Chapter 9 - Audit of Liabilities Roque Uploaded by Cristina Ramirez ! 100% (4) · 2K views · 77 pages Document Information " reviewer Date uploaded Aug 16, 2018 & Download Copyright © © All Rights Reserved Available Formats DOCX, PDF, TXT or read online from Scribd Share this document IX – AUDIT OF LIABILITIES PROBLEM NO. 1 – Current and noncurrent liabilities Facebook You were able to obtain the following from the accountant for Agdangan Corp. related to the company’s liabilities as of December 31, 2010. Accounts Payable Notes Payable – trade Notes Payable – bank Wages and salaries payable Interest payable # Email Mortgage notes notes payable payable – – 12% 10% Mortgage Bonds Payable Twitter P 650,000 190,000 800,000 15,000 ? 600,000 1,500,000 2,000,000 The following additional information pertains to these liabilities. Did you find this document useful? $ a. All trade notes payable are due within six months from the end of the reporting period. b. Bank notes-payable include two separate notes payable to Allied Bank. (1) A P300,000, 8% note issued March 1, 2008, payable on demand. Interest is payable every sixmonths. (2) A 1-year, P500,000, 11 ½ % not issued January 2, 2010. On December 30, 2010, Agdangan negotiated a written agreement with Allied Bank to replace the note with a 2-year, P500,000, 10% note to be issued January 2,2011. The interest was paid on December 31, 2010. c. The 10% mortgage note was issued October 1, 2007, with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2016, Agdangan is three months behind in paying its required interest payment. % Is this content inappropriate? Report this Document d. The 12% mortgage note was issued May 1,2004, with a term of 20 years. The current principal amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due April 30, 2011. The payment includes interest of P180,000. e. The bonds payable is 10-year, 8% bonds, issued June 30, 2001. Interest is payable semi-annually every June 30 and December 31. QUESTIONS: Based on the above and the result of your audit, answer the following. 1. Interest payable as of December 31, 2010 is a. P155,000 c. P143,000 b. P203,000 d. P215,000 Improve Your Experience ' Rating will help us to suggest even better related documents to all of our readers! $ Useful % Not useful 2. The portion of the Note Payable-bank to be reported under current liabilities as of December 31, 2010 is a. P300,000 c. P500,000 b. P800,000 d. P 0 3. Total current liabilities as of December 31, 2010 is a. P3,950,000 c. P4,138,000 b. P3,938,000 d. P 0 4. Total noncurrent liabilities as of December 31, 2010 is a. P1,760,000 c. P2,560,000 b. P3,960,000 d. P1,960,000 Answers: 1)C 2)A 3)B 4)D Suggested Solution: Question No. 1 P300,000 note payable to bank (P300,000 x 8% x 4/12) Mortgage note payable – 10% (P600,000 x 10% x 3/12) Mortgage note payable – 12% (P1,500,000 x 12% x 8/12) Total interest payable, 12/31/10 P 8,000 15,000 120,000 143,000 Question No. 2 Note payable to bank – payable on demand P 300,000 The P500,000 note payable to bank will be classified as noncurrent because it was refinanced on a long term basis as of December 31, 2010. Question No. 3 Accounts Payable Notes Payable – trade Notes Payable – bank (see no. 2) P 650,000 190,000 300,000 Wages and salaries payable Interest payable (see no. 1) Mortgage note payable – 10% (with breach of loan covenant) Mortgage note payable – 12% (P220,000 – P180,000) Bonds payable, due 7/1/11 Total current liabilities, 12/31/10 15,000 143,000 600,000 40,000 2,000,000 P3,938,000 In accordance with the revised PAS 1 par. 69, an entity shall classify a liability as current when: (a) (b) (c) (d) it expects to settle the liability in its normal operating cycle; it holds the liability primarily for the purpose of trading; the liability is due to be settled within twelve months after the reporting period; or the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. An entity shall classify all other liabilities as non-current. When an entity breaches an undertaking under a long-term loan agreement on or before the end of the reporting period with the effect that the liability becomes payable on demand, the liability is classified as current, even if the lender has agreed, after the reporting period and before the authorization of the financial statements for issue, not to demand payment as a consequence of the breach. The liability is current, because at the end of the reporting period, the entity does not have an unconditional right to defer its settlement for at least twelve months after that date. (PAS 1 par. 74) However, the liability is classifies as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least 12 months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [PAS 1 par. 75] Question No. 4 Notes payable – bank (see no. 2) Mortgage note payable – 12% (P1,500,000 – P40,000) Total noncurrent liabilities, 12/31/10 P 500,000 1,460,000 P 1,960,000 PROBLEM NO. 2 – Current and noncurrent liabilities Atimonan 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, 2010: Notes Payable Atimonan has signed several long-term notes with financial institutions. The maturities of these notes are given below. The total unpaid interest for all of these notes amounts to P408,000 on March 31, 2010. Due date April 31, 2010 July 31, 2010 September 1, 2010 February 1, 2011 Amount P 720,000 1,080,000 540,000 540,000 April 1, 2011 – March 31, 2012 3,240,000 P 6,120,000 Estimated warranties Atimonan has a one-year product warranty on some selected items. The estimated warranty liability in sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2009, amounted to P302, 400. The warranty costs on sales made from April 1, 2009 to March 31, 2010, are estimated at P756,0 00. The actual warranty costs incurred during 2009-2010 fiscal year are as follows: Warranty claims honored on 2008-2009 sales Warranty claims honored on 2009-2010 sales Total Trade payables P 302,400 342,000 P 644,400 Trade payables Accounts payable for supplies, goods, and services purchases on open account amount to P672,000 as of March 31, 2010. Dividends On March 10, 2010, Atimonan’s board of directors declared a cash dividend of P0.30 per o rdinary share and a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2010 to shareholders on record at the close of business on March 31, 2010. As of March 31, 2010 Atimonan has 6 million, P2 par value, ordinary shares issued and outstanding. Bonds payable Atimonan issued P6,000,000, 12% bonds, on October 1, 2004 at 96. The bonds will mature on October 1, 2014. Interest is paid semi-annually on October 1 and April 1. Atimonan 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 31,2010: 1. Estimated warranty payable a. P414,000 b. P756,000 c. P 302,400 d. P1,058,400 2. Unamortized bond discount a. P132,000 b. P108,000 c. P 240,000 d. P 120,000 3. Bond interest payable a. P360,000 b. P300,000 c. P 180,000 d. P 0 4. Total current liabilities a. P7,734,000 b. P6,126,000 c. P 6,534,000 d. P 4,734,000 5. Total noncurrent liabilities a. P9,132,000 P9,240,000 b. Answers: 1) A 2) B c. P d. P 9,108,000 9,000,000 3) A 4) C 5) B Suggested Solution: Question No. 1 Warranty payable, 3/31/09 Add warranty expense accrued during 2009-2010 Total Less payments during 2009-2010 Warranty payable, 3/31/10 P 302,400 756,000 1,058,400 644,400 P 414,000 Question No. 2 Bond discount, 10/1//04 (P6,000,000 x .04) Discount amortization, 10/1/04 to 3/31/10 (P240,000 x 5.5/10) Bond discount, 3/31/10 P 240,000 132,000 P 108,000 Question No. 3 Bond interest payable, 10/1/09 to 3/31/10 (P6,000,000 x 12% x 6/12) P 360,000 Question No. 4 Notes payable – current (maturing up to 3/31/11) Accrues interest payable – Notes Payable Estimated warranty payable (see no. 1) Accounts payable Cash dividend payable (6 million shares x P0.30) Accrued interest payable – Bonds payable Total current liabilities P 2,880,000 408,000 414,000 672,000 1,800,000 360,000 P 6,534,000 Question No. 5 Notes payable – noncurrent Bonds payable, net of discount of P108,000 Total noncurrent liabilities P 3,240,000 5,892,000 P 9,132,000 PROBLEM NO. 3 – Various current liabilities The following information relates to Candelaria Company’s obligations as of December 31, 2010. For each of the numbered items, determine the amount if any, that should be reported as current liability in the Candelaria’s December 31, 2010 statement of financial position . 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 had not been recorded as of December 31, 2010: a) A Company – P244,000 merchandise shipped on December 31, 2010, FOB destination; received on January 10, 2011. b) B, Inc. – P192,000 merchandise shipped on December 26, 2010, FOB shipping point; received on January 16, 2011. c) C Super Services – P144,000 janitorial services for the three-month period ending January 31, 2011. d) MERALCO – P67,200 electric bill covering the period December 16, 2010 to January 15, 2011. On December 28, 2010, a supplier authorized Candelaria to return goods billed at P160,000 and shipped on December 20, 2010. The goods were returned by Candelaria on December 28, 2010, but the P160,000 credit memo was not received until January 6, 2011. a. P5,923,200 b. P5,601,600 c. d. P5,712,000 P5,841,600 2. Payroll: Items related to Candelaria’s payroll as of December 31, 2010 are: Accrued salaries and wages P776,000 Payroll deductions for: Income taxes withheld 56,000 SSS contributions Philhealth contributions Advances to employees a. P776,000 b. 832,000 64,000 16,000 80,000 c. d. P992,000 P912,000 3. Litigation: In May, 2010, Candelaria became involved in a litigation. The suit being contested, but Candelaria’s lawyer believes there is probable that Candelaria 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. P3,000,000 P 0 b. c. d. P2,000,000 P2,500,000 4. Bonus obligation: Candelaria 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.) P 722,600 c. P395,000 b. P2,240,000 a. d. P628,000 5. Note payable: A note payable to the Bank of the Philippine Islands for P2,400,000 is outstanding on December 31, 2010. The note is dated October 1, 2009, 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, 2010. a. P800,000 b. P 72,000 c. P908,000 d. P872,000 6. Purchase commitment: During 2010, Candelaria entered in a noncancellable commitment to purchase 320,000 units of inventory at fixed price of P5 per unit, delivery to be made in 2011. On December 31, 2010 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, 2011. a. P 0 b. P1,408,000 c. P1,600,000 d. P 192,000 7. Deferred taxes: On December 31, 2010, Candelaria’s deferred income tax account has a 2010 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 For depreciation on property and equipment For product warranty expense a. P772,800 b. P196,800 c. d. P376,000 Cr 576,000 Cr 179,200 Dr P772,000 Cr P952,000 P 0 8. Product warranty: Candelaria has one year product warranty on selected items in its product line. The estimated warranty liability on sales made during 2009, which was outstanding as of December 31, 2009, amounted to P416,000. The warranty costs on sales made in 2010 are estimated at P1,504,000. Actual warranty costs incurred during 2010 are as follows: Warranty claims honored on 2009 sales P 416,000 Warranty claims honored on 2010 sales 992,000 Total warranty claims honored P 1,408,000 a. P 0 b. P96,000 c. P1,504,000 d. P 512,000 9. Premiums: To increase sales, Candelaria Company inaugurated a promotional campaign on June 30, 2010. Candelaria placed a coupon redeemable for a premium in each package of product sold. Each premium costs P100. A premium is offered to customers who send in 5 coupons and a remittance of P30. The distribution cost per premium is P20. Candelaria estimated that only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2010, the following is available: Packaged of product sold 160,000 Premiums purchased 16,000 Coupons redeemed 64,000 a. P1,728,000 c. P1,152,000 b. P1,600,000 d. P 576,000 10. Due to Five Six Finance company: Candelaria’s accounting records show that as of December 31, 2010, P1,280,000 was due to Five Six Finance Company for advances made against P1,600,000 of trade accounts receivable assigned to the finance company with recourse. a. P 0 c. P1,600,000 b. P 320,000 d. P1,280,000 Answers: 1)D 2)D 3)D 4)D 5)D 6)D 7)D 8)D 9)D 10)D Suggested Solution: Question No. 1 Accounts payable per general ledger Debit balances in suppliers’ accounts P5,440,000 240,000 Goods in transit on 12/31/10, FOB shipping point Unrecorded purchase return Accounts payable, as adjusted Accrued janitorial expenses (P144,000 x 2/3) Accrued utilities (P67,200 x 15/30) Total 192,000 (160,000) 5,712,000 96,000 33,600 P5,841,600 Question No. 2 Accrued salaries and wages Income taxes withheld SSS contributions payable Philhealth contributions Total P776,000 56,000 64,000 16,000 P912,000 Question No. 3 Midpoint of the range [(P2,000,000 + P3,000,000)/2] P2,500,000 PAS 37 par. 36 states that the amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Par. 39 further states that where there is a continuous range of possible outcomes, and each point in that range is a likely as any other, the mid-point of the range is used. Question No. 4 B = 10% (P9,600,000 – B – T) T = 30% (P9,600,000 – B) T = P2,880,000 - .3B B = 10% [P9,600,000 – B – (P2,880,000 - .3B)] B = 10% (P9,600,000 – B – P2,880,000 + .3B) B = 10% (P6,720,000 - .7B) B = P672,000 - .07B 1.07B = P672,000 B = P628,000 (rounded off) Question No. 5 Principal amount due, 10/1/11 Accrued interest payable (P1,600,000 x 18% x 3/12) P800,000 72,000 Total P872,000 Question No. 6 Estimated liability for purchase commitment [320,000 x (P5 – P4.40)] P192,000 If an entity has a contract that is onerous, the present obligation under the contract shall be recognized and measured as a provision. ( PAS 37 par. 66) An onerous contract is a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Question No. 7 The revised PAS 1 par. 56 states that when an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications on the face of the statement of financial position, it shall not classify deferred tax assets (liabilities) as current assets (liabilities). Question No. 8 Warranty payable, 12/31/09 P 416,000 Add: Warranty expense accrued during 2010 1,504,000 Total 1,920,000 Trusted by over 1 million members Try Scribd FREE for 30 days to access over 125 million titles without ads or interruptions! Start Free Trial Cancel Anytime. Less: Payments during 2010 Warranty Payable, 12/31/10 1,408,000 P 512,000 Question No. 9 Estimated coupons to be redeemed (160,000 x 60%) 96,000 Less coupons redeemed 64,000 Coupons outstanding 32,000 Divide by exchange rate Premiums to be issued Multiply by net premium cost (P100 + P20 – P30) Estimated liability for coupons, 12/31/10 5 6,400 P90 P576,000 Question No. 10 This transaction involves assignment of accounts receivable, wherein the company obtained a loan using the receivable as security. Accounts receivable – assigned will be included in trade and other receivables, while the related loan will be reported under current liabilities. PROBLEM NO. 4 Estimated liabilities – warranty and premium Dolores’ Music Emporium carries a wide variety of music promotion techniques – warranties and premiums – to attract customers. Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor. The estimated warranty cost, 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 or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio. Dolores pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed. Dolores’ total sales for 2010 were P57,600,000 – P43,200,000 from musical instrument and sound reproduction equipment and P14,400,000 from recorded music and sheet music. Replacement parts and labor for warranty work totaled P1,312,000 during 2010. A total of 52,000 AM/FM radio used in the premium program were purchased during the year and there were 9,600,000 coupons redeemed in 2010. The accrual method is used by Dolores account the warranty premium for financial purposes. The balance in the accountstorelated tofor warranties and and premiums oncosts January 1, 2010,reporting were as shown below: Inventory of Premium AM/FM radio Estimated Premium Claims Outstanding Estimated Liability from Warranties P 319,600 358,000 1,088,000 QUESTIONS: Based on the above and the result of your audit, determine the amounts that will be shown on the 2010 financial statements for the following: 1. Warranty expense a. P 864,000 b. P1,152,000 c. P1,312,000 d. P 640,000 2. Estimated liability from warranties a. P 864,000 c. P1,088,000 b. P1,312,000 d. P 640,000 3. Premium expense a. P 604,800 c. b. P1,468,800 d. 4. Inventory of AM/FM radio a. P375,600 c. b. P319,600 d. 5. Estimated liability for premiums a. P604,800 c. b. 291,200 d. Answers: 1) A; 2) D; 3) A; 4) D; P 864,000 P 1,008,000 P 618,800 P 455,600 P 507,600 P 358,400 5) B Suggested Solution: Question No. 1 Warranty expense (P43,200,000 x 2%) P864,000 Question No. 2 Estimated liability from warranties, 1/1/10 P1,088,000 Add: Warranty expense for 2010 864,000 Total 1,952,000 Less: Actual expenditures for 2010 1,312,000 Estimated liability from warranties, 12/31/10 640,000 Question No. 3 Premium expense [(14,400,000 x 60%)/ 200 x P14] P604,800 Question No. 4 Inventory of premium, 1/1/10 P 319,600 Add: Premium purchases (52,000 x P34) 1,768,000 Total premium available 2,087,600 Less: Premiums issued (9,600,000/200 x P34) 1,632,000 Inventory of premium, 12/31/10 455,600 Question No. 5 Estimated premium claims outstanding, 1/1/10 P358,400 Add: Premium expense for 2010 604,800 Total 963,200 Less: Premiums issued (P 9,600,000/200 x P14) 672,000 Estimated premium claims outstanding, 12/31/10 291,200 PROBLEM NO. 5 – Provisions and contingent liabilities The following information relates to Alabat Company as of December 31, 2010. Answer the following questions relating to each of the independent situations as requested. 1. Beginning 2010, Alabat Company began marketing a new beer called “Red Colt.” To help promote the product, the management is offering a special beer mug to each customer for every 20 specially marked bottle caps of Red Colt. Alabat estimates that out of the 300,000 bottles of Red Colt sold during 2010m only 50% of the marked bottle caps will be redeemed. For the year 2010, 8,000 mugs were ordered by the company at a total cost of P360,000. A total of 4,500 mugs were already distributed to customers. What is the amount of the liability that Alabat Company should report on its December 31, 2010 statement of financial position? a. P135,000 c. P337,500 b. P202,500 d. P360,000 2. On January 2, 2008, Alabat Company introduced a new line of products that carry a three-year warranty against factory defects. Estimated warranty costs related to peso sales are as follows: 1% of sales in the year of sale, 2% in the year after sales and 3% in the second year after sale. Sales and actual warranty expenditures for the period 2008 to 2010 were as follows: Sales 2008 2009 2010 P100,000 250,000 350,000 P700,000 What amount should Alabat report as warranty expense in 2010? a. P 3,500 c. P11,500 b. P 11,250 d. P21,000 Actual Warranty Expenditures P 3,750 750 11,250 P15,750 3. During 2010, Alabat Company guaranteed a supplier’s P500,000 loan from a bank. On October 1, 2010, Alabat was notifies that the supplier had defaulted on the loan and filed for bankruptcy protection. Counsel believes Alabat will probably have to pay between P250,000 and P450,000 under its guarantee. As a result of the supplier’s bankruptcy, Alabat entered into a contract in December 2010 to retool its machines so that Alabat could accept parts from other suppliers. Retooling costs are estimated to be P300,000. What amount should Manfred report as a liability in its a. December P250,000 31, 2010, statement of financial position? c. P350,000 b. P450,000 d. P650,000 A court case decided on 21 December 2010 awarded damages against Alabat. The judge has announced that the amount of damages will be set at a future date, expected to be in March 2011. Alabat has received advice from its lawyers that the amount of the damages could be anything between P20,000 and P7,000,000. As of December 31, 2010, how much should be recognized in the statement of financial position regarding this court case? a. P 20,000 b. P3,150,000 c. P7,000,000 d. P 0 Alabat’s directors decided on 3 November 2010 to restructure the company’s operations as follows: a) Factory T would be closed down and put on the market for sale. b) 100 employees working in Factory T would be retrenched effective 30 November 2010 and would be paid their accumulated entitlements p lus 3 months’ wages. c) The remaining 20 employees working in Factory T would be transferred to Factory X, which would continue operating. d) 5-head-office staff would be retrenched effective 31 December 2010 and would be paid their accumulated entitlements plus 3 month’s wages. As at 31 December 2010 the following transactions and events had occurred: ! ! Factory T was shut down on 30 November 2010. An offer of P80M had been received for Factory T; however there was no binding sales agreement The 100 employees had been retrenched, had left and their accumulated entitlements had been paid, however an amount of P1,520,000, representing a portion of the 3 months’ wages for the retrenched employees, had still not been paid. ! ! Costs in ofFactory P460,000 expectedwill to be incurred transferring work X.were The transfer occur on 15inJanuary 2011.the 20 employees to their new Four of the five-head-office staff had been retrenched, had left and their accumulated entitlements, including the 3 months’ wages, had been paid. However one employee, D. Terminator, remained on to complete administrative tasks relating to the closure of Factory T and the transfer of staff to Factory X. D. Terminator was expected to stay until 31 January 2011. D. Terminator’s salary for January would be P80,000 and his retrenchment package would be P260,000, all of which would be paid on the day he left. He estimated that he would spend 60% of his time administering the closure of Factory T, 30% of his time administering the transfer of staff to Factory X and the remaining 10% on general administration. Calculate the amount of the restructuring provision to be recognized in Alabat’s financial statements as at 31 December 2010. a. P 116,000 b. P1,828,000 Answers: 1) A; Suggested Solution: Question No. 1 c. P93,000 d. P89,000 2) D; 3) C; 4) D; 5) B; Question No. 1 Total estimated mugs to be issued [(300,000 x 50%)/20] 7,500 Less mugs issued 4,500 Balance 3,000 Multiply by premium cost (P360,000/8,000) Estimated premium liability, 12/31/10 45 P135,000 Question No. 2 Warranty expense for 2010 (P350,000 x 6%) P21,000 Question No. 3 Provision for guarantee, 12/31/10 [(P250,000 + P450,000) / 2] P350,000 A provision is a liability of uncertain timing or amount. The amount recognized as a provision shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. (PAS 37 par. 36) Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used (PAS 37 par. 39) Question No. 4 There is a present obligation and the obligating event has occurred, however the amount cannot be reliably measured as the estimated range is too great. Therefore, no liability can be recognized. This will only be disclosed as a contingent liability. Question No. 5 Unpaid salaries of retrenched employees D. Terminator’s retrenchment package P1,520,000 260,000 D. Terminator’s salary related to administration of the closure (P80,000 x 60%) 48,000 P1,828,000 A restructuring is a program that is planned and controlled by management, and materially changes either: (a) The scope of a business undertaken by an entity; or (b) The manner in which that business is conducted. A restructuring provision shall include only the direct expenditures arising from the restructuring, which are those that are both (a) Necessarily entailed by the restructuring; and (b) Not associated with the ongoing activities of the entity. (PAS 37 par. 80) A restructuring provision does not include such costs as: (a) Retaining or relocating continuing staff; (b) Investment Marketing; in ornew systems and distribution networks. (c) These expenditures relate to the future conduct of the business and are not liabilities for restructuring at the end of the reporting period. Such expenditures are recognized on the same basis as if they arose independently of a restructuring. PROBLEM NO. 6 – Provisions, contingent liabilities, and contingent assets Burdeos Corporation, a listed company, is a manufacturer of confectionery and biscuits. Its end of reporting period is December 31 Relevant extracts from its financial statements at 31 December 2009 are as follows: Current liabilities Provision Provision for warranties P270,000 Non-current liabilities Provision Provision for warranties P180,000 Note 36 – Contingent liabilities Burdeos is engaged in litigation with various parties in relation to allergic reactions to traces of peanuts alleged to have been found in packets of fruit gums. Burdeos strenuously denies the allegations and, as at the date of authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any costs or damages that may be payable to the plaintiffs. The provision for warranties at December 31, 2009 was calculated using the following assumptions: There was no balance carried forward from the prior year. Estimated cost of repairs – products with minor defects P1,000,000 Estimated cost of repairs – products with major defects P6,000,000 Expected % of products sold during 2009 having no Defects in 2010 80% Expected % of products sold during 2009 having Minor defects in 2010 15% Expected % of products sold during 2009 having Major defects in 2010 5% Expected timing of settlement of warranty payments - Those with minor defects Expected timing of settlement of warranty payments - Those with major defects All in 2010 40% in 2010 60% in 2011 During the year ended December 31, 2010 the following occurred: 1. In relation to the warranty provision of P450,000 at December 31, 2009, P200,000 was paid out of the provision. Of the amount paid, P150,000 was for products with minor defects and P50,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2010. 2. In calculating its warranty provision for December 31, 2010, Burdeos made the following adjustments to the assumptions used for the prior year: Estimated cost of repairs – products with minor defects No change Estimated cost of repairs – products with major defects P5,000,000 Expected % of products sold during 2010 having no Defects in 2011 85% Expected % of products sold during 2010 having Minor defects in 2011 13% Expected % of products sold during 2010 having Major defects in 2011 2% Expected timing of settlement of warranty payments - Those with minor defects All in 2011 Expected timing of settlement of warranty payments - Those with major defects 40% in 2011 60% in 2012 3. Burdeos determined that part of its plant and equipment needed an overhaul – the conveyer belt on one of its machines would need to be replaced in about December 2011 at an estimated cost of P250,000. The carrying amount of the conveyer belt at December 31, 2009 was P140,000. Its original cost was P200,000.. 4. Burdeos was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1,500,000 to the plaintiffs. As at December 31, 2010 Burdeos had paid P800,000. 5. Burdeos commenced litigation against one of its advisers for negligent advise given on the original installation of the conveyers belt referred to in (4) above. In October 2010 the court found in favor of Burdeos. The hearing for damages had not been scheduled as at the date the financial statements for 2010 were authorized for issue. Burdeos estimated that it would receive about P425,000. 6. Burdeos signed an agreement with Craft Bank to the e Burdeos would guarantee a loan made by Craft Bank to the subsidiary, Burgis Ltd. Burgis’ loan with Craft B P3,200,000 as at December 31, 2010. Burgis was in financial position at December 31, 2010. QUESTIONS: Based on the above and the result of your audit, answer the following 1. The warranty expense in 2010 is a. P100,000 b. P160,000 c. P400,000 d. P230,000 2. The provision for warranties as of December 31, 2010 is a. P580,000 c. P230,000 b. P480,000 d. P410,000 3. The provision for warranties to be reported as current liabilities on December 31, 2010 is a. P220,000 c. P150,000 b. P400,000 d. P330,000 4. The provision for warranties to be reported as noncurrent as of December 21, 2010 is a. P 80,000 c. P260,000 b. P150,000 d. P330,000 5. Total provisions to be reported in the statement of financial position as of December 31, 2010 is a. P 480,000 c. P 410,000 b. P1,180,000 d. P1,360,000 Answers: 1) B; 2) D; 3) A; 4) A; 5) C Suggested Solution: Question No. 1 No defects – 85% P 0 Minor defects (P1,000,000 x 13%) 130,000 Major defects (P5,000,000 x 2%) 100,000 Increase in provision in 2010 230,000 Unused amounts reversed in 2010 (P270,000 – P200,000) ( 70,000) Warranty Expense in 2010 P 160,000 Where the provision being measured involves a large population of items, the obligation is estimated by weighing all possible outcomes by their associated probabilities. The name for this statistical method of estimation is ‘expected value’. Improve Your Experience ' Rating will help us to suggest even better related documents to all of our readers! $ Useful Search ( % Not useful & Download Question No. 2 Balance, 1/1/10 (P270,000 + 180,000) P450,000 Amounts used in 2010 (200,000) Increase in provision in 2010 230,000 Unused amounts reversed in 2010 ( Balance, 12/31/10 P 410,000 70,000) Alternative computation: Increase in provision in 2010 Balance of provision from 2009 payable in 2011 Balance, 12/31/10 P230,000 180,000 P410,000 A provision shall be used only for expenditures for which the provision was originally recognized. Provisions shall be reviewed at the end of each reporting period and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed. Question No. 3 Balance of provision from 2009 payable in 2011 P 180,000 Increase in provision in 2010 Minor defects Major defects (P100,000 x 20%) Provision for warranties – current 130,000 20,000 P 330,000 Question No. 4 Provision for warranties, 12/31/10 P410,000 Less current provision for warranties Non-current provision for warranties 330,000 P 80,000 Scribd ))))* Question No. 5 Books, audiobooks, and more. Provision for warranties, 12/31/10 Get our free app + , - . / Home Books Audiobooks Documents P410,000 The other items should be treated as follows: EXCLUSIVE OFFER Expected overhaul – not a provision; Burdeos has no present obligation to conduct over haul. Rather, it is evidence that the conveyer belt’s useful life has been shortened. + Unpaid amount of P700,000 (re peanut allergy case) – not a provision; there is no uncertainty regarding timing or amount of settlement. The amount should be included as part of trade and other payables. Try Scribd for Free Claim for damages against the entity’s advisers – contingent asset. Books, audiobooks, more. Guarantee – not a and provision; although the entity has a present obligation under the guarantee; it is not probable that an outflow of economic benefits beThe required to settle the obligation since was in a strong financial position at December 31, will 2010. guarantee would be disclosed asBurgis a contingent liability. Read free for 30 days PROBLEM NO. 7 – Bonds Payable Gumaca Corporation authorized the sale of P2,000,000 of 12%, 10 year debentures on January 1, 2005. Interest is payable on January 1 and July 1. The entire issue was sold on April 1, 2005, at 102 plus accrued interest. On April 1, 2010, P1,000,000 of the bond issue was reacquired and retired at 99 plus accrued interest. On June 30, 2010, the remaining bonds were reacquired at 97 plus accrued interest and refunded with an issue of P1,600,000 of 9% bonds which were sold at 100. QUESTIONS: Based on the above and the result of your audit. Determine the following: ( Use straight line method to amortize premium or discount) 1. Total cash receive from the sale of P2 million bonds on April 1, 2005 a. P2,100,000 c. P2,040,000 b. P2,000,000 d. P2,120,000 2. Interest expense for 2005 a. P180,000 c. P 157,241 b. P183, 077 d. P176,923 3. Carrying amount of bonds payable as of December 31, 2005 a. P2,037,241 c. P2,036,923 b. P2,042,759 d. P2,043,077 4. Gain or loss on retirement of P1 million bonds on April 1, 2010 a. P19,744 gain c. P 256 gain b. P19,744 loss d. P19, 828 gain 5. Gain or loss on retirement of remaining bonds on June 30, 2010 a. P39,231 loss c. P 20,679 gain b. P39,231 gain d. P39,310 gain Answers: 1) A; 2) D; 3) C; 4) A; 5) B Suggested Solution: Question No. 1 Issue price (P2,000,000 x 1.02) Accrued interest (P2,000,000 x 12% x 3/12) Total cash received from sale of bonds P2,040,000 60,000 P2,100,000 Question No. 2 Nominal interest (P2,000,000 x 12% x 9/12) Less premium amortization for 2005 P180,000 Less premium amortization for 2005 (P40,000* x 9/117**) 3,077 Interest expense for 2005 P176,923 *(P2,000,000 x .02) ** 120 months (10 years) – 3 months (1/1/2005 to 4/1/2005) Question No. 3 Carrying amount, 4/1/2005 (see no. 1) Less premium amortization for 2005 (see no. 2) P2,040,000 3,077 Carrying amount, 12/31/2005 P2,036,923 Question No. 4 Face value of bonds retired P1,000,000 Add unamortized bond premium, (P40,000 x ½ x 57/117) 9,744 Carrying amount of bonds retired 1,009,744 Less retirement price (P1,000,000 x .99) 990,000 Gain on bond reacquisition P 19,744 Question No. 5 Face value of bonds retired P1,000,000 Add unamortized bond premium, (P40,000 x ½ x 54/117) 9,231 Carrying amount of bonds retired 1,009,231 Less retirement price (P1,000,000 x .97) 970,000 Gain on bond reacquisition P 39,231 PROBLEM NO. 8 – Bonds payable In your initial audit of Infanta Finance Co., you find the following ledger account balances. Debit Credit 12%,25-year Bonds Payable, 2006 issue 01/01/2006 P6,400,000 Treasury Bonds 10/01/2010 P864,000 Bond Premium 01/01/2006 320,000 Bond Interest Expense 01/01/2010 384,000 07/01/2010 384,000 The bonds were redeemed for permanent cancellation on October 1, 2010 at 105 plus accrued interest. QUESTIONS: Based on the above and the result of your audit, determine the following: ( Use straight line method to amortize premium or discount) 1. The adjusted balance of bonds payable as of December 31, 2010 is a. P5,536,000 c. P5,600,000 b. P6,400,000 d. P4,000,000 2. The unamortized bond premium on December 31, 2010 is a. P320,000 c. P256,000 b. P224,000 d. P235,200 3. The total bond interest expense for the year 2010 is a. P756,400 c. P731,600 b. P755,200 d. P731,200 4. The gain or loss on partial bond redemption is a. P7,600 loss c. P7,600 gain b. P72,400 loss d. P72,400 gain Answers: 1)C; 2)B; 3)C; 4)A Suggested Solution: Question No. 1 Question No. 1 Total bonds issued P6,400,000 Face value of bonds retired {P864,000/[1.05+(.12x3/12)]} Adjusted balance of bonds payable, 12/31/10 Question No. 2 Unamortized bond premium, 12/31/10 (P320,000 x 8/64 x 20/25) Question No. 3 Nominal interest: Remaining bonds (P5,600,000 x 12%) Bonds retired (P800,000 x 12% x 9/12) Less premium amortization: Remaining bonds (P320,000/25 x 14/16 Bonds retired (P320,000/25 x 2/16 x 9/12) Question No. 4 Face value of bonds redeemed Unamortized bond premium Interest rate (P320,000 x 8/64 x 20.25/25) Interest payment date Carrying amount of bonds redeemed Maturity dates and amount: 12% per annum March 1 Maturity dates and amount: Less retirement price (P800,000 x 1.05) Date of maturity Loss on bond redemption March 1, 2010 Amount P March 1, 2011 P PROBLEM NO. 9 – Bonds payable March 1, 2012 P In connection with the audit of the company’s financial statements for March 1, 2013 the Lucban Corporation presented to you their records. This is the Pfirst The company issued serial bonds on April 1, 2007. Your audit showed P2,000,00 and the accounts as of December 31, 2010: Since the corporation had excess cash, bonds of P500,000 schedule Total face value The total amount paid was charged P2,000,000 retired on April 1, 2010. to serial Date of bond March 1, 2007 Serial Bonds Payable Total proceeds VR 3/01/2010 P500,000 4/01/2010 P495,000 VR P2,676,000 4/01/2007 Accrued Interest Payable 01/01/2010 Interest Expense 3/01/2010 VR P240,000 QUESTIONS: Based on the information presented above and the result of your bond outstanding method to amortize premium or discount) 1. The adjusted balance of the bonds payable account as of a. P2,000,000 c. b. P1,084,000 d. 2. The unamortized bond premium as of December 31, 2010 a. P66,642 c. b. P82,444 d. b. P82,444 d. 3. 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