Quiz 1 Audit of Liabilities

Your audit of Honduras Inc.’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. Honduras’ financial
statements are authorized for issuance on March 6, 2019.

A. A ₱150,000 short-term obligation due on March 1, 2019. Its maturity could be extended to
March 1, 2021, provided Honduras agrees to provide additional collateral. On February 12,
2019, an agreement is reached to extend the loan’s maturity to March 1, 2021.
B. A short-term obligation of ₱3,600,000 in the form of notes payable due February 5, 2019.
The company issued 75,000 ordinary shares for ₱36 per share on January 25, 2019. The
proceeds from the issuance, plus ₱900,000 cash, were used to fully settle the debt on
February 5, 2019.
C. A long-term obligation of ₱2,500,000 due December 1, 2028. On November 10, 2018,
Honduras 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 December 11, 2018.
D. A long-term obligation of ₱4,000,000. The loan is maturing over 4 years in the amount of
₱1,000,000 per year. The loan is dated September 1, 2018, and the first maturity date is
September 1, 2019.
E. A debt obligation of ₱1,000,000 maturing on December 31, 2021. The debt is callable on
demand by the lender at any time.

1. What amount of current liabilities should be reported on the December 31, 2018 statement of
financial position?
a. 8,250,000
b. 5,750,000
c. 4,750,000
d. 3,750,000

a) is a current liability because the refinancing happened after the reporting date and the condition to
extend the maturity is not unconditional

b) is also current because the extinguishment of liability happened after the balance sheet date

c) is non-current because the breach has been waived before the balance sheet date

d) is partly current for 1,000,000 and non-current for 3,000,000. 1,000,000 is current because it is
payable on September 2013, which is within 2 months after December 2012. The rest is payable after
December 2013, thus non-current

e) is current because the payment of this liability may be demanded at anytime during the term

2. What amount of noncurrent liabilities should be reported on the December 31, 2018 statement
of financial position?
 a. 5,500,000
b. 3,000,000
c. 6,500,000
d. 7,500,000

Noncurrent liabilities, also known as long-term liabilities, are obligations listed on the balance

sheet not due for more than a year.

The key concept here is the provision of IAS 1, which states that a company should classify its liabilities
as current if the entity has no unconditional right to defer payment for at least 12 months from
reporting date. This also follows the concept that liabilities maturing within 12 months from reporting
date would be considered as current; and the rest would be considered as noncurrent.

Keep in mind that our reporting date (year-end) is December 31, 2012.

a. 150,000 CURRENT - the agreement to extend maturity was met only after year-end. as of reporting
date (December 31, 2012) the liability is still due on March 2013 (I think there is a typo here; the
reference says 2012. but regardless, it is still current), hence current

b. 3,600,000 CURRENT - the settlement only happened after year-end (February 5, 2013). as of year-end
the liability is payable within 12 months, hence current.

c. 2,500,000 NONCURRENT - initially the liability is classified as noncurrent. due to the breach of

covenant, the liability became payable on demand, which renders it current. But since the breach was
resolved within the year, the classification reverted to noncurrent. as of year-end the liability will be
considered noncurrent since there was a waiver of the breach (meaning there is a waiver of the payable
on demand action)

d. 1,000,000 CURRENT 3,000,000 NONCURRENT - since the liability is due 1,000,000 every year, the

1,000,000 portion is payable on Sept 2013 (within 12 months from year-end) so it will be classified as
current. the rest of the liability (3,000,000) would be classified as noncurrent

e. 1,000,000 CURRENT - despite having a maturity that is more than 12 months from year-end, the
liability is still current as it is payable on demand. in other words, the entity has no unconditional right to
defer payment as of year-end.

Total current liabilities = 5,750,000

Total noncurrent liabilities = 5,500,000

Summa Inc. records its purchases at gross amounts but wishes to change to recording purchases net of
purchase discounts. Discounts on purchases recorded from January 1, 2018 to December 31, 2018
totaled ₱80,000. Of this amount, ₱8,000 is still available in the accounts payable balance. The balances
in Summa’s accounts as of and for the year ended December 31, 2018, before conversion are:
 Purchases ₱4,000,000
Purchase discounts 32,000
Accounts payable 1,200,000
3. The amount of purchase discounts lost to be recognized is:
a. 8,000
b. 0
c. 32,000
d. 40,000

Discounts on 2010 purchases P80,000

Less: Discounts taken P32,000

Discounts still available

Accounts Payable balance P8,000 (P40,000)

Purchase discounts lost to be recognized P40,000

4. The accounts payable balance should be reduced by:

a. 8,000
b. 80,000
c. 32,000
d. 40,000

5. The purchases account should be reduced by:

a. 32,000
b. 80,000
c. 40,000
d. 8,000

6. The entry to record the conversion is:

a. Accounts Payable 80,000
Purchases 80,000
b. Purchase discounts lost 32,000
Purchases 32,000
c. Purchase discounts lost 40,000
Purchase discounts 32,000
Accounts payable 8,000
Purchases 80,000
d. Purchase discounts lost 32,000
Accounts payable 8,000
Purchases 40,000

Placido Corp. 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. Placido accounts for the containers not returned within the time limit as being sold at
the deposit amount. Information for 2018 is as follows:

Containers held by customers at

December 31, 2017, from deliveries in: 2016 85,000
2017 240,000 325,000
Containers delivered in 2018 430,000
Containers returned in 2018 from
deliveries in: 2016 57,500
2017 140,000
2018 157,000 354,500

7. How much revenue from container sales should be recognized for 2018?
a. 127,500
b. 267,500
c. 27,500
d. 85,000

Containers held by customers at Dec. 31, 2017, from deliveries in 2016 P85,000

Less: Containers returned in 2018 from deliveries in 2016 (P57,500)

Revenue from container sales P27,500

8. What is the total amount of Placido’s liability for returnable containers at December 31, 2018?
a. 373,000
b. 400,500
c. 267,500
d. 430,000

Liability for returnable containers, Dec. 31, 2017 P325,000

Add: Deliveries in 2018 P430,000

Total 755,000

Less: 2018 container returns P354,500

2018 revenue container sales 27,000 (P382,000)

Liability for returnable containers, Dec. 31, 2018 P373,000

On December 31, 2018, Orchid Corporation acquired a piece of equipment from Hybrid Co. by issuing a
₱1,200,000 note, payable in full on December 31, 2022. Orchid’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 ₱150,000
salvage value. The present value of 1 at 10% for 4 periods is 0.68301.
 9. What is the equipment’s book value on December 31, 2020?
a. 551,767
b. 630,000
c. 491,767
d. 341,767

Cost of equipment P819,612

(P1,200,000x0.68301)

Less: Accumulated depreciation, (267,845)

Dec. 31, 2020 (P819,612-
P150,000=P669,612x2/5)

Book value, Dec. 31, 2020 P551,767

10. What is the carrying value of the note at December 31, 2020?
a. 1,090,903
b. 991,730
c. 1,200,000
d. 819,612

Amortization Table

Date Discount of 10% Carrying Value

Dec. 31, 2018 -- P819,612

Dec. 31, 2019 81,961 901,573

Dec. 31, 2020 90,157 991,730

Dec. 31, 2021 99,173 1,090,903

Dec. 31, 2022 109,097 1,200,000

Orion Music Corp. carries a wide variety of musical instruments, sound reproduction equipment,
recorded music, and sheet music. To promote the sale of its products, Orion uses two promotion
techniques – premiums and warranties.

Premiums
The premium is offered on the recorded and sheet music. Customers receive a coupon for each ₱10
spent on recorded music and sheet music. Customers may exchange 200 coupons and ₱200 for a CD
player. Orion pays ₱340 for each CD player and estimates that 60% of the coupons given to customers
will be redeemed. A total of 6,500 CD players used in the premium program were purchased during the
year and there were 1,200,000 coupons redeemed in 2018.
Warranties
Musical instruments and sound reproduction equipment are sold with a one-year warranty for
replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales.
Replacement parts and labor for warranty work totaled ₱1,640,000 during 2018.

Orion uses the accrual method to account for the warranty and premium costs for financial reporting
purposes. Orion’s sales for 2018 totaled ₱72,000,000 - ₱54,000,000 from musical instruments and sound
reproduction equipment and ₱18,000,000 from recorded music and sheet music. The balances in the
accounts related to warranties and premiums on January 1, 2018, were as shown below:

Inventory of premium CD players ₱399,500

Estimated premium claims outstanding 448,000
Estimated liability from warranties 1,360,000

Based on the preceding information, determine the amounts that will be shown on the 2018 financial
statements for the following:

11. Warranty expense

a. 1,640,000
b. 1,080,000
c. 800,000
d. 360,000

Sales of musical instruments and sound reproduction equipment P54,000,000

Estimated warranty cost x2%

Warranty expense for 2018 P1,080,000
12. Estimated liability from warranties
a. 1,920,000
b. 1,080,000
c. 240,000
d. 800,000

Estimated liability from warranties Jan. 1,2018 P1,360,000

Add: 2018 warranty expense P1,080,000

Total 2,440,000

Less: Actual warranty costs during 2018 1,640,000

Estimated liability from warranties, Dec.31,2018 P800,000

13. Premium expense

a. 1,836,000
b. 840,000
 c. 756,000
d. 2,189,500

Sales related to recorded and sheet music = 18,000,000

Required payment to receive coupon = P10
Needed Coupon to obtain CD player = 200 coupon
Needed payment to obtain CD player = P200
Cost of Purchasing CD player = P340
Estimated coupons to be redeemed = 60%

Coupons Issued (18,000,000/10) 1,800,000

Multiply by estimated redemption rate 60%

Estimated number of coupons to be redeemed 1,080,000

Divided by exchange rate /200

Estimated number of CD players to be issued 5,400

1,080,000/200

Multiply by net cost of purchasing CD player x 140

340-200

Premium Expense for 2018 P756,000

14. Inventory of premium CD players

a. 399,500
b. 569,500
c. 2,210,000
d. 739,500

Inventory of premium CD players P399,500

Add: Premium CD players purchase during 2018 2,210,000

(340x6,500)

Total 2,609,500

Less: Premium CD players distributed to the customers (2,040,000)

during 2010
 (1,200,000/200=6,000x340)

Inventory of premium CD players, Dec 31 569,500

15. Estimated premium claims outstanding

a. 364,000
b. 840,000
c. 756,000
d. 672,000

Estimated premium claims outstanding, P448,000

Jan. 1,2018

Add: 2018 premium expense 756,000

Total 1,204,000

Less: 2018 actual redemptions 840,000

(1,200,000/200=6,000x140)

Estimated premium claims outstanding, P364,000

Dec. 31, 2018