLEM 4
In connection with the audit of liabilities, you were able to onbtain the following information:
Luxury Company is a car manufacturer who gives warranties to its clients at the time of purchase. Under the terms of
sale contract, Luxury Company undertakes a repair manufacturing defects or replace defective parts that become
apparent within 5 years from the date of sale.
Based onprevious experience, it is probable that there will be some claims under warranties Estimated cash flows
related to the cars covered by warranty as of the reporting period are as follows:
Question 4:
How much should Luxury Company recognize as warranty provision?
A. None
B. P 50,000
C. P 80,000
D. P 130,000
SOLUTION:
Likelihood occurrence Estimated cash flows Provision
Major defects 4% 2,000,000 80,000
Minor defects 10% 500,000 50,000
No defects 86% 0 0
Total provisions 130,000
MCQ PROBLEM 5
At December 31, 2020, you are contacted by the chief accountant of Exotic Corporation to audit its financial
statements for the current year, and he provided you the following information:
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
Advances received from customers on purchase orders 64,000
Accrued interest on bonds payable 360,000
Banco de Oro Checking Account - Overdraft 90,000
Cash dividends payable 80,000
Convertible bonds, due January 31, 2022 1,000,000
Dividends in arrears on preferred stock, not yet declared 200,000
Deposit on containers 50,000
Deficiency VAT assessment being contested 500,000
Deferred revenue 87,000
Employees’ income tax withheld 20,000
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
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Notes Payable arising from:
Purchase of goods 304,000
5 year-bank loans, on which marketable securities valued at P 600,000
have been pledged as security, P400,000 due on June 30, 2021;
P100,000 due on Dec. 31, 2021 500,000
Advances by officers, due June 30, 2021 50,000
Notes receivable discounted 200,000
Ordinary shares warrants outstanding 120,000
Ordinary shares options outstanding 210,000
Philippine National Bank Savings Account 390,000
Reserve for general contingencies 400,000
Share Dividends Payable 100,000
Unused letters of credit 400,000
Additional information:
. The 2020 financial statements were issued on March 31, 2021.
. The P 400,000 note payable was replaced by an 18-month note for the same amount on March 1, 2021.
Exotic Corporation is also considering similar action on the P 100,000 note payable due on December 31,
2021.
. James Hanson, a former employee, filed a lawsuit on December 1, 2020 seeking P 200,000 for unlawful
dismissal. Exotic Corporation's attorneys believe that the suit is without merit. As of year-end, no court date
has been set.
. The Bureau of Internal Revenue assessed Exotic Corporation on January 15, 2021 an additional income tax
of P 300,000 for the 2018 tax year. Exotic's attorneys and tax accountants have stated that it is likely that
the BIR will agree to a P 200,000 settlement.
Based on the above and the result of your audit, answer the following questions:
Question 5:
What is the total current liabilities that would be reported in the statement of financial position as of December 31,
2020?
A. P 2,400,000
B. P 2,100,000
C. P 2,300,000
D. P 2,500,000
Question 6:
What is the total noncurrent liabilities that would be reported in the statement of financial position as of December
31, 2020?
A. P 3,400,000
B. P 3,000,000
C. P 2,900,000
D. P 3,300,000
Question 7:
What is the total liabilities that would be reported in the statement of financial position as of December 31, 2020?
A. P 5,800,000
B. P 5,000,000
C. P 5,400,000
D. P 5,200,000
SOLUTION:
LIABILITIES
Current Noncurrent
Accounts payable arising from purchase of goods
(P 170,000 + P 30,000) 200,000
Accounts receivable credit balances 40,000
Advances received from customers on purchase orders 64,000
Accrued interest on bonds payable 360,000
Banco de Oro Checking Account - Overdraft 90,000
Cash dividends payable 80,000
Convertible bonds, due January 31, 2022 1,000,000
Deposit on containers 50,000
Deferred revenue 87,000
Employees’ income tax withheld 20,000
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
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 100,000 1,900,000
Notes Payable arising from:
Purchase of goods 304,000
5 year-bank loans, on which marketable securities valued
at P 600,000 have been pledged as security, P400,000
due on June 30, 2021; P100,000 due on Dec. 31, 2021 500,000
Advances by officers, due June 30, 2021 50,000
Estimated Income Tax Payable (additional assessment) 200,000
Total 2,500,000 2,900,000
No. 5 No. 6
MCQ PROBLEM 6
The following information relates to Sonic Company’s obligations as of December 31, 2020. For each of the numbered items,
determine the amount if any, that should be reported as current liability in Sonic’s December 31, 2020 balance sheet.
Question no. 8:
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, 2020:
A. A Company – P224,000 merchandise shipped on December 31, 2020, FOB destination; received on
January 10, 2021.
B. B, Inc. – P192,000 merchandise shipped on December 26, 2020, FOB shipping point; received on
January 16, 2021.
C. C Super Services – P144,000 janitorial services for the three-month period ending January 31, 2021.
D. MERALCO – P67,200 electric bill covering the period December 16, 2020 to January 15, 2021.
On December 28, 2020, a supplier authorized Sonic to return goods billed at P160,000 and shipped on
December 20, 2020. The goods were returned by Sonic on December 28, 2020, but the P160,000 credit
memo was not received until January 6, 2021.
A. P 5,923,200
B. P 5,712,000
C. P 5,601,600
D. P 5,841,600
SOLUTION:
Accounts Payable, unadjusted balance 5,440,000
Adjustments:
Debit balance in suppliers' account 240,000
A Company - correctly not recorded in 2020 -
B, Inc. unrecorded purchases in 2020 192,000
C Super Services (P 192,000 x 2/3) 96,000
Meralco (P 67,200 x 1/2 month) 33,600
Purchase return - unrecorded in 2020 -160,000
Accounts Payable, adjusted balance 5,841,600
Question no. 9:
PAYROLL
Items related to Sonic’s payroll as of December 31, 2020 are:
A. P 776,000
B. P 992,000
C. P 832,000
D. P 912,000
SOLUTION:
Accrued salaries and wages 776,000
Add: Payroll deductions
Withholding Taxes Payable 56,000
SSS Contributions Payable 64,000
Philhealth Contributions Payable 16,000 136,000
Total current liabilities 912,000
Question no. 10:
LITIGATION
In May, 2020, Sonic became involved in a litigation. The suit is being contested, but Sonic’s lawyer believes it is
possible that Sonic 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.
A. Zero
B. P 2,000,000
C. P 3,000,000
D. P 2,500,000
SOLUTION:
It is only possible to be held liable for damages and not probably. This requires only disclosure.
SOLUTION:
B = 10% (NI - B - T)
B = 10% [P 9,600,000 - B - 30%(P 9,600,000 - B)]
B = 10% [P 9,600,000 - B - P 2,880,000 + 0.3B)]
B = P 960,000 - 0.10B - P 288,000 + 0.03B]
B = P 672,000 - 0.07B
B + 0.07B = P 672,000
1.07B = P 672,000
B = P 672,000 / 1.07
B = P 628,037
SOLUTION:
Liability, 12/31/2020
Current Noncurrent
Notes Payable, 10/1/2019 2,400,000
Less: First payment, 10/1/2020 800,000
Notes Payable, 10/1/2020, after first payment 1,600,000 800,000 800,000
Add: Interest payable during 2020
(P 1,600,000 x 18% x 3/12) 72,000
Total current liabilities, 12/31/2020 872,000
SOLUTION:
Estimated Liability for Purchase Commitment = (P 5.00 - P 4.40) x 320,000 units = P 192,000
Related Journal entry:
Loss on Purchase Commitment 192,000
Estimated Liability for Purchase Commitment 192,000
A. P 772,800
B. P 952,000
C. P 196,800
D. Zero
SOLUTION:
Answer is ZERO
The revised PAS 1 paragraph 56 states, "When an entity presents current and non ‑current assets, and current and
non‑current liabilities, as separate classifications in its statement of financial position, it shall not classify deferred
tax assets (liabilities) as current assets (liabilities).
A. Zero
B. P 1,504,000
C. P 96,000
D. P 512,000
SOLUTION:
Warranty Payable, January 1, 2020 416,000
Add: Warranty Expense fof 2020 1,504,000
Total 1,920,000
Less: Warranty claims honored in 2020
From year 2019 sales 416,000
From year 2020 sales 992,000 1,408,000
Warranty Payable, December 31, 2020 512,000
A. P 1,728,000
B. P 1,152,000
C. P 1,600,000
D. P 576,000
SOLUTION:
Premium cost 100
Less: Remittance by customers 30
Net Premium cost 70
Add: Distribution cost 20
Total premium cost 90
Multiply by estimated redemption at year end:
No. of packages of product sold 160,000
Multiply by expected redemption % 60%
Estimated no. of packages to be redeemed 96,000
Less: Number of coupons redeemed 64,000
Estim. Number of premiums no yet redeemed 32,000
Divide by required number of coupons 5 6,400
Estimated Premium Liability at 12/31/2020 576,000
Sonic’s accounting records show that as of December 31, 2020, P1,280,000 was due to Pa-Two-Boan Company for
advances made against P1,600,000 of trade accounts receivable assigned to the finance company with recourse.
Sonic’s accounting records show that as of December 31, 2020, P1,280,000 was due to Pa-Two-Boan Company for
advances made against P1,600,000 of trade accounts receivable assigned to the finance company with recourse.
A. Zero
B. P 1,600,000
C. P 320,000
D. P 1,280,000
SOLUTION:
The transaction involves assignment of accounts receivable, wherein the company obtained a loan using the
receivables as security. Accounts Receivable - assigned will be included in Trade and Other Receivables account,
while the related loan will be reported under the current liabilities.
. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion
of
A. Existence or occurrence
B Presentation and disclosure
C. Completeness
D. Valuation or allocation
. An auditor performs a test to determine whether all merchandise for which the client was billed was received.
The population for this test consists of all
A. Merchandise received
B. Vendor's invoices
C. Canceled checks
D. Receiving reports
. The primary audit test to determine if accounts payable are valued properly is
A. Confirmation of accounts payable
B. Vouching accounts payable to suporting documentation
C. As analytical procedure
D. Verification that accounts payable was reported as a current liability in the statement of financial position
.
Which of the following procedures is least likely to be performed before the statement of financial position date?
A. Observation of inventory
B. Testing of internal control over cash
C. Search for unrecorded liabilities
D. Confirmation of receivables
.
An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase order
was dated after receipt of goods. The purchasing agent had forgotten to issue purchase order. Also a
disbursement of P450 for materials did not have a receiving report. The assistant wanted to select additional
purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should
An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase order
was dated after receipt of goods. The purchasing agent had forgotten to issue purchase order. Also a
disbursement of P450 for materials did not have a receiving report. The assistant wanted to select additional
purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should
A. Agree with the assistant because the amount of the purchase order exception was considerably larger than
the receiving report exception
B. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that
the failure to fill out a report didn’t happen very often.
C. Disagree with the assistant because two problems have an equal risk of loss associated with them.
D. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with
it.
. When using confirmation to provide evidence about completeness assertion for accounts payable, the
appropriate population most likely is
A. Vendors with whom the entity has previously done business.
B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year end.
D. Invoices filed in the entity’s open invoice file.
. Which of the following is a substantive test that an auditor is most likely to perform to verify the existence and
valuation of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and
accounted for.
B. Receiving the client’s mail, unopened, for a reasonable period of time after year end
to search for unrecorded vendor’s invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving
reports.
D. Confirming accounts payable balances with known suppliers who have zero balances.
. Only one of the following four statements, which compare confirmation of accounts payable with suppliers and
confirmation of accounts receivable with debtors is false. The false statement is that
A. Confirmation of accounts receivable with debtors is a more widely accepted auditing procedures than is
confirmation of accounts payable with suppliers.
B. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in
the confirmation of accounts receivable.
C. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to
emphasize accounts with zero balances at the balance sheet date.
D. It is less likely that the confirmation request sent to the supplier will show the amount owed than that
request sent to the debtor will show the amount due.
. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a
purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the
A. Quantity
B. Quality
C. Price
D. Terms
. Which of the following audit procedures is least likely to detect an unrecorded liability?
A Analysis and recomputation of interest expense.
B. Analysis and recomputation of depreciation expense.
C. Mailing of standard bank confirmation forms.
D. Reading of the minutes of meetings of the board directors.
. Unrecorded liabilities are most likely to be found during the review of which of the following documents?
A. Unpaid bills
B. Shipping records
C. Bills of lading
D. Unmatched Sales Invoices
. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the
related payables apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine
whether they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and recorded cash
payments.
D. Reconciling vendors’ statement to the file of receiving reports to identify items received just prior to the
balance sheet date.
. In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor is most interested in
examining the purchase
A. Journa;
B. Requisitions
C. Orders
D. Invoices
. Which of the following procedures relating to the examination of accounts payable could the auditor delegate
entirely to the client’s employees?
A. Test footings in the accounts payable ledger
B. Reconcile unpaid invoices to vendors statements
C. Prepare a schedule of accounts payable
D. Mail confirmations for selected account balances
. An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is
to obtain evidence concerning management’s assertions about
A. Existence and occurrence
B. Presentation and disclosure
C. Completeness
D. Valuation or allocation
. An auditor’s program to audit long term debt should include steps that require
A. Examining bond trust indentures
B. Inspecting the accounts payable subsidiary ledger.
C. Investigating credits to the bond interest income account.
D. Verifying the existence of the bondholders.
. In an audit of bonds payable, an auditor expects the trust indenture to include the
A. Auditee’s debt-to-equity ratio at the time of issuance.
B. Effective yield of the bonds issued.
C. Subscription list.
D. Description of the collateral
. The auditor is most likely to verify accrued commissions payable in conjunction with the
A. Sales cutoff test
B Verification of contingent liabilities
C. Review of post balance sheet date disbursements
D. Examination of trade accounts payable
. Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store.
Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby
enabling hisrelative to buy at Judd’s wholesale prices. Jackson was probably able to accomplish this because of
Judd’s poor internalcontrol over
A. Purchase Orders
B. Purchase Requisitions
C. Cash Receipts
D. Perpetual inventory records
. To avoid potential errors and fraud a well-designed internal control in the accounts payable area should include a
separation of which of the following functions?
A. Cash disbursements and invoice verification
B. Invoice verification and merchandise ordering
C. Physical handling of merchandise received and preparation of receiving reports
D. Check signing and cancellation of payment documentation.
. Which of the following internal control procedures is effective in preventing duplicate payment of vendors'
invoices?
A. The invoices should be stamped, perforated or otherwise effectively cancelled before subsmission for
approval of the voucher.
B. Unused vocher forms should be prenumbered and accounted for.
C. Cancelled checks should be sent to person other than the cashier or accounting department personnel.
D. Properly authorized and approved vouchers with appropriate documentation should be the basis for check
preparation.
. Effective controls relevant to purchasing of raw materials should usually include all of the following except
A. Systematic reporting of product changes that will affect raw materials.
B. Determining the need for the raw materials prior to preparing the purchase order.
C Obtaining third-party written quality and quantity reports prior to payment for the raw materials.
D. Obtaining financial approval prior to making a commitment.
. Effective internal control over purchases generally can be achieved in a well-planned organizational structure
with a separate purchasing department that has
A. The responsibility of reviewing purchase orders issued by user departments.
B. The authority to make purchases of requisitioned materials and services.
C. A direct reporting responsibility to the controller of the organization.
D. The ability to prepare payment vouchers based on the information on a vendor's invoice.
. Hansel Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Hansel will
probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if
A. Partial payments to vendors are continuously made in the ordinary course of business.
B. It is difficult to reconcile vendors’ monthly statements.
C. Vendors’ requests for confirmation of receivables often go unanswered for several months until paid
invoices can be reviewed.
D. There are usually invoices in an unmatched invoice file.
. Which of the following most likely would approve the issuance of notes payable?
A. Controller.
B. Payroll.
C. Personnel.
D. Treasurer.
. The primary reason for preparing a reconciliation between interest bearing obligations outstanding during the
year and interest expense presented in the financial statements is to:
A. Evaluate internal control over securities.
B. Determine the validity of prepaid interest expense.
C. Ascertain the reasonableness of imputed interest.
D. Detect unrecorded liabilities.
. A client's procurement system ends with the assumption of a liability and the eventual payment of the liability.
Which of the following best describes the auditors' primary concern with respect to liabilities resulting from the
procurement system?
A. Accounts payable are not materially understated.
B. Authority to incur liabilities is restricted to one designated person.
C. Acquisition of materials is not made from the vendor or one group pf vendors.
D. Commitments for all purchases are made only after established competitive bidding procedures are
followed.
March 31. The following
October 1, 2024.
o amortize bond
2,400,000
management’s assertion
g documents?
Remarks
sset - Investment
nted a P 200,000
gearboxes. These
Urduja Company, early
hine Tool Company on
sition on credit of
d premiums – to attract
h peso spent on
FM radio. Dolores pays
d.
sound reproduction
arts for warranty work
chased during the year
l reporting purposes.
shown below:
Account Charged
Supplies on Hand
Prepaid Insurance
Utilities Expense
egal Expense
Medical Expenses
Manufacturing Costs
nterest Expense
Dividends Payable
e reversed effective
Supplies on Hand
Prepaid Insurance
Subscription Expense
Utilities Expense
egal Expense
Medical Expenses
Salaries and Wages
Manufacturing Costs
Repairs & Maintenance
nterest Expense
Dividends Payable
ctions for the year
he amount of P 180,000,
r 31, 2023. The office
uded in Accounts
uary 10, 2021, it was
of 9%. The note was
or bonuses due at
OURSELF)
statement of financial
t of P 1,500,000 were
against the common
se. Under the terms of
e parts that become
position as of December
of December 31, 2020?
IABILITIES
Total
5,400,000
No. 7
he numbered items,
ance sheet.
ry 31, 2021.
wyer believes it is
0 and P3,000,000, and
e of P772,800,
ELF)
management’s assertion
t of financial position
payable, the
procedures than is
the performance of a
the
g documents?
etermine whether the
et date to determine
ecorded cash
s most interested in
he auditor delegate
ccounts payable is
ELF)
ment of vendors'
e subsmission for
partment personnel.
be the basis for check
following except
anizational structure
procedures are
MULTIPLE CHOICE PROBLEMS - CURRENT LIABILITIES (DO-IT-YOURSELF)
MCQ PROBLEM 1
Gemini Corporation presented to you the analysis of its liabilities as of December 31, 2020:
Additional information:
A. The accounts payable is also net of post-dated checks of P 100,000 issued to supplier.
B. The deferred tax liability is based on temporary differences that will be reversed in 2021.
Question 1:
What is the total amount of current liabilities in the statement of financial position as of December 31, 2020?
A. P 10,800,000
B. P 11,150,000
C. P 11,550,000
D. P 14,750,000
MCQ PROBLEM 2
King Mark Company has a 10%, P 5,000,000 loan payable as of December 31, 2020 that is maturing on July 1, 2021.
Interest on loan is payable every July 1 and December 31.
On February 1, 2021, King Mark Company entered into a financing agreement with a bank to refinance the loan on a
long-term basis. Both parties are financially capable of honoring the agreement's provisions. King Mark's financial
statements were authorized to issue on March 10, 2021.
Question 2:
How much is presented as current liability in relation to the loan in King Mark's 2020 year-end statement of financial
position?
A. P 5,000,000
B. P 500,000
C. P 250,000
D. Zero
MCQ PROBLEM 3
The accounts payable balance of Giovanni Corporation as of December 31, 2020 was P 24,000,000 before any
adjustments as follows:
A. On December 29, 2020, Razzini Company, a supplier, authorized Giovanni Corporation to return for full
credit goods shipped and billed at P 600,000 on December 15, 2020. The returned goods were shipped by
Giovanni Corporation on December 31, 2020. On January 6, 2021, a credit memo of P 600,000 was
received and recorded.
On December 29, 2020, Razzini Company, a supplier, authorized Giovanni Corporation to return for full
credit goods shipped and billed at P 600,000 on December 15, 2020. The returned goods were shipped by
Giovanni Corporation on December 31, 2020. On January 6, 2021, a credit memo of P 600,000 was
received and recorded.
B. On December 16, 2020, goods shipped to Giovanni Corporation with an invoice cost of P 1,500,000 were
lost in transit. On January 16, 2021, Giovanni Corporation filed a P 1,500,000 claim against the common
carrier.
Question 3:
What should Giovanni Corporation report as accounts payable on December 31, 2020?
A. P 25,500,000
B P 24,900,000
C. P 23,400,000
D. P 22,500,000
MCQ PROBLEM 4
In connection with the audit of liabilities, you were able to onbtain the following information:
Luxury Company is a car manufacturer who gives warranties to its clients at the time of purchase. Under the terms of
sale contract, Luxury Company undertakes a repair manufacturing defects or replace defective parts that become
apparent within 5 years from the date of sale.
Based onprevious experience, it is probable that there will be some claims under warranties Estimated cash flows
related to the cars covered by warranty as of the reporting period are as follows:
Question 4:
How much should Luxury Company recognize as warranty provision?
A. None
B. P 50,000
C. P 80,000
D. P 130,000
MCQ PROBLEM 5
At December 31, 2020, you are contacted by the chief accountant of Exotic Corporation to audit its financial
statements for the current year, and he provided you the following information:
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
Advances received from customers on purchase orders 64,000
Accrued interest on bonds payable 360,000
Banco de Oro Checking Account - Overdraft 90,000
Cash dividends payable 80,000
Convertible bonds, due January 31, 2022 1,000,000
Dividends in arrears on preferred stock, not yet declared 200,000
Deposit on containers 50,000
Deficiency VAT assessment being contested 500,000
Deferred revenue 87,000
Employees’ income tax withheld 20,000
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
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Notes Payable arising from:
Purchase of goods 304,000
5 year-bank loans, on which marketable securities valued at P 600,000
have been pledged as security, P400,000 due on June 30, 2021;
P100,000 due on Dec. 31, 2021 500,000
Advances by officers, due June 30, 2021 50,000
Notes receivable discounted 200,000
Ordinary shares warrants outstanding 120,000
Ordinary shares options outstanding 210,000
Philippine National Bank Savings Account 390,000
Reserve for general contingencies 400,000
Share Dividends Payable 100,000
Unused letters of credit 400,000
Additional information:
. The 2020 financial statements were issued on March 31, 2021.
. The P 400,000 note payable was replaced by an 18-month note for the same amount on March 1, 2021.
Exotic Corporation is also considering similar action on the P 100,000 note payable due on December 31,
2021.
. James Hanson, a former employee, filed a lawsuit on December 1, 2020 seeking P 200,000 for unlawful
dismissal. Exotic Corporation's attorneys believe that the suit is without merit. As of year-end, no court date
has been set.
. The Bureau of Internal Revenue assessed Exotic Corporation on January 15, 2021 an additional income tax
of P 300,000 for the 2018 tax year. Exotic's attorneys and tax accountants have stated that it is likely that
the BIR will agree to a P 200,000 settlement.
Based on the above and the result of your audit, answer the following questions:
Question 5:
What is the total current liabilities that would be reported in the statement of financial position as of December 31,
2020?
A. P 2,400,000
B. P 2,100,000
C. P 2,300,000
D. P 2,500,000
Question 6:
What is the total noncurrent liabilities that would be reported in the statement of financial position as of December
31, 2020?
A. P 3,400,000
B. P 3,000,000
C. P 2,900,000
D. P 3,300,000
Question 7:
What is the total liabilities that would be reported in the statement of financial position as of December 31, 2020?
What is the total liabilities that would be reported in the statement of financial position as of December 31, 2020?
A. P 5,800,000
B. P 5,000,000
C. P 5,400,000
D. P 5,200,000
MCQ PROBLEM 6
The following information relates to Sonic Company’s obligations as of December 31, 2020. For each of the numbered items,
determine the amount if any, that should be reported as current liability in Sonic’s December 31, 2020 balance sheet.
Question no. 8:
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, 2020:
A. A Company – P224,000 merchandise shipped on December 31, 2020, FOB destination; received on
January 10, 2021.
B. B, Inc. – P192,000 merchandise shipped on December 26, 2020, FOB shipping point; received on
January 16, 2021.
C. C Super Services – P144,000 janitorial services for the three-month period ending January 31, 2021.
D. MERALCO – P67,200 electric bill covering the period December 16, 2020 to January 15, 2021.
On December 28, 2020, a supplier authorized Sonic to return goods billed at P160,000 and shipped on
December 20, 2020. The goods were returned by Sonic on December 28, 2020, but the P160,000 credit
memo was not received until January 6, 2021.
A. P 5,923,200
B. P 5,712,000
C. P 5,601,600
D. P 5,841,600
Question no. 9:
PAYROLL
Items related to Sonic’s payroll as of December 31, 2020 are:
A. P 776,000
B. P 992,000
C. P 832,000
D. P 912,000
A. Zero
B. P 1,504,000
C. P 96,000
D. P 512,000
A. P 1,728,000
B. P 1,152,000
C. P 1,600,000
D. P 576,000
Sonic’s accounting records show that as of December 31, 2020, P1,280,000 was due to Pa-Two-Boan Company for
advances made against P1,600,000 of trade accounts receivable assigned to the finance company with recourse.
A. Zero
B. P 1,600,000
C. P 320,000
D. P 1,280,000
OURSELF)
statement of financial
position as of December
he numbered items,
ance sheet.
ry 31, 2021.
wyer believes it is
0 and P3,000,000, and
e of P772,800,
ranty liability on sales
The warranty costs on
rrent 2020 fiscal year
. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion
of
A. Existence or occurrence
B Presentation and disclosure
C. Completeness
D. Valuation or allocation
. An auditor performs a test to determine whether all merchandise for which the client was billed was received.
The population for this test consists of all
A. Merchandise received
B. Vendor's invoices
C. Canceled checks
D. Receiving reports
. The primary audit test to determine if accounts payable are valued properly is
A. Confirmation of accounts payable
B. Vouching accounts payable to suporting documentation
C. As analytical procedure
D. Verification that accounts payable was reported as a current liability in the statement of financial position
.
Which of the following procedures is least likely to be performed before the statement of financial position date?
A. Observation of inventory
B. Testing of internal control over cash
C. Search for unrecorded liabilities
D. Confirmation of receivables
.
An audit assistant found a purchase order for a regular supplier in the amount of P5,500. The purchase order
was dated after receipt of goods. The purchasing agent had forgotten to issue purchase order. Also a
disbursement of P450 for materials did not have a receiving report. The assistant wanted to select additional
purchase orders for investigation but was unconcerned about lack of receiving report. The audit director should
A. Agree with the assistant because the amount of the purchase order exception was considerably larger than
the receiving report exception
B. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that
the failure to fill out a report didn’t happen very often.
C. Disagree with the assistant because two problems have an equal risk of loss associated with them.
D. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with
it.
. When using confirmation to provide evidence about completeness assertion for accounts payable, the
appropriate population most likely is
A. Vendors with whom the entity has previously done business.
B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year end.
D. Invoices filed in the entity’s open invoice file.
. Which of the following is a substantive test that an auditor is most likely to perform to verify the existence and
valuation of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and
accounted for.
B. Receiving the client’s mail, unopened, for a reasonable period of time after year end
to search for unrecorded vendor’s invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving
reports.
D. Confirming accounts payable balances with known suppliers who have zero balances.
. Only one of the following four statements, which compare confirmation of accounts payable with suppliers and
confirmation of accounts receivable with debtors is false. The false statement is that
A. Confirmation of accounts receivable with debtors is a more widely accepted auditing procedures than is
confirmation of accounts payable with suppliers.
B. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in
the confirmation of accounts receivable.
C. As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to
emphasize accounts with zero balances at the balance sheet date.
D. It is less likely that the confirmation request sent to the supplier will show the amount owed than that
request sent to the debtor will show the amount due.
. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a
purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the
A. Quantity
B. Quality
C. Price
D. Terms
. Which of the following audit procedures is least likely to detect an unrecorded liability?
A Analysis and recomputation of interest expense.
B. Analysis and recomputation of depreciation expense.
C. Mailing of standard bank confirmation forms.
D. Reading of the minutes of meetings of the board directors.
. Unrecorded liabilities are most likely to be found during the review of which of the following documents?
A. Unpaid bills
B. Shipping records
C. Bills of lading
D. Unmatched Sales Invoices
. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the
related payables apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine
whether they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and recorded cash
payments.
D. Reconciling vendors’ statement to the file of receiving reports to identify items received just prior to the
balance sheet date.
. In verifying debits to perpetual inventory records of a nonmanufacturing firm, the auditor is most interested in
examining the purchase
A. Journa;
B. Requisitions
C. Orders
D. Invoices
. Which of the following procedures relating to the examination of accounts payable could the auditor delegate
entirely to the client’s employees?
A. Test footings in the accounts payable ledger
B. Reconcile unpaid invoices to vendors statements
C. Prepare a schedule of accounts payable
D. Mail confirmations for selected account balances
. An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is
to obtain evidence concerning management’s assertions about
A. Existence and occurrence
B. Presentation and disclosure
C. Completeness
D. Valuation or allocation
. An auditor’s program to audit long term debt should include steps that require
A. Examining bond trust indentures
B. Inspecting the accounts payable subsidiary ledger.
C. Investigating credits to the bond interest income account.
D. Verifying the existence of the bondholders.
. In an audit of bonds payable, an auditor expects the trust indenture to include the
A. Auditee’s debt-to-equity ratio at the time of issuance.
B. Effective yield of the bonds issued.
C. Subscription list.
D. Description of the collateral
. The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts
payable because
A. Accrued liabilities usually pertain to services of a continuing nature while accounts payable are the result of
completed transactions
B Accrued liability balances are less material than accounts payable balances.
C. Evidence supporting accrued liabilities in nonexistence while evidence supporting accounts payable is
readily available.
D. Accrued liabilities at year-end will become accounts payable during the following year.
. The auditor is most likely to verify accrued commissions payable in conjunction with the
A. Sales cutoff test
B Verification of contingent liabilities
C. Review of post balance sheet date disbursements
D. Examination of trade accounts payable
ELF)
management’s assertion
t of financial position
payable, the
procedures than is
the performance of a
the
g documents?
et date to determine
ecorded cash
s most interested in
he auditor delegate
verification of accounts
ccounts payable is
MULTIPLE CHOICE PROBLEMS - THEORY (DO-IT-YOURSELF)
Internal Control for Current Liabilities
. Jackson, the purchasing agent of Judd Hardware Wholesalers, has a relative who owns a retail hardware store.
Jackson arranged for hardware to be delivered by manufacturers to the retail store on a COD basis thereby
enabling hisrelative to buy at Judd’s wholesale prices. Jackson was probably able to accomplish this because of
Judd’s poor internalcontrol over
A. Purchase Orders
B. Purchase Requisitions
C. Cash Receipts
D. Perpetual inventory records
. To avoid potential errors and fraud a well-designed internal control in the accounts payable area should include a
separation of which of the following functions?
A. Cash disbursements and invoice verification
B. Invoice verification and merchandise ordering
C. Physical handling of merchandise received and preparation of receiving reports
D. Check signing and cancellation of payment documentation.
. Which of the following internal control procedures is effective in preventing duplicate payment of vendors'
invoices?
A. The invoices should be stamped, perforated or otherwise effectively cancelled before subsmission for
approval of the voucher.
B. Unused vocher forms should be prenumbered and accounted for.
C. Cancelled checks should be sent to person other than the cashier or accounting department personnel.
D. Properly authorized and approved vouchers with appropriate documentation should be the basis for check
preparation.
. Effective controls relevant to purchasing of raw materials should usually include all of the following except
A. Systematic reporting of product changes that will affect raw materials.
B. Determining the need for the raw materials prior to preparing the purchase order.
C Obtaining third-party written quality and quantity reports prior to payment for the raw materials.
D. Obtaining financial approval prior to making a commitment.
. Effective internal control over purchases generally can be achieved in a well-planned organizational structure
with a separate purchasing department that has
A. The responsibility of reviewing purchase orders issued by user departments.
B. The authority to make purchases of requisitioned materials and services.
C. A direct reporting responsibility to the controller of the organization.
D. The ability to prepare payment vouchers based on the information on a vendor's invoice.
. Hansel Corporation uses a voucher register and does not record invoices in a subsidiary ledger. Hansel will
probably benefit most from the additional cost of maintaining an accounts payable subsidiary ledger if
A. Partial payments to vendors are continuously made in the ordinary course of business.
B. It is difficult to reconcile vendors’ monthly statements.
C. Vendors’ requests for confirmation of receivables often go unanswered for several months until paid
invoices can be reviewed.
Vendors’ requests for confirmation of receivables often go unanswered for several months until paid
invoices can be reviewed.
D. There are usually invoices in an unmatched invoice file.
. Which of the following most likely would approve the issuance of notes payable?
A. Controller.
B. Payroll.
C. Personnel.
D. Treasurer.
. The primary reason for preparing a reconciliation between interest bearing obligations outstanding during the
year and interest expense presented in the financial statements is to:
A. Evaluate internal control over securities.
B. Determine the validity of prepaid interest expense.
C. Ascertain the reasonableness of imputed interest.
D. Detect unrecorded liabilities.
. A client's procurement system ends with the assumption of a liability and the eventual payment of the liability.
Which of the following best describes the auditors' primary concern with respect to liabilities resulting from the
procurement system?
A. Accounts payable are not materially understated.
B. Authority to incur liabilities is restricted to one designated person.
C. Acquisition of materials is not made from the vendor or one group pf vendors.
D. Commitments for all purchases are made only after established competitive bidding procedures are
followed.
ELF)
ment of vendors'
e subsmission for
partment personnel.
be the basis for check
following except
anizational structure
procedures are