Chapter 9 - Audit of Liabilities Roque
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IX – AUDIT OF LIABILITIES
PROBLEM NO. 1 – Current and noncurrent liabilities
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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
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Mortgage notes
notes payable
payable –
– 12%
10%
Mortgage
Bonds Payable
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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.
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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.
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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
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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
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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’.
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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
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Books, audiobooks, and
more.
Provision
for warranties, 12/31/10
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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.
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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.
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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. The accrued interest payable as of December 31, 2010 is
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