CPA Review
Audit of Liabilities
PROBLEM NO.1
PUKPOK, INC. is a manufacturer and retailer of household furniture. Your audit of the company’s
financial statements for the year ended December 31, 2017; discloses the following debt obligations
of the company at the end of its reporting period. Pukpok’s financial statements are authorized for
issuance on March 06, 2018.
1. A P200,000 short-term obligation due on March 01, 2018. Its maturity could be extended
to March 01, 2020, provided Pukpok agrees to provide additional collateral. On February 12,
2018, an agreement is reached to extend the loan’s maturity to March 01, 2020.
2. A short-term obligation of P4,200,000 in the form of notes payable due February 05,2018.
The company issued 80,000 ordinary shares for P40 per share on January 25, 2018. The
proceeds from the issuance, plus P1,000,000 cash, were used to fully settle the debt on
February 05, 2018.
3. A long-term obligation of P1,500,000 due on December 01, 2027. On November 10, 2017,
Pukpok breaches a covenant on its debt obligation and the loan becomes payable on demand.
An agreement is reached to provide a waiver of the breach on January 11, 2018.
4. A long-term obligation of P4,000,000. The loan is maturing over 8 years in the amount of
P500,000 per year. The loan is dated September 01, 2017, and the first maturity date is
September 01, 2018.
5. A debt obligation of P600,000 maturing on December 31, 2020. The debt is callable on
demand be the lender at any time.
Requirements:
1. What amount of current liabilities should be reported on the December 31, 2017, statement
of financial position?
a. P7,000,000 b. P7,500,000 c. P6,400,000 d. P10,000,000
2. What amount of noncurrent liabilities should be reported on the December 31, 2017,
statement of financial position?
a. P4,000,000 b. P3,500,000 c. P4,100,000 d. P0
Solution:
1
2
3
Current
200,000
4,200,000
1,500,000
Noncurrent
Requirement
4
5
500,000
600,000
7,000,000
3,500,000
Requirement #1- A
#2- B
3,500,000
Current liabilities
69 An entity shall classify a liability as current when:
(a) it expects to settle the liability in its normal operating cycle;
(b) it holds the liability primarily for the purpose of trading;
(c) the liability is due to be settled within twelve months after the reporting period; or
(d) it does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting period (see paragraph 73). Terms of a liability that could, at the option of
the counterparty, result in its settlement by the issue of equity instruments do not affect its
classification.
An entity shall classify all other liabilities as non-current.
PROBLEM NO.2
In connection with the audit of the TIKI-TIKI COMPANY for the year ended December 31, 2017,
you are called upon to verify the accounts payable transactions. You find that the company does not
make use of a voucher register but enters all merchandise purchases in a Purchases Journal, from
which postings are made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,
500, 000 as of December 31, 2017, agrees with the accounts payable balance in the company’s general
ledger. An analysis of the account disclosed the following:
Trade creditors, credit balances
Trade creditors, debit balances
Net
Estimated warranty on products sold
Customer’s deposits
Due to officers and shareholders for advances
Goods received on consignment at selling price
(Offsetting debit made to Purchases)
P 1, 363, 000
63, 000
1, 300, 000
100, 000
9, 000
50, 000
41, 000
P 1, 500, 000
A further analysis of the “Trade Creditors” debit balances indicates:
Date
03/03/15
06/10/16
07/10/17
Item
Miscellaneous debit balances prior to 2013.
No information available due to loss of
records in a fire
Amount
P 3, 000
Manila Co. – Merchandise returned for credit,
but the company is now out of business.
8, 000
Cebu Corp. - Merchandise returned, but
Cebu says “never received.”
7, 000
Jolo Distributors – Allowance granted on
defective merchandise after the invoice
was paid.
5, 000
10/10/17
Bulacan Co. – Overpayment in Invoice
12, 000
12/05/17
Advance to Zambales Co. This company agrees
to supply certain articles on a cost-plus basis
24, 000
12/05/17
Goods returned for credit and adjustments on
price after the invoices were paid; credit
memos from suppliers not yet received.
4, 000
P63, 000
Your next step is to check the invoices in both the paid and the unpaid invoices files against ledger
accounts. In this connection, you discover an invoice from Atlas Co. of P45, 000 dated December 12,
2017, marked “Duplicate” which was entered in the Purchases Journal in January 2018. Upon inquiry,
you discover that the merchandise covered by this invoice was received and sold, but that the original
invoice apparently has not been received.
In the bank reconciliation working papers, there is a notation that five checks totaling P63, 000 were
prepared and entered in the Cash Disbursements Journal of December, but these checks were not
issued until January 10, 2018.
The inventory analysis summary discloses goods in transit of P6, 000 at December 31, 2017, not taken
up by the company under audit during the year 2017. These goods are included in your adjusted
inventory.
Requirement:
1. The Accounts payable – Trade balance at December 31, 2017, should be
a. P1, 471, 000
b. P1, 614, 000 c. P1, 214, 000
d. P1, 477, 000
2. The net adjustments to Purchases should include a
a. Net debit of P51, 000
b. Net credit of P41, 000
c. Net debit of P10, 000
d. Net debit of P73, 000
3. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to Miscellaneous losses of
a. P18, 000
b. P23, 000
c. P35, 000
d. P39, 000
4. The entry to adjust the Accounts payable account for those accounts with debit balances
should include a debit to
a. Miscellaneous losses of P23, 000
b. Advances to suppliers of P24, 000
c. Suppliers debit balances of P18, 000
d. Purchases of P21, 000
5. Auditor confirmation of accounts payable balances at the end of the reporting period may
be unnecessary because
a. There is likely to be other reliable external evidence to support the balances.
b. Correspondence with the audit client’s attorney will reveal all legal action by
vendors for non-payment.
c. This is a duplication of cutoff test.
d. Accounts payable at the end of the reporting period may not be paid before the
audit is completed.
Solution
1. Trade Creditors, Credit balances
Trade Creditors, Debit balances
Lost invoice
Undelivered checks
Goods in transit, invoice not recorded
Accounts payable adjusted
2. Lost invoice
Goods in transit, invoice not received
Goods received on consignment
Net adjustment to Purchases
3. Miscellaneous debit balance
Manila Co.
Cebu Corp.
Miscellaneous losses
AJE – Miscellaneous Loss
Accounts Payable
1,300,000
63,000
45,000
63,000
6,000
1,477,000
D
45,000
6,000
(41,000)
10,000
C
3,000
8,000
7,000
18,000
A
18,000
18,000
4. Advance to Zambales Co. 24,000
AJE for trade payables debit
Miscellaneous loss
Suppliers’ Debit balances
Advances to Suppliers
Accounts payable
18,000
21,000
24,000
63,000
B
5. There is likely to be other reliable external evidence to support the balances. A
Explanation:
PAS 1, the presentation and classification of items in the financial statements shall be retained from
one period to the next, unless a change is justified either by a change in circumstances or a requirement
of new PFRS.
PROBLEM NO.3
LAPAYAT CORPORATION, a client, requests that you compute the appropriate balance of its
estimated liability for product warranty account for a statement as of June 30, 2017.
Lapayat Corporation manufactures television components and sells them with a 6-month warranty
under which defective components will be replaced without charge. On December 31, 2016,
Estimated Liability for Product warranty had a balance of P 620, 000. By June 30, 2017, this balance
had been reduced to P 120, 400 by debits for estimated net cost of components returned that had
been sold in 2016.
The corporation started out in 2017 expecting 7% of the peso volume of sales to be returned. However,
due to the introduction of new models during the year, this estimated percentage of returns was
increased to 10% on May 1. It is assumed that no components sold during a given month are returned
in that month. Each component is stamped with a date at time of sale so that the warranty may be
properly administered. The following table of percentages indicates the likely pattern of sales returns
during the 6-month period of the warranty, starting with the month following the sale of components.
Month Following Sale
First
Second
Third
Fourth through sixth – 10% each month
Percentage of Total
Returns Expected
30%
20
20
30
100%
Gross sales of components were as follows for the first six months of 2017:
Month
Amount
Month
January
P 4, 200, 000
April
February
4, 700, 000
May
March
3, 900, 000
June
Amount
P 3, 250, 000
2, 400, 000
1, 900, 000
The corporation’s warranty also covers the payment of freight cost on defective components returned
and on the new components sent out as replacements. This freight cost runs approximately 5% of the
sales price of the components returned. The manufacturing cost of the components is roughly 70%
of the sales price, and the salvage value of returned components averages 10% of their sales price.
Returned components on hand at December 31, 2016, were thus valued in inventory at 10% of their
original sales price.
Based on the given information, determine the following:
1. Total estimated returns from the sales made during the first 6 months of 2017
a.
2.
a.
3.
a.
4.
a.
5.
a.
b.
P 1, 481, 500
b. P 1, 651, 000
c. P 1, 424, 500
d.
Total estimated returns subsequent to June 30, 2017
P 678, 250
b. P 648, 850
c. P 591, 850
d.
Estimated loss on component replacement (in percentage of sales price)
65%
b. 75%
c. 70%
d.
Required Estimated Liability for Product Warranty balance at June 30, 2017
P 301, 353
b. P 421, 753
c. P 120, 400
d.
Required adjustment to liability account
P 301, 353 debit
c. P 421, 753 debit
P 301, 353
d. P 421, 753
credit
credit
P 1, 553, 500
P 615, 950
80%
P 77, 847
Solution:
Question 1
Answer: D
Month
January
February
March
April
May
June
TOTAL
Sales
P 4, 200, 000
4, 700, 000
3, 900, 000
3, 250, 000
2, 400, 000
1, 900, 000
x
x
x
x
x
x
Estimated Returns
(based on Sales)
7% P 294, 000
7
329, 000
7
273, 000
7
227, 500
10 240, 000
10 190, 000
P 1, 553, 500
PAS 37 states that “an entity must recognise a provision if, and only if a present obligation (legal or
constructive) has arisen as a result of a past event (the obligating event), payment is probable ('more
likely than not'), and the amount can be estimated reliably.”
Question 2
Answer: B
Percentage of Total Returns
Estimated Returns Expected
Month
(based on Sales)
Feb
Mar Apr
May Jun
July – Dec Estimated Returns
January
P 294, 000
30% 20% 20% 10% 10% x 10%
P 29, 400
February 329, 000
30
20
20
10
x 20
65, 800
March
273, 000
30
20
20
x 30
81, 900
April
227, 500
30
20
x 50
113, 750
May
240, 000
30
x 70
168, 000
June
190, 000
x 100
190, 000
TOTAL
P 648, 850
PAS 37 states that provision for warranties is recognized when an obligating event occurs (sale of
product with a warranty and probable warranty claims will be made).
Question 3
Answer: A
70% Cost
5
Add: Freight cost
10
Less: Salvage value
65% Estimated loss on component replacement
PAS 37 states that provisions are “measured at the best estimate of the expenditures required to satisfy
the obligation at the end of the reporting period, that is, the amount that an entity would rationally
pay to settle the obligation at the balance sheet date or to transfer it to a third party.”
Question 4
Answer: B
P 648, 850 Estimated returns at June 30, 2017
65%
Multiply by: Estimated loss on component replacement
P 421, 753 Estimated liability for product warranty at June 30, 2017
PAS 37 states that “provisions for large populations
measured at a probability-weighted expected value.”
Question 5
Answer: B
Estimated Liability for Product
Warranty
P 120, 400
301, 353
P 421, 753
of events (warranties, customer refunds) are
6/30/17 Unadjusted balance
Adjustment (squeeze)
6/30/17 Adjusted balance
PAS 37 states that provisions are reviewed, adjusted and remeasured at each balance sheet date.
PROBLEM NO.4
FEEL NA FEEL, INC. has been producing quality appliances for more than two decades. The
company’s fiscal year runs from April 1 to March 31. The following information relates to the
obligations of Feel Na Feel as of March 31, 2017.
Bonds Payable
Feel Na Feel issued P10, 000, 000 of 10% bonds on July 1, 2015. The prevailing market rate of interest
for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2025.
Interest is paid semi-annually on July 1 and January 1. Feel Na Feel uses the effective interest rate
method to amortize bond premium or discount.
Notes Payable
Feel Na Feel has signed several long-term notes with financial institutions. The maturities of these
notes are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,
000 on March 31, 2017.
Due Date
April 1, 2017
July 1, 2017
October 1, 2017
January 1, 2018
April 1, 2018 - March 31, 2019
April 1, 2019 - March 31, 2020
April 1, 2020 - March 31, 2021
April 1, 2021 - March 31, 2022
April 1, 2022 - March 31, 2023
Amount Due
P400, 000
600, 000
300, 000
300, 000
1, 200,000
1, 000,000
1, 400,000
800, 000
1, 000,000
P 7, 000, 000
Estimated Warranties
Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated
warranty liability on sales made during the 2015-2016 fiscal year and still outstanding as of March 31,
2016, amounted to P180, 000. The warranty costs on sales made from April 1, 2016, through March
31, 2017, are estimated at P520, 000. The actual warranty costs incurred during the current 2016-2017
fiscal year as follows:
Warranty claims honored on 2015-2016 sales
Warranty claims honored on 2016-2017 sales
Total warranty claims honored
Other Information:
P180, 000
178, 000
P358, 000
1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to P740, 000
as of March 31, 2017.
2. PAYROLL RELATED ITEMS
Accrued Salaries and wages
Withholding Taxes Payable
Other Payroll Deductions
P300, 000
94, 000
10, 000
3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150, 000 as of March 31, 2017.
4. DIVIDENDS
On March 15, 2017, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common
share and a 10% ordinary stock dividend. Both dividends were to be distributed on April 12, 2017, to
the ordinary shareholders of record at the close of business on March 31, 2017. Data regarding Feel
Na Feel ordinary shares are as follows:
Par Value
P5.00 per share
Number of shares issued and outstanding
6,000,000 shares
Market Values of Ordinary shares:
March 15, 2017
March 31, 2017
April 12, 2017
P22.00 per share
21.50 per share
22.50 per share
1. How much was received by Feel Na Feel from the bonds issued on July 1, 2015?
A. P8, 852,960
B. P10,000,000 C. P10,500,000 D.P10,647,040
2. On March 31, 2017, Feel Na Feel’s statement of financial position would report total current
liabilities of
A. P5,286,000
B. P4,386,000
C. P5,336,000
D. P5,642,000
3. On March 31, 2017, Feel Na Feel’s statement of financial position would report total noncurrent
liabilities of
A. P14,389,350 B. P14,352,217 C. P14,370,783
D. P14,252,960
Solution:
1.
Present value of principal (P10,000,000 x 0.31180)
Present value of interest payments
P3, 118,000
(P10,000,000 x 5% = P500,000 x 11.46992)
Issue Price/Proceeds
5,734,960
P8,852,960
A.
2.
Notes Payable - current portion ( 400,000 + 600,000 + 300,000 + 300,000)
Estimated warranties payable ( 180,000 + 520,000 - 358,000)
Accounts Payable
Payroll-related accruals and deductions withheld
Miscellaneous Accruals
Cash Dividends Payable
Accrued Interest on:
Bonds Payable (P10,000,000 x 10% x 3/12)
Notes Payable
Total Current Liabilities
P1,600,000
342,000
740,000
404,000
150,000
1,200,000
A.
250,000
600,000
P5,286,000
3.
Date
7/1/2015
12/31/2015
7/1/2016
12/31/2016
1/1/2017
Interest
Paid
P500,000
P500,000
P500,000
P500,000
Interest
Expense
P531.178
533,048
535,031
537,133
Bonds Payable
Carrying Value, Jan. 1, 2017
Add: Discount amortization
Jan. 1 - Mar. 31 (P37,133 x 3/6)
Notes Payable - noncurrent portion:
(P7,000,000 - P1,600,000 current portion)
Total non-current liabilities
Discount
Amortization
P31,178
33,048
35,031
37,133
Carrying
Value
P8,852,960
8,884,138
8,917,186
8,952,217
8,989,350
P8,952,217
18,566
P8,970,783
C.
5,400,000
P14,370,783
PFRS 9 provides that an entity shall measure initially a financial liability at fair value minus, in the case
of financial liability not designated at fair value through profit or loss, transaction costs that are directly
attributable to the issue of the financial liability.
Transaction costs include:
a. Broker’s fee and commission
b. Levies
c. Transfer taxes and duties
Transaction costs do not include:
a. debt premiums or discounts
b. financing costs
c. internal administrative or holding costs
Bonds payable shall also be measured initially at fair value minus directly attributable costs.
Amortized cost of bonds payable is the initial amount plus or minus the cumulative amortization using
the effective interest method.
PROBLEM NO.5
On January 1, 2016, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value, 11%
bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each
December 31. Wizards uses the effective interest method of amortization. On December 31, 2017,
the 2,000 bonds were extinguished early through acquisition in the open market by Wizards for
P1,980,000 plus accrued interest.
On July 1, 2016, Wizards issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par.
Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest
rate of similar debt without the conversion option is 12%. On July 1, 2017, an investor in Wizards’
convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Wizards’ ordinary shares,
which had a fair value of P105 and a par value of P1 at the date of conversion.
Based on the above and the result of your audit, determine the following: (Round off present value
factors to four decimal places.)
Requirement:
1. The issue price of the 2,000 5-year, P1,000 face value bonds on January 1, 2016 is
A. 2,155,500
B. 2,000,000
C. P1,844,400
D. P2,147,800
2. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31,2016, is
A. P1,898,400
B. P2,129,500
C. P2,000,000
D. P2,121,100
3. The gain on early retirement of bonds on December 31, 2017, is
A. P20,000
B. P112,000
C. P121,200
D. P0
4. The carrying value of the 5,000 6-year, P1,000 face value bonds on December 31, 2016, is
A. P4,605,800
B. P5,000,000
C. P4,732,875
D. P4,615,400
5. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2017, will increase share
premium by
A. P1,485,000
B. P1,374,600
C. P1,415,054
D. P1,377,697
Solution:
1.
Present value of principal (2M x .6499)
Present value of interest payments (220,000 x
3.8897)
Issue price of FV bonds 1/1/2016
1,299,800
855,734
2,155,500 A
The sum of the carrying amounts assigned to the liability (present value of expected cash flows) and
equity components (proceeds) on initial recognition is always equal to the fair value that would be
ascribed to the instrument as a whole.
2.
Date
Int. Paid
(11%)
Int. Exp. (9%)
Amortization
1/1/2016
Balance
2,155,500
12/31/2016 220,000
193,995
26,005
2,129,500 B
12/31/2017 220,000
191,655
28,345
2,101,200
Amortization of discount reduces the balance in the contra account to bonds payable and results in
an increase in carrying amount of bonds payable. Amortization reduces the balance in discount on
bonds payable account such that at the maturity the bonds payable's carrying amount is equal to its
face value.
3.
Retirement Price
1,980,000
Carrying Value 12/31/2017
2,101,200
Gain on retirement
121,200 C
The stated book value (or carry value for a discount or premium bond) will most likely be the same as
market value for which the company repurchased the bond. This difference creates an extraordinary
gain or loss for the repurchasing company. If the price paid to retire the bonds is greater the carrying
amount of bonds the company needs to record a loss on retirement. On the other hand, if the price
paid is less than the carrying amount of the bonds at retirement the company records a gain on
retirement
of
bonds.
4.
Date
Int. Paid
(10%)
Int. Exp.
(6%)
Amortization
7/1/2016
Balance
4,580,950
12/31/2016
250,000
274,857
24,850
4,605,800 A
7/1/2017
250,000
276,348
26,340
4,632,140
Amortization of discount reduces the balance in the contra account to bonds payable and results in
an increase in carrying amount of bonds payable. Amortization reduces the balance in discount on
bonds payable account such that at the maturity the bonds payable's carrying amount is equal to its
face value.
5.
CV of bonds
4,632,140
1500
x 5000
Total consideration
1,389,642
Par value of OS
(15,000)
Share premium
1,374,642 B
On the conversion date, the carrying value of the bonds converted is used to measure the ordinary
shares issued. No gain or less is recognized. The excess of the consideration from the par value of the
ordinary shares shall be credited to the Share Premium account.
PROBLEM NO.6
The following data were obtained from the initial audit of BIBI COMPANY
15%, 10-year, Bonds Payable, dated January 1, 2016
DEBIT
CREDIT
Cash proceeds from issue on January 1, 2016 of 1,000
bonds. The market rate of interest on the date of issue
P 1,172,044
was 12%
Bond Interest Expense
Cash Paid, 1/2/17
Cash Paid 7/1/17
Accrual 12/31/17
P 75,000
75,000
75,000
Accrued Interests on Bonds
Balance 1/1/17
Accrual 12/31/17
Treasury Bonds
Redemption price and interest to date on 200 bonds
permanently retired on 12/31/17
Based on the preceding information determine the following:
1. Carrying value of bonds payable at December 31, 2017.
A. P831,110
B. P800,000
C. P1,151,583
D. P921,266
2. Loss on Bond Redemption
A. P4,683
B. P19,683
C. P15,000
D. P34,683
3. Accrued Interest on Bonds at December 31, 2017
A. P75,000
B. P135,000
C. P60,000
D. P52,500
4. Bond Interest Expense for the year ended December 31, 2017
P 1,172,044
P 75,000
150,000
225,000
P 75,000
75,000
P 265,000
BALANCE
P 75,000
150,000
P 265,000
A.
B.
C.
D.
150,000
139,174
69,745
160,826
REQUIREMENT # 1
1/1/2016
7/1/2016
1/1/2017
7/1/2017
1/1/2018
interest
payable
interest
expense
amortization
75,000
75,000
75,000
75,000
70322.64
70042
69744.52
69429.19
4,677
4,958
5,255
5,571
1,151,583 x 800/1000 =
carrying
amount
1,172,044
1,167,367
1,162,409
1,157,153
1,151,582
921265.9 D
IFRS 9 Paragraph 3.3.4 If an entity repurchases a part of a financial liability, the entity shall allocate
the previous carrying amount of the financial liability between the part that continues to be recognised
and the part that is derecognised based on the relative fair values of those parts on the date of the
repurchase. The difference between (a) the carrying amount allocated to the part derecognised and (b)
the consideration paid, including any non-cash assets transferred or liabilities assumed, for the part
derecognised shall be recognised in profit or loss.
REQUIREMENT # 2
Retirement Price
Carring amount of principal (1,151,583 x 200/1000)
Interest (200,000 x 15% x 6/12)
Loss on Bond Redemption
265,000
230,317
15,000
245,317
19,683 B
IFRS 9 Paragraph 3.3.3 The difference between the carrying amount of a financial liability (or part of
a financial liability) extinguished or transferred to another party and the consideration paid, including
any non-cash asset
REQUIREMENT # 3
Accrued Interest on Bonds at December 31, 2017
800,000 x 15% 6/12 = 60,000 C
Accrued interest for the unretired portion of the bonds payable .
REQUIREMENT # 4
7/1/2017
1/1/2018
Bond Interest Expense
69744.52
69429.19
139173.7 B
Interest expense from for the year as shown In the schedule of amortization of the bonds payable