Accounting Review 2 Auditing

Audit of Liabilities

PROBLEM No. 1
Describe below are certain transactions of Abergos Corporation. The Company uses the periodic inventory system.
1. On February 2, the corporation purchased goods from Martin Company for P70,000 subject to cash discount
terms of 2/10,n/30. The corporation at net amounts records purchases and accounts payable after cash
discounts. The invoice was paid on February 26.
2. On April 1, the corporation bought a truck for P50,000 from General Specific Company, paying P4,000 in cash
and signing a one-year, 12% note for the balance of the purchase price.
3. On May 1, the corporation borrowed P83,000 from Daragang Magayon Bank by signing a P92,000 zero-interest
bearing note due one year from May 1.
On August 1, the board of directors declared a P300,000 cash dividend that was payable on September 10 to
stockholders of record on August 31.

1. Make all the journal entries necessary to record the transactions above using appropriate dates.
2. Abergos Corporation’s year-end is December 31. Assuming that no adjusting entries relative to the transactions above
have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial
statements at December 31. Assume straight-line amortization of discounts.

PROBLEM No. 2
3. Presented below is a list of possible transactions of Balanta Z Company.
1. Purchased inventory for P80,000 on account (assume perpetual is used).
2. Issued an P80,000 note payable in payment on account (see item 1 above).
3. Recorded accrued interest on the note from item 2 above.
4. Borrowed P100,000 from the bank by signing a 6-month, P112,000, zero-interest-bearing note.
5. Recognized 4 months’ interest expense on the note from item 4 above.
6. Recorded cash sales of P75,260, which includes 12% sales tax.
7. Recorded wage expense of P35,000. The cash paid was P25,000; the difference was due to various amounts
withheld.
8. Recorded employer’s payroll taxes.
9. Accrued accumulated vacation pay.
10. Recorded an environment liability and related asset.
11. Recorded bonuses due to employees.
12. Recorded sales of product and related warranties (assume sales warranty approach).
13. Accrued warranty expense (assume expense warranty approach).
14. Paid warranty costs that were accrued in item 13 above.
15. Recorded a liability on a lawsuit that the company will probably lose.
16. Paid warranty costs under contracts from item 12.
17. Recognized warranty revenue (see item 12).
18. Recorded estimated liability for premium claims outstanding.

Using the table below, analyze the effect of the 18 transactions on the financial statements categories indicated. Use the
following code: I- increase; D- decrease and NE- no net effect.
# Assets Liabilities Equity Net Income
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.

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 Accounting Review 2 Auditing
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PROBLEM No. 3
4. Prepare any necessary audit adjustments for the following audit findings of unrecorded transactions for the year ended
December 31, 2012 of Bataller IC Tech Inc:

a) An invoice for an insurance premium in the amount of P180,000 dated December 31, 2012. Effective date of
policy 12/01/2012 - 11/30/2015. Invoice unpaid at December 31, 2012, due to the invoice being misplaced by the
client. Premium was paid on January 10, 2013 and check cleared bank on January 12, 2013.

b) An invoice for 10,000 computer payroll checks in the amount of P10,000 dated December 15, 2012. Checks had
been received, but audit inspection confirms that none had been used by December 31, 2012. Invoice paid on
January 22, 2013.

c) An invoice for a 3-year service contract on the client’s electric typewriters in the amount of P18,000, dated
December 1, 2012. Effective date of service contract, 11/01/2012 – 10/31/2015. The office manager overlooked
approving this invoice until the date of payment – January 10, 2013.

d) The audit of the client’s SSS Premiums for December 2012, revealed that the employer’s share in the amount of
P10,000, had not been recorded at December 31, 2012.

e) The return of your account payable verification letter from Search, Inc. indicated a balance due of P12,000.
Comparison with the client’s subsidiary ledger showed a balance of P18,000. The difference was due to a client
error in debiting Sink, Inc. for the P6,000 paid to Search, Inc.

f) Your examination of the Subordinated Notes Payable account at December 31, 2012 revealed the following due
dates:
P 1,000,000 due 11/01/2013
P 1,000,000 due 11/01/2014
P 1,000,000 due 11/01/2015

g) A review of the client’s profit sharing plan revealed:

1. No contribution if profits are P250,000 or less.
2. When profits are in excess of P250,000, contribution is to be 10 percent of such excess, but not to
exceed 20 percent of participants annual salary.
3. Profits are P900,000 and participants salaries are P1, 200,000.

No entry has been made to date.

h) A non interest-bearing note to the president, in the amount of P240, 000 has been included in Accounts Payable
– Non-trade. After discussion of this situation with board of directors on January 10, 2013, it was recorded in the
minutes of that meeting, approval of the loan, but to bear interest at 9 percent per annum. The note was dated
November 1, 2012, and due on demand.

i) The review of the sales bonus plan of your client revealed that no entry had been made for bonuses at
December 31, 2012. the provision of the plan stipulated the following:
No bonus on first P2, 500, 000 sales
10 percent on next P5,000,000 sales
5 percent on next P10,000,000 sales
2 percent on any sales in excess of P 17,500,000 sales

Total audited net sales – P25,000,000 (Disregard payroll taxes.)

j) Your client is in the process of obtaining a patent on a fixture it is currently using in assembling products. This is
one of many patents the client has or will secure. The legal fees, in the amount of P24,000, incurred in the
determination of the patentable nature of this item, have not been paid at December 31, 2012.

PROBLEM No. 4
5. Based upon an audit of Belga Corp., (for the year ended December 31, 2012) a number of adjustments must be made. In
order for the client to realize the importance of these adjustments, it is necessary to discuss with him the effect of the
adjusting entries on (a) net income tax (before income tax), (b) current liabilities, (c) net working capital, (d) provision for
income tax, and (e) retained earnings.

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Accounting Review 2 Auditing
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Prepare an analysis that will indicate whether each of the above is increased (I), decreased (D), or no effect (N) using the
table below. These are the adjusting entries:

(1) Interest Expense 10,000

Accrued Interest Payable 10,000
Error in not accruing interest on note.
(2) Retained Earnings 20,000
Stock Divided Payable 20,000
Error in recording stock divided calculation on 06/30/04.
(3) Accrued Interest Payable 2,000
Interest Expense 2,000
Payment due 01/01/2013 recorded twice.
(4) Notes Payable 40,000
Accounts Payable – Trade 40,000
Payment on account recorded as payment on notes payable.
(5) Profit – Sharing Plan Expense 60,000
Profit – Sharing Plan Payable 60,000
Record provision of profit sharing plan approved by board of directors.
(6) Tax Expense 40,000
Accrued Tax Payable 40,000
Record employer’s tax cost of payroll for week ended 12/21/2012.
(7) Accrued Payroll Insurance Payable 30,000
Payroll Insurance Expense 30,000
Cancel the accrual of unemployment insurance.
(8) Notes Payable – Bank 100,000
First Mortgage Loan Payable 100,000
Correct payment to bank made on short-term notes & not on the first mortgage.
(9) Income Tax 60,000
Provision for Income Tax 60,000
Recorded additional income tax due for 2012.
(10) Retained Earnings 20,000
Dividend Payable 20,000
Record cash divided declaration to stockholders as of 12/28/2012 record date.

Net Income Current Net Provision for Retained

(before income Liabilities Working income tax Earnings
tax) Capital
1
2
3
4
5
6
7
8
9
10

For the subsequent problems, PROVIDE JOURNAL ENTRIES IN ADDITION TO THE REQUIREMENTS

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PROBLEM No. 5
In connection with the audit of the Bogador Company for the year ended December 31, Year 4, 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, Year 4 agrees with the accounts payable
balance in the company’s general ledger. An analysis of the account disclosed the following:

Trade creditors, credit balances P1,363,000

Trade creditors, debit balances 63,000
Net 1,300,000
Estimated warranty on products sold 100,000
Customers’ deposits 9,000
Due to officers and shareholders for advances 50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000
P1,500,000

A further analysis of the “Trade Creditors” debit balances indicates:

Date Item Amount

Miscellaneous debit balance prior to Year 1. No information P 3,000
available due to loss of records in a fire.
03/03/Y2 Manila Co. - Merchandise returned for credit, but the company is 8,000
now out of business.
06/10/Y3 Cebu Corp. - Merchandise returned, but Cebu says, “never 7,000
received.”
07/10/Y4 Jolo Distributors - Allowance granted on defective merchandise 5,000
after the invoice was paid.
10/10/Y4 Bulacan Co. - Overpayment of invoice. 12,000
12/05/Y4 Advance to Zambales Co. This company agrees to supply certain 24,000
articles on a cost-plus basis.
12/05/Y4 Goods returned for credit and adjustments on price after the 4,000
invoices were paid; credit memos from suppliers not yet received.
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, Year 4 marked “Duplicate” which was
entered in the Purchase Journal in January Year 5. Upon inquiry, you discover that the merchandise covered by this
invoice was received and sold, but 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, Year 5.

The inventory analysis summary discloses goods in transit of P6,000 at December 31, Year 4, not taken up by the
company under audit during the Year 4. These goods are included in your adjusted inventory.

6. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
Miscellaneous losses of
7. The net adjustment to Purchases should include a
8. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
9. The Accounts payable - Trade balance at December 31, Year 4 should be

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 Accounting Review 2 Auditing
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PROBLEM No. 6
The following data was taken from the books of the Buado Company that uses a voucher system. All invoices are subject
to term 2/10, n/30 and are entered net of discount. At the end of the company’s reporting period, unpaid vouchers do not
prove against the Vouchers Payable control. You are called in to make the necessary adjustments.

A voucher of unpaid vouchers as of December 31, 2012, all of which are net of discount, is shown below.
Date Voucher No. Supplier Amount in P
Nov. 27 797 Kuala Lumpo Co. 78,400
Dec. 02 821 Malisya Company 19,600
Dec. 11 829 Singapooh Corp. 44,100
Dec. 20 836 Thathay, Inc. 17,150
Dec. 21 842 Indianero Co. 22,050
Dec. 22 856 Kota Kinabaluga 80,850
Dec. 31 865 Betty La Diosa, Inc. 78,400
340,550

Vouchers Payable (control account)

Cash disbursement 1,309,500 Purchases journal 1,645,000
Purchase returns journal 36,750*

*Voucher Nos. 821 and 836 canceled as goods were returned in December.

Based on the above and the result of your audit, compute for the following as of December 31, 2012:
10. Adjusted balance of Vouchers Payable
11. Purchase discounts lost on unpaid vouchers
12. Purchase discount lost on paid vouchers
13. Adjusting journal entry or entries to correct the accounts will include

PROBLEM No. 7
You are reviewing the Notes Payable and Interest Expense accounts of Delos Santos Fashion Store as of December 31,
2012. You noted that the company regularly borrows from the bank in order to finance working capital. The following
schedule shows loans with 12% interest rate, with interest payable at maturity. All loans are repaid, with no adjustments
taken up at yearend:

Date of loan Amount Maturity date Term of loan

November 1, 2011 1,500,000 October 31, 2012 One year
February 1, 2012 2,500,000 July 31, 2012 Six months
May 1, 2012 1,000,000 January 31, 2013 Nine months

14. How much did Delos Santos Fashion Store record as interest during the year 2012?
15. What is the correct interest expense during the year 2012 as a result of the above loans?
16. How much Notes Payable, inclusive of Interest Payable should be shown in the current liabilities section of the statement
of financial position as a result of the foregoing loans?

PROBLEM No. 8
Deyto’s Music Emporium carries a wide variety of musical instruments, sound reproduction equipment, recorded music,
and sheet music. Deyto’s uses two sales promotion techniques - warranties and premiums - to attract customers.

Musical instruments and sound equipment are sold with 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 music and sheet music. Customers receive a coupon for each peso spent on
recorded music or music sheet. Customers may exchange 200 coupons and P20 for a CD player. Deyto’s pays P34 for
each CD player and estimates that 60% of the coupons given to customers will be redeemed.

Deyto’s total sales for 2012 were P14,400,000 - P10,800,000 from musical instruments and sound reproduction
equipment and P3,600,000 from recorded music and music sheet. Replacement parts and labor for warranty work totaled
P328,000 during 2012. A total of 13,000 CD players used in the premium program were purchased during the year and
there were 2,400,000 coupons redeemed in 2012.

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 Accounting Review 2 Auditing
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Deyto’s to account for the warranty and premium costs for financial reporting purposes uses the accrual method. The
balances in the accounts related to warranties and premiums on January 1, 2012, were as shown below:

Inventory of Premium CD Players P 79,900

Estimated Premium Claims Outstanding 89,600
Estimated Liability from Warranties 272,000

Deyto’s Music Emporium is preparing its financial statements for the year ended December 31, 2012. Determine the
amounts that will be shown on the 2012 financial statements for the following:

17. Warranty expense

18. Estimated liability from warranties
19. Premium expense
20. Inventory of premium CD players
21. Estimated premium claims outstanding

PROBLEM No. 9
Eje Corporation manufactures and sells food products and food processing machinery. Its balance sheet date is
December 31. Relevant extracts from its financial statements at December 31, 2008 are as follows:

Current liabilities
Provision
Provision for warranties P270,000

Noncurrent liabilities
Provision
Provision for warranties 180,000

Notes 36 - Contingent Liabilities

Eje 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. Eje 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, 2008 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 2008 having no defects in 2009 80%
Expected % of products sold during 2008 having minor defects in 2009 15%
Expected % of products sold during 2008 having major defects in 2009 5%
Expected timing of settlement of warranty payments
- those with minor defects All in 2009
Expected timing of settlement of warranty payments
- those with major defects 40% in 2009
60% in 2010

During the year ended December 31, 2009, the following occurred:

1. In relation to the warranty provision of P450,000 at December 31, 2008, 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 the products with major
defects, all of which related to amounts that had been expected to be paid in 2009.

2. In calculating its warranty provision for December 31, 2009, Eje made the following adjustments to the
assumptions used for the prior year:

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 Accounting Review 2 Auditing
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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 2009 having no defects in 2010 85%
Expected % of products sold during 2009 having minor defects in 2010 13%
Expected % of products sold during 2009 having major defects in 2010 2%
Expected timing of settlement of warranty payments
- those with minor defects All in 2010
Expected timing of settlement of warranty payments
- those with major defects 20% in 2010
80% in 2011

3. Eje determined that part of its plant and equipment needed an overhaul - the conveyor belt on one of its
machines would need to be replaced in about December 2010 at as estimated cost of P250,000. The carrying
amount of the conveyor belt at December 31, 2008 was P140,000. Its original cost was P200,000.

4. Eje was unsuccessful in its defense would the peanut allergy case and was ordered to pay P1,500,000 to the
plaintiffs. As at December 31, 2009, Eje had paid P800,000.

5. Eje commenced litigation against one of its advisers for negligent advice on the original installation of the
conveyor belt referred to in (3) above. In October 2009, the court found in favor of Eje. The hearing for damages
had not been scheduled as at the date the financial statements for 2009 were authorized for issue. Eje estimated
that it would receive about P425,000.

6. Eje signed an agreement with Buli Bank to the effects that Eje would guarantee a loan made by Buli Bank to
Eje’s subsidiary, Sandwich Ltd. Sandwich’s loan with Buli Bank was P3,200,000 as at December 31, 2009.
Sandwich was in a strong financial position at 31 December 2009.

Based on the above and the result of your audit, answer the following:
22. The warranty expense in 2009 is
23. The provision for warranties as of December 31, 2009 is
24. The provision for warranties to be recorded as current liability as of December 31, 2009 is
25. The provision for warranties to be reported as noncurrent liability as of December 31, 2009 is
26. Total provisions to be reported in the balance sheet as of December 31, 2009 is

PROBLEM No. 10
In your examination of the financial statements of Enriquez Financials, you learn that its president has a profit-sharing
agreement with the corporation. The agreement states that the president is to receive a bonus consisting of a basic
amount to 10% of the company’s net income before deduction of bonus but after deduction of corporate income tax. In
addition, the basic bonus will be increased by the company’s tax savings because the total amount of bonus if deductible
in computing the company’s taxable income. (The tax savings is the difference between the income taxes the company
would have paid if there were no bonus and the taxes the company must pay after Enriquez Financials registered a net
income of P100,000 in Year 1 before deduction of the presidents’ bonus or the corporate income tax.) The company is
subject to a corporate income tax of 30% of its income after deducting the president’s bonus.

27. What is the total bonus due to the president for Year 1?
28. What is the corporate income tax for Year 1?
29. What is the total tax savings from the president’s bonus (to be added to this basic bonus of 10% of net income after taxes
before deduction of bonus)?
30. What is the net income for Year 1 after deducting the president’s bonus and the corporate income tax?

PROBLEM No. 11
You have been asked by a client to review the record of Estayan Co., a small manufacturer of precision tools and
machines. Your client is interested in buying the business, and arrangements have been made for you to review the
accounting records:

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 Accounting Review 2 Auditing
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Your examination reveals the following:

a. Estayan commenced business on April 1, 2001, and has been reporting on a fiscal year ending March 31. The
company has never been audited, but the annual statements prepared by the bookkeeper reflect the following
income before closing and before deducting income taxes:
Year Ended March 31 Income before Taxes
2008 P 143,200
2009 P 222,800
2010 P 207,160

b. A relative small number of machines have been shipped on consignment. These transactions have been
recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of
consignees amounted to:
2008 P 13,000
2009 None
2010 11,180

Sales price was determined by adding 30% to cost. Assume the consigned machines are sold the following year.

c. On March 30, 2009, two machines were shipped to a customer on a C.O.D basis. The sale was not entered until
April 5, 2009, when cash was received for P 12,200. The machines were not included in the inventory at March
31, 2009. (Title passed on March 30, 2009.)

d. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be incurred in
connection with the warranty will amount to ½ of 1% of sales. The company has charged an expense account for
warranty costs incurred.

Sales per books and warranty costs were:

Year ended Sales Warranty Expense for Sales Made in
Mar. 31 2008 2009 2010 Total
2008 P 1,880,000 P 1,520 P 1,520
2009 P 2,020,000 720 P 2,620 3,340
2010 P 3,590,000 640 3,240 P 3,820 7,700

e. Bad debts have been recorded on a direct write-off basis. Experience of similar enterprises indicates that losses
will approximate ¼ of 1% of sales. Bad debts written were:
Bad Debts Incurred on Sales Made In
2008 2009 2010 Total
2008 P 1,500 P 1,500
2009 1,600 P 1,040 2,640
2010 700 3,600 P 3,400 7,700

f. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were:
2008 P 2,800
2009 1,600
2010 2,240

g. A review of the corporate minutes reveals the manager is entitled to a bonus of ½ of 1% of the income before
deducting income taxes and the bonus. The bonuses have never been recorded or paid.

Based on the preceding information and on the result of your audit, calculate the following:
31. Correct sales for the year ended March 31, 2009
32. Correct sales for the year ended March 31, 2010
33. Additional warranty expense for the year ended March 31, 2010
34. Additional bad debts expense for the year ended March 31, 2009
35. Allowance for bad debts at March 31, 2010
36. Additional commission expense for the year ended March 31, 2010
37. Manager’s bonus expense for the year ended March 31, 2010
38. Correct income before income taxes for the year ended March 31, 2008
39. Correct income before income taxes for the year ended March 31, 2009
40. Correct income before income taxes for the year ended March 31, 2010

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 Accounting Review 2 Auditing
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PROBLEM No. 12
On December 31, 2007, Llamoso Company was indebted to VM Co. on a P2,000,000, 10% note. Only interest had been
paid to date. Due to its financial difficulties Llamoso Company has negotiated a restructuring of its note payable. The
parties agreed that Llamoso Company would settle the debt on the following terms:

• Settle one-half of the note by transferring land with a recorded value of P800,000 and a fair value of
P900,000.
• Settle one-fourth of the note by transferring 200,000 share of P1 par ordinary shares with a fair
market value of P15 per share.
• Modify the terms of the remaining one-fourth of the note by reducing the interest rate to 5%, extend
the due date three years from the date three years from the date of restructuring and reducing the
principal to P300,000.

Based on the above and the result of your audit, determine the following.
41. Gain on extinguishment of debt on the P1 million note
42. Share premium to be recognized on the settlement of P500,000 note by issuing ordinary shares
43. Total gain on extinguishment of debt
44. Interest expense in 2008
45. Carrying amount of the note payable as of December 31, 2008

PROBLEM No. 13
On January 1, 2012, Lovendino Corporation issued 2,000 of its 5-year, P1,000 face value, 11% bonds dated January 1 at
an effective annual rate (yield) of 9%. Interest is payable each December 31. Lovendino uses the effective interest
method of amortization. On December 31, 2013, the 2,000 bonds were extinguished early through acquisition in the open
market by Lovendino for P1,980,000 plus accrued interest.

On July 1, 2012, Lovendino 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 for similar debt without
the conversion option is 12%. On July 1, 2013, an investor in Lovendino’s convertible bonds tendered 1,500 bonds for
conversion into 15,000 shares of Lovendino’s common stock, which had a fair value of P105 and a par 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.)

46. The issue price of the 2,000 5-year, P1,000 face value bonds on January 1, 2012 is
47. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2012 is
48. The gain on early retirement of bonds on December 31, 2013 is
49. The carrying value of the 5,000 6-year, P1,000 face value bonds on December 31, 2012 is
50. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2013 will increase share premium by

PROBLEM No. 14
In the course of your examination of the liabilities accounts of Marquez Company, you found that the entity on January 2,
2010 issued at a premium bonds payable with face value of P500,000. The company to Interest Income erroneously
credited the premium. The bonds are payable on December 31, 2019 and pay interest semiannually on June 30 and
December 31. You instructed your audit staff to compute the premium amortization using the interest method and he
provided you with the following:

Premium amortization from January 2, 2010 to June 30, 2010 1,562

Bonds carrying value as of June 30, 2010 555,738
Total interest paid on bonds for the year 2010 (payments made 70,000
on June 30 and December 31)

51. What is the annual stated interest rate on the bonds?

52. What is the effective annual interest rate on the bonds?
53. What is the premium amortization on the bonds payable for 2010?
54. What is the interest expense on bonds for 2010?

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PROBLEM No. 15
In your initial audit of Mortega Company, you find the following ledger account balances.

12% Bonds Payable - Due 10 Years from 01-01-2008

01.02.08 CR P5,000,000

Bonds Payable Redeemed

10.01.11 CD P1,110,000

Bonds Interest Expense

01.01.11 CD P300,000
07.01.11 CD P300,000

The bonds were deemed for permanent cancellation on October 1, 2012 at P108 plus accrued interest. Based on your
computation, the bonds were originally issued to yield 14%.

55. The adjusted balance of bonds payable as of December 31, 2011

56. The adjusted balance of the bonds discount on December 31, 2011
57. The bond interest expense for the year 2011
58. The loss on bond redemption
59. The balance of interest payable on December 31, 2011

PROBLEM No. 16
Your audit staff for the audit of Napay Corporation turned over to you his working papers containing information on the
company’s liabilities. You noted the following:

Accounts Payable
• The general ledger balance is P5, 000,000.
• The balance is net of debit balances in a supplier’s account amounting to P200,000.
• Unrecorded vouchers include the following:
§ X Company for P300,000. The merchandise was shipped December 31, 2010, FOB shipping
point. The goods were received on January 3, 2011.
§ Y Company for P120,000. The merchandise was shipped on December 28,2010, FOB
destination. The goods were received on January 4, 2011.
• The company, as consignee, held goods worth P90.000. These goods were not included in the physical
inventory on December 31, 2010 but were included in the Accounts Payable.

Bonds Payable
• Napay issued 2,000 of its 5-year P1, 000 face value 11% bonds on January 1, 2008. These bonds were sold for
P2, 155,800 a price that yields 9%. The bonds were dated January 1, 2008 and pay interest annually every
December 31. On July 1, 2010, 1,000 of the bonds were retired, the company paying P1, 100,000 inclusive of
accrued interest. The company to the Bonds Payable account charged this amount. On December 31, 2010, the
company charged Interest Expense for the amount of interest paid. The company made no entry during 2010 for
the amortization of bond premium.

Other Obligations:
• In October 2010, an employee was injured on the parking lot in an accident partially the result of his own
negligence. The employee has sued for P500, 000. The legal counsel believes it is probable that the outcome of
the action will be unfavorable and that the settlement would cost the corporation from P200,000 to P300,000,
with P240,000 the most probable amount within this range.

• Napay sells goods with a warranty under which customers are covered for the cost of any manufacturing defects
that become apparent within the first year after the purchase. If minor defects were detected in all products sold,
repair costs of P2, 000,000 would result. If major defects were detected in all products sold, repair costs of P5,
000, 000 would result. The enterprise’s past experience and future expectations indicate that 65% of the goods
sold have no defects, 25% of the goods sold have minor defects and 10% of the goods have major defects.

Rey Joseph M. Redoblado | 10

 Accounting Review 2 Auditing
Audit of Liabilities

• On September 30, 2008, Napay special equipment from Doodle Company by paying P2,000,000 down and
signing a note with a face value of P4,000,000 due September 30, 2011. The note is non-interest bearing.
Market rate of interest for similar notes at the date of its issuance was 10%. (Round present value factors to five
decimal places.)

60. The adjusted balance of Accounts Payable at December 31, 2010 is

61. The adjusted ledger balance of Premium on Bonds Payable at December 31, 2010 is
62. The amount of gain or (loss) on retirement of bonds payable during 2010 is
63. The carrying amount of Notes Payable that will be shown on December 31, 2010 statement of financial position is
64. The provision for litigation expenses that should be shown on the statement of financial position at December 31, 2010 is
65. The provision for warranties that should be shown on the statement of financial position at December 31, 2010 is
66. The provision for warranties that should be shown on the statement of financial position at December 31, 2010 is

Rey Joseph M. Redoblado | 11