CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING PROBLEMS
AUDIT OF LIABILITIES

PROBLEM NO. 1
In the audit of the Heats Corporation’s financial statements at December 31, 2005, the
chief accountant of the said corporation provided the following information:
Notes payable:
Arising from purchase of goods 304,000
Arising from 5 year-bank loans, on which marketable securities
valued at P600,000 have been pledged as security, P400,000 due
on June 30, 2006; P100,000 due on Dec. 31, 2006 500,000
Arising from advances by officers, due June 30, 2006 50,000
Reserve for general contingencies 400,000
Employees’ income tax withheld 20,000
Advances received from customers on purchase orders 64,000
Containers’ deposit 50,000
Accounts payable arising from purchase of goods,
net of debit balances of P30,000 170,000
Accounts receivable, net of credit balances P40,000 360,000
Cash dividends payable 80,000
Stock dividends payable 100,000
Dividends in arrears on preferred stock, not yet declared 200,000
Convertible bonds, due January 31, 2007 1,000,000
First mortgage serial bonds, payable in semi-annual installments
of P50,000, due April 1 and October 1 of each year 2,000,000
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory
performance on a contract 160,000
Estimated expenses on meeting guarantee for service
requirements on merchandise sold 120,000
Estimated premiums payable 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Common stock warrants outstanding 120,000
Common stock options outstanding 210,000
Unused letters of credit 400,000
Deficiency VAT assessment being contested 500,000
Notes receivable discounted 200,000

On March 1, 2006, the P400,000 note payable was replaced by an 18-month note for the
same amount. Heats is considering similar action on the P100,000 note payable due on
December 31, 2006. The 2005 financial statements were issued on March 31, 2006.
On December 1, 2005, a former employee filed a lawsuit seeking P200,000 for unlawful
dismissal. Heats’ attorneys believe that the suit is without merit. No court date has been
set.

On January 15, 2006, the BIR assessed Heats an additional income tax of P300,000 for
the 2003 tax year. Heats’ attorneys and tax accountants have stated that it is likely that
the BIR will agree to a P200,000 settlement.

REQUIRED:
Based on the above and the result of your audit, compute for the following as of December
31, 2005:
1. Total current liabilities
a. P2,500,000 b. P2,100,000 c. P2,300,000 d. P2,400,000
2. Total noncurrent liabilities
a. P3,300,000 b. P2,900,000 c. P3,000,000 d. P3,400,000
3. Total liabilities
a. P5,200,000 b. P5,000,000 c. P5,400,000 d. P5,800,000

PROBLEM NO. 2
The following information relates to Sonic Company’s obligations as of December 31,
2005. For each of the numbered items, determine the amount if any, that should be
reported as current liability in Sonic’s December 31, 2005 balance sheet.

1. Accounts payable:
Accounts payable per general ledger control amounted to P5,440,000, net of
P240,000 debit balances in suppliers’ accounts. The unpaid voucher file included the
following items that not had been recorded as of December 31, 2005:
a) A Company – P224,000 merchandise shipped on December 31, 2005, FOB
destination; received on January 10, 2006.
b) B, Inc. – P192,000 merchandise shipped on December 26, 2005, FOB shipping
point; received on January 16, 2006.
c) C Super Services – P144,000 janitorial services for the three-month period ending
January 31, 2006.
d) MERALCO – P67,200 electric bill covering the period December 16, 2005 to
January 15, 2006.
On December 28, 2005, a supplier authorized Sonic to return goods billed at P160,000
and shipped on December 20, 2005. The goods were returned by Sonic on December
28, 2005, but the P160,000 credit memo was not received until January 6, 2006.
a. P5,923,200 b. P5,712,000 c. P5,601,600 d.
P5,841,600

2. Payroll:
Items related to Sonic’s payroll as of December 31, 2005 are:
 Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000
a. P776,000 b. P992,000 c. P832,000 d. P912,000

3. Litigation:
In May, 2005, Sonic became involved in a litigation. The suit is being contested, but
Sonic’s lawyer believes it is possible that Sonic may be held liable for damages
estimated in the range between P2,000,000 and P3,000,000, and no amount is a
better estimate of potential liability than any other amount.
a. P0 b. P2,000,000 c. P3,000,000 d.P2,500,000

4. Bonus obligation:
Sonic Company’s president gets an annual bonus of 10% of net income after bonus
and income tax. Assume the tax rate of 30% and the correct income before bonus
and tax is P9,600,000. (Ignore the effects of other given items on net income.)
a. P722,600 b. P395,000 c. P2,240,000 d. P628,000