2023.AUD.A.

05 AUDIT OF LIABILITIES

PROBLEM 1
For each of the numbered items, determine the amount if any, that should be reported as current liability in
December 31, 2023 balance sheet.
1. Accounts Payable:
Accounts payable per general ledger control amounted to P5,440,000, net of P240,000 debit
balances in suppliers’ accounts. The unpaid voucher file included the following items that not had
been recorded as of December 31, 2023:
a. Christine Company – P224,000 merchandise shipped on December 31, 2023, FOB destination; received
on January 10, 2024.
b. Chanda, Inc. – P192,000 merchandise shipped on December 26, 2023, FOB shipping point; received on
January 16, 2024
c. Stephanie Super Services – P144,000 janitorial services for the three-month period ending January 31,
2024
d. Francis Electric Co. – P67,200 electric bill covering the period December 16, 2023 to January 15, 2024

On December 28, 2023, a supplier authorized John Free Company to return goods billed at P160,000 and
shipped on December 20, 2023. The goods were returned by John Free on December 28, 2023, but the
P160,000 credit memo was not received until January 6, 2024.

a. P5,923,200 c. P5,601,600
b. P5,712,000 d. P5,841,600

2. Payroll:
Items related to Chanley Inc. payroll as of December 31, 2023 are:
Accrued salaries and wages P 776,000.00
Payroll deductions for:
Income taxes withheld 56,000.00
SSS contributions 64,000.00
Philhealth contributions 16,000.00
Advances to employees 80,000.00

a. P776,000 c. P832,000
b. P992,000 d. P912,000

3. Litigation:
In May, 2023, Josiebelle Company became involved in a litigation. The suit is being contested, but Josiebelle
Company’s lawyer believes it is possible that Josiebelle 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. P0 c. P3,000,000
b. P2,000,000 d. P2,500,000

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

a. P722,600 c. P2,240,000
b. P395,000 d. P628,000
5. Note payable:
A note payable to the Bank of the Queenie's Islands for P2,400,000 is outstanding on December 31, 2023. The
note is dated October 1, 2022, bears interest at 18%, and is payable in three equal annual installment of
P800,000. The first interest and principal payment was made on October 1, 2023.

a. P800,000 c. P72,000
b. P908,000 d. P872,000

6. Purchase Commitment:
During 2023, Angelica Inc. entered in a noncancellable commitment to purchase 320,000 units of inventory at
fixed price of P5 per unit, delivery to be made in 2024. On December 31, 2023, the purchase price of this
inventory item had fallen to P4.40 per unit. The goods covered by the purchase contract were delivered on
January 28, 2024

a. P0 c. P1,408,000
b. P1,600,000 d. P192,000

7. Deferred Taxes:

On December 31, 2023, Jashey Company’s deferred income tax account has a 2023 ending credit balance of
P772,800, consisting of the following items:

Caused by temporary differences in accounting Deferred tax

For gross profit on installment sales P 376,000 credit
For depreciation on property and equipment 576,000 credit
For product warranty expense 179,200 debit
P 772,800 credit

a. P772,800 c. P196,800
b. P952,000 d. P0

PROBLEM 2
The following companies official fiscal year ends on March 31. The following information relates to the
obligations of each of the respective company as of March 31, 2023:

Notes Payable
Mariel Lyn Co. 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 P340,000 on March 31,
2023.

Due Date Amount

April 31, 2023 P 700,000
July 31, 2023 900,000
February 1, 2024 800,000
April 30, 2024 1,200,000
June 30, 2024 1,500,000
P 5,100,000

Required:
1. Total Current Liabilities as of March 31, 2023
2. Total Non-current Liabilities as of March 31, 2023
Estimated Warranties, Trade Payables and Dividends
Rachel Co. has one-year product warranty on some selected items. The estimated warranty liability on sales
made during the 2021-2022 fiscal year and still outstanding as of March 31, 2022, amounted to P252,000. The
warranty costs on sales made from April 1, 2022 to March 31, 2023, are estimated at P630,000. The actual
warranty costs incurred during 2022-2023 fiscal year are as follows:

Warranty claims honored on 2021-2022 sales P 252,000

Warranty claims honored on 2022-2023 sales 285,000
P 537,000

Accounts payable for supplies, goods, and services purchases on open account amount to P560,000 as of
March 31, 2023.

On March 10, 2023, Rachel Co.’s board of directors declared a cash dividend of P0.30 per ordinary share and
a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2023 to ordinary
shareholders on record at the close of business on March 31, 2023. As of March 31, 2023, Rachel Co. has 5
million, P2 par value, ordinary shares issued and outstanding.

Required:
1. Total Current Liabilities as of March 31, 2023
2. Total Non-current Liabilities as of March 31, 2023

Bonds Payable
Ella Inc. issued P5,000,000, 12% bonds, on October 1, 2017 at 96. The bonds will mature on October 1, 2027.
Interest is paid semiannually on October 1 and April 1. Ella Inc. uses the straight-line method to amortize bond
discount.

Required:
1. Total Current Liabilities as of March 31, 2023
2. Total Non-current Liabilities as of March 31, 2023