COLLEGE OF ACCOUNTANCY

Prepared by: Mr. Gerber Mendoza

Subject: Review on Auditing Problem

Module Title: AUDIT OF LIABILITIES

Description of the Module: This module contains a range of problem solving

regarding audit of laibilities for students especially the 5 th year BSA. The problem
solving includes answered problems with individual activity to be submitted to instructor.

Objectives:
The Students must be able to apply the following assertions of this audit
Existence: Recorded liabilities exist

1. Obtain from the client a listing of accounts and notes payable as of year-end and
reconcile to the general ledger
2. Vouch recorded liabilities to the suppliers' statements.
3. Confirm recorded liabilities directly with suppliers and creditors. Investigate
differences in liabilities reported in the confirmations with the recorded book
amounts.
4. Examine bank confirmations for loans.
Completeness: All liabilities are recorded

5. Perform purchases cutoff examination.

6. Test for unrecorded liabilities.
7. Perform analytical procedures.
Rights and obligations: Liabilities are owed by the entity

8. Confirm recorded liabilities directly with suppliers and creditors.

9. Review documentation in client's files.
10. Examine subsequent payments to credits.
Valuation and allocation: Liabilities are accordance with GAAP

11. Vouch accounts payable schedule.

12. Test computation of accrued or prepaid interest.
Presentation and disclosure: Liabilities are classified and disclosed in accordance with
GAAP

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Review financial statements and perform analytical procedures to determine whether
accounts are classified and disclosed in the financial statements in accordance with
GAAP.

Title of the Preparatio Task Time Assessment

Lesson n Time Frame/Date of
Submission
on-line
AUDIT OF 2-3hours For Groupings: March 27, 2020 There’s a
LIABILITIES Make excel corresponding
presentations grades for the
for the solution of individual activity
each questions

For Individual:
Answer the
individual Activity
portion of the
problem solving
located at the end
of module. Your
answer here must
be written on
yellow paper to
be submitted
using online
facilities i.e
Emails,
Messenger

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PROBLEM NO.1
PUKPOK, INC. is a manufacturer and retailer of household furniture. Your audit of the
company's financial statements for the year ended December 31, 2018, discloses the
following debt obligations of the company at the end of its reporting period. Pukpok's
financial statements are authorized for issuance on March 6, 2019.
1. A P200,000 short-term obligation due on March 1, 2019. Its maturity could be
extended to March 1, 2021, provided Pukpok agrees to provide additional
collateral. On February 12, 2019, an agreement is reached to extend the loan's
maturity to March 1, 2021.

2. A short-term obligation of P4,200,000 in the form of notes payable due February

5, 2019. The company issued 80,000 ordinary shares for P40 per share on
January 25, 2019. The proceeds from the issuance, plus P1,000,000 cash, were
used to fully settle the debt on February 5, 2019.
3. A long-term obligation of P1,500,000 due on December 1, 2028. On November
10, 2018, Pukpok breaches a covenant on its debt obligation and the loan
becomes payable on demand. An agreement is reached to provide a waiver of
the breach on January 11, 2019.
4. A long-term obligation of P4,000,000. The loan is maturing over 8 years in the
amount of P500,000 per year. The loan is dated September 1, 2018, and the first
maturity date is September 1, 2019.
5. A debt obligation of P600,000 maturing on December 31, 2021. The debt is
callable on demand by the lender at any time.
Questions:

1. What amount of current liabilities should be reported on the December 31, 2018,
statement of financial position?
A. P7,000,000
B. P7,500,000
C. P6,400,000
D. P10,000,000
2. What amount of noncurrent liabilities should be reported on the December 31,
2018, statement of financial position?
A. P4,000,000
B. P3,500,000
C. P4,100,000
D. P 0

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PROBLEM NO.2
In the audit process, the following data were obtained from the books of the ZUMBA
COMPANY which uses a voucher system. All invoices are subject to terms 2/10, n/30
and are entered net with the discount entered in Purchase Discounts column of the
voucher register.
The accountant in charge of the books went on leave to attend to his family based in
New Jersey. A fresh accountancy graduate has been assigned to record the
transactions. At year-end, the substitute accountant finds that the unpaid vouchers do
not agree with the Vouchers Payable control account. You are called to adjust the
matter.
A schedule of unpaid vouchers as of December 31, 2018, all of which are net of
discount, is presented to you.
Date Voucher No. Supplier Amount
Nov 27 797 Donita Supply Co. P78,400
Dec 2 821 Golden Distributors 19,600
11 829 Panutsa Sales 44,100
20 836 Mukasim Dealers 17,150
21 842 Boom Merchandising 22,050
22 856 Holen Mercantile 80,850
31 865 Balentong Traders 78,400
P340,550
Vouchers Payable (Control account)
Cash disbursements P 1,309,500 Purchases journal P1,645,000
Purchase returns journal 36,750*
* Voucher Nos. 821 and 836 canceled as goods were returned in December.
Based on the above and the result of your audit, compute for the following as of
December 31, 2018:

1. Adjusted balance of Vouchers Payable

A. P310,000
B. P306,750
C. P303,800
D. P344 250
2. Purchase discounts lost on unpaid vouchers
A. P6,200
B. P2,950
C. P3,700
D. P 0
3. Purchase discounts lost on paid vouchers
A. P28,750
B. P8,000
C. P5,050
D. P41,800

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PROBLEM NO.3
LAPAYAT CORPORATION, a client, requests that you compute the appropriate balance
of its estimated liability for product warranty account for a statement as of June 30,
2018.
Lapayat Corporation manufactures television components and sells them with a 6-
month warranty under which defective components will be replaced without charge. On
December 31, 2017, Estimated Liability for Product warranty had a balance of
P620,000. By June 30, 2018, this balance had been reduced to P120,400 by debits for
estimated net cost of components returned that had been sold in 2017.
The corporation started out in 2018 expecting 7% of the peso volume of sales to be
returned. However, due to the introduction of new models during the year, this estimated
percentage of returns was increased to 10% on May 1. It is assumed that no
components sold during a given month are returned in that month. Each component is
stamped with a date at time of sale so that the warranty may be properly administered.
The following table of percentages indicates the likely pattern of sales returns during the
6-month period of the warranty, starting with the month following the sale of
components.
Month Following Sale Percentage of Total
Returns Expected
First 30%
Second 20
Third 20
Fourth through sixth-10% each month 30
100%
Gross sales of components were as follows for the first six months of 2018:
Month Amount Month Amount
January P4,200,000 April P3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 1,900,000
The corporation's warranty also covers the payment of freight cost on defective
components returned and on the new components sent out as replacements. This
freight cost runs 2 approximately 5% of the sales price of the components returned. The
manufacturing cost of the component is roughly 70% of the sales price, and the salvage
value of returned components averages 10% of their sales price. Returned components
on hand at December 31, 2017, were thus valued in inventory at 10% of their original
sales price.
Based on the given information, determine the following:

1. Total estimated returns from the sales made during the first 6 months of 2018
A. P1,481,500
B. P1,651,000
C. P1,424,500
D. P1,553,500

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 2. Required adjustment to liability account
A. P301,353 debit
B. P301,353 credit
C. P421,753 debit
D. P421,753 credit

PROBLEM NO.4

OMEGA COMPANY sells its products in expensive, reusable containers. The customer
is charged a deposit for each container delivered and receives a refund for each
container returned within two years after the year of delivery. Omega accounts for the
containers not returned within the time limit as being sold at the deposit amount.
Information for 2017 is as follows:

Containers held by customers at

December 31, 2016,
from deliveries in: 2015 85,000
2016 240,000 325,000
Containers delivered in 2017 430,000
Containers returned in 2017
from deliveries in: 2015 57,500
2016 140,000
2017 157,000 354,500

1.How much revenue from container sales should be recognized for 2017?
A. P127,500 B. P267,500 C. P27,500 D. P85,000

2.What is the total amount of Omega Company’s liability for returnable containers at
December 31, 2017?
A. P373,000 B. P400,500 C. P267,500 D. P430,000

PROBLEM NO. 5

Rocks Corp. is asset rich but cash poor. In an attempt to alleviate its liquidity
problems, it entered into an agreement on January 1, 2018 to sell its processing plant to
Ahjussi Corp. for P467,100. At the date of sale, the plant had a carrying amount of
P400,000 and a future useful life of five years. Ahjussi Corp. immediately leased the
processing plant back to Rock Corp. The terms of the lease agreement were:
Lease term 3 years
Economic life of plant 5 years
Annual rental payment, in arrears (commencing 31 December 2018) P165,000
Residual value of plant at end of lease term P90,000
Residual value guaranteed by Rocks Corp. P60,000
Interest rate implicit in the lease ?

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The lease is cancellable, but only with the permission of the lessor. At the end of the
lease term, the plant is to be returned to Ahjussi Corp. In setting up the lease agreement
Ahjussi Corp. incurred P9,414 of initial direct costs. The annual rental payment includes
P15,000 to reimburse the lessor for maintenance costs incurred on behalf of the lessee.

QUESTIONS:
Based on the above and the result of your audit, answer the following: (Round off
present value factors to four decimal places)
1. The interest income to year ended 31 December 2018 is
A. P28,591
B. P27,080
C. P27,644
D. P28,026
2. The carrying amount of the finance lease receivable to be reported by the lessor
as of 31 December 2018 is
A. P338,384
B. P328,406
C. P355,105
D. P345, 126
3. The total lease-related expenses to be recognized by the lessee for the year
ended 31 December 2018 is
A. P172,522
B. P157,522
C. P162,522
D. P120,345
4. The amount to be reported by the lessee under current liabilities as liability under
finance lease as of 31 December 2018 is
A. P122,920
B. P198,110
C. P128,694
D. P130,296

PROBLEM NO. 6

Accounting for Noninterest-bearing Note (Payable in Installments)

OHRID COMPANY purchased machinery on December 31, 2018. paying P80,000 down
and agreeing to pay the balance in four equal installments of P60,000 payable each
December 31 Implicit in the purchase price is an assumed interest of 12%
The following data are abstracted from the present value tables:
Present value of 1 at 12% for 4 periods 0.63552
Present value of an ordinary annuity of 1 at 12% for 4 periods 3.03735

1. What is the cost of the machinery purchased on December 31, 2017?

A. P233,083
B. P320,000
C. P262,241
D. P290,842
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2. How much interest expense should be reported in Ohrid's income statement for the
year ended December 31, 2018?
A. P38,131
B. P21,869
C. P17,293
D. P42,707
3. What is the carrying value of the note at December 31, 2019?
A. P120,000
B. P144,110
C. P99,310
D. P101,403

PROBLEM NO. 7

Accounting for Noninterest-bearing Note

On December 31, 2017, BAIKAL COMPANY acquired a piece equipment from Seller
Company by issuing a P1,200,000 note payable in full on December 31, 2021. Baikal's
credit rating permits it to borrow funds from its several lines of credit at 10%. The
equipment is expected to have a 5-year life and a P150,000 salvage value. The present
value of 1 at 10% for 4 periods is 0.68301.
1. What is the equipment's book value on December 31, 2019?
A. P551,767
B. P630,000
C. P491,767
D. P341,767

2. What is the carrying value of the note at December 31, 2019?

A. P1,090,903
B. P991,730
C. P1,200,000
D. P819,612

INDIVIDUAL ACTIVITY
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 PROBLEM A
FEEL NA FEEL, INC. has been producing quality appliances for more than two
decades. The company's fiscal year runs from April 1 to March 31. The following
information relates to the obligations of Feel Na Feel as of March 31, 2018.

BONDS PAYABLE
Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2016. The prevailing market
rate of interest for these bonds was 12% on the date of issue. The bonds will mature on
July 1, 2026.
Interest is paid semiannually on July 1 and January 1. Fee! Na Feel uses the effective
interest rate method to amortize bond premium or discount.

NOTES PAYABLE
Feel Na Feel has signed several long-term notes with financial institutions. The
maturities of these notes are given in the schedule below. The total unpaid interest for
all of these notes amounts to P600,000 on March 31, 2018.
Due Date Amount Due
April 1, 2018 P 400,000
July 1, 2018 600,000
October 1, 2018 300,000
January 1, 2019 300,000
April 1, 2019 - March 31, 2020 1,200,000
April 1, 2020 - March 31, 2021 1,000,000
April 1, 2021 - March 31, 2022 1,400,000
April 1, 2022 - March 31, 2023 800,000
April 1, 2023 - March 31, 2024 1,000,000
P7,000,000

ESTIMATED WARRANTIES
Feel na Feel has a one-year product warranty on some selected items in its product
line. The estimated warranty liability on sales made during the 2016-2017 fiscal year
and still outstanding as of March 31, 2017 amounted to P180,000. The warranty costs
on sales made from April 1, 2017 as of March 31, 2018 amount, are estimated at
P520,000. The actual warranty costs incurred during the current 2017-2018 fiscal year
are as follows:

Warranty claims honored on 2016-2017 sales P180,000

Warranty claims honored on 2017-2018 sales 178,000
Total warranty claims honored P358,000

OTHER INFORMATION
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1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account
amount to P740,000 as of March 31, 2018.

2. PAYROLL RELATED ITEMS

Accrued salaries and wages P 300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000

3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31,
2018.

4. DIVIDENDS

On March 15, 2018, Feel Na Feel's board of directors declared a cash dividend
of P0.20 per common share and a 10% ordinary stock dividend. Both dividends
were to be distributed on April 12, 2018, to the ordinary shareholders of record at
the close of business on March 31, 2018. Data regarding Feel Na Feel ordinary
shares are as follows:
Par value P 5.00 per share
Number of shares issued and 6,000,000 shares
outstanding

Market values of ordinary shares:

March 15, 2018 P22.00 per share
March 31, 2018 21.50 per share
April 12, 2018 22.50 per share

1. How much was received by Feel na Feel from the bonds issued on July
1, 2016?
2. On March 31, 2018, Feel na Feel's statement of financial position would
report total current liabilities of
3. On March 31, 2018, Feel na Feel's staternent of financial position would
report total noncurrent liabilities of

PROBLEM B

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Your firm has been engaged to examine the financial statements of LOL Corporation for
the year 2018. The bookkeeper who maintains the financial records has prepared all the
unaudited financial statements for the corporation. The client provides you with the
information below.
LOL Corporation
Statement of Financial Position
December 31, 2018
Assets Liabilities
Current assets P1,881,100 Current liabilities P 962,400
Other assets 5,171,400 Long-term liabilities 1,439,500
Capital 4,650,600
P7,052,500 P7,052.500
 An analysis of current assets discloses the following:
Cash (restricted in the amount of P400,000 for
plant expansion) P571,000
Investment in land 185,000
Accounts receivable less allowance of P30,000 480,000
Inventories 645,100

P1,881,100
 Other assets include:
Prepaid expenses P47,400
Plant and equipment less accumulated
depreciation of P1,430,000 4,130,000
Cash surrender value of life insurance policy 84,000
Unamortized bond discount 49,500
Notes receivable (short term) 162,300
Goodwill 252,000
Land 446,200
P5,171,400
 Current liabilities include:
Accounts payable P510,000
Notes payable (due 2020) 157,400
Income tax payable 145,000
Share premium reserve 150,000
P962,400
 Long-term liabilities include:
Unearned revenue 489,500
Dividends payable 200,000
8% bonds payable (due May 1, 2023) 750,000
P1,439,500

 Capital includes:

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 Retained earnings P2,810,600
Share capital, par value P10; authorized
200,0000 shares, 184,000 shares issued 1,840,000
P4,650.600
The supplementary information below is also provided.
a. On May 1, 2018, the company issued at 93.4, P750,000 of bonds to finance plant
expansion. The long term bond agreement provided for the annual payment of
interest every May 1. The existing plant was pledged as security for the loan. Use
straight-line method for discount amortization.
b. The bookkeeper made the following mistakes:
1. In 2016, the ending inventory was overstated by P183,000. The ending
inventories for 2017 and 2018 were correctly computed.
2. In 2018, accrued wages in the amount of P275,000 were omitted from the
balance sheet and these expenses were not charged on the income
statement.
3. In 2018, a gain of P175,000 (net of tax) on the sale of certain plant assets
was credited directly to retained earnings.
c. You learned on January 28, 2019, prior to completion of the audit, of heavy
damage because recent fire to one of the entity's two plants; the loss will not be
reimbursed by insurance. The plant has a carrying amount of P1,200,000 on the
date of fire.
QUESTIONS:

Based on the above and the result of the audit, answer the following:
1. The adjusted current assets as of December 31, 2018 is
2. The adjusted current liabilities as of December 31, 2018 is
3. The adjusted noncurrent liabilities as of December 31, 2018 is
4. The adjusted equity as of December 31, 2018 is
5. When a subsequent event provides evidence about conditions that existed
at the balance sheet date, the auditor should do which of the following?
A. Assign a specialist.
B. Ensure that the financial statements are adjusted to reflect the
information, including any necessary footnote disclosures.
C. Shop for an opinion that fits the desired type of event.
D. Provide management with a new engagement letter to document the
terms of the revised arrangement.

PROBLEM C

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The following data were obtained from the initial audit of :
15%, 10-year, Bonds Payable, dated January 1, 2017
Debit Credit Balance
Cash proceeds from issue on January 1, P1,172,044 P1,172,044
2017, of 1,000, P1,000 bonds. The
market rate of interest on the date of
issue was 12%.
Bond Interest Expense
Cash paid, 1/2/18 P 75,000 75,000
Cash paid, 7/1/18 75,000 150,000
Accrual, 12/31/18 75,000 225,000
Accrued Interest on Bonds
Balance, 1/1/18 P 75,000 75,000
Accrual, 12/31/18 75,000 150,000
Treasury Bonds
Redemption price and interest to date on P265,000 P265,000
200 bonds permanently retired on
12/31/18
Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2018

2. Loss on Bond Redemption
3. Accrued Interest on Bonds at December 31, 2018

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