ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
LIABILITIES
PROBLEM 1
The A Corporation’s Chief Accountant provided the following information:
Notes payable:
Arising from purchase of goods 304,000
Arising from 5-year bank loans, on which a security valued at P600,000 have been pledged,
P400,000 due on June 30, 2020; P100,000 due on December 31, 2020. 500,000
Arising from advances by officers, due on June 30, 2020. 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 of P40,000 360,000
Cash dividends payable 80,000
Share dividends payable 100,000
Dividend in arrears on preference shares 200,000
Convertible bonds, due January 31, 2021 1,000,000
First mortgage on serial bonds, payable in semi-annual installments of P50,000, due April 1 and
October 1 of each year. 2,000,000
Overdraft with MIRS bank 90,000
Cash in bank balance with BDO 390,000
Estimated liability for damages 160,000
Estimated liability on meeting guaranteed for service requirements on merchandise sold 120,000
Estimated liability for premiums 75,000
Deferred revenue 87,000
Accrued interest on bonds payable 360,000
Share warrants outstanding 120,000
Share options outstanding 210,000
Unused letter of credit 400,000
Notes receivable discounted 200,000
On March 1, 2020, the P400,000 note payable was replaced by an 18-month note for the same amount. The
entity is considering similar action on the P100,000 note payable due on December 31, 2020. The 2019
financial statement were authorized for issue on March 31, 2020.
On December 31, 2019, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal. The
entity’s attorney believed that the suit is without merit. No court date has been set.
1. Total current liabilities (2019)
2. Total non-current liabilities (2019)
Page 1 of 3 Compiled & Adapted
ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
PROBLEM 2
You were engaged to audit the liabilities section of B Company for the period ended December 31, 2020. The
following selected transactions were noted during your inquiry and inspection of documents for the period
ending December 31, 2020:
Notes payable:
a. March 1, 2020, borrowed P25,000 on a two-year, 12 percent, interest bearing note. Interest is paid
yearly.
b. April 1, 2020, borrowed cash and signed a P20,000, two-year noninterest bearing note. The market
rate of interest for this level of risk was 16 percent.
c. January 1, 2020, purchased a special truck with a list price of P33,000. Paid P3,000 cash and signed a
P30,000, three year, 10%, interest bearing note payable in equal payments every December 31,
starting 2020 which includes interest based on outstanding balance. The market rate of interest for this
level of risk was 16% percent.
Warranties:
B Company sells washing machine with a 3-year warranty. In the past, B found out that in the year of sale,
warranty cost have been 3% of sale; in the second year after sale, 5% of sales; and in the third year after
sale, 7% of sales. The following data were also available:
Year Sales Warranty
Expenditure
201 500,000 62,000
8
201 600,000 82,000
9
202 700,000 85,000
0
You were able to properly inquire and inspect the related set of evidence and documents, and based on the
working papers that you presented, the liability account had a balance of P88,200 at the end of 2017.
Premiums:
In 2019, B Company initiated a promotional program whereby customers are given coupons redeemable in
P25 special savings certificates. Each certificate can be turned into the savings company for its face amount at
the end of the third year from its issuance to the customer. One coupon is issued for each peso of sales. On
the surrender of 500 coupons, one P25 savings certificate (cost is P20) is given. It is estimated that 25 percent
of the coupons issued will never be presented for redemption. Sales for the period ending 2019 were
P4,000,000 and the number of coupons redeemed totaled 2,100,000. Sales for the period ending 2020 were
P4,400,000 and the number of coupons redeemed totaled 3,000,000. The savings certificates are acquired
when needed.
Other matters:
a. A customer is suing B Company for P800,000 in damages because her child Chona was injured in
November 2020 while riding an escalator that stopped suddenly in one of its sate of the art store in
Makati. The child was hurt, feeling broken down, and feeling the pain from inside and out when she
tripped and fell while walking down an escalator that was going up. Legal counsel feels that the child is
partially at fault, and so deserves all the pain, but that is probable that the lawsuit will be settled for
between P50,000 and P100,000, with P70,000 being the most likely amount.
b. B Company has an incinerator behind its state of the art facility in Makati which is used to burn
cardboard boxes received in shipments of inventory from suppliers. The environmental protection
agency filed a lawsuit against the company in August 2020 for air pollution. The company expects to
stop using the incinerator and began recycling. However, its lawyers believe that it is probable that a
fine of between P40,000 and P60,000 will be levied against the company, although they cannot predict
the exact amount.
1. The balance of estimated liability of warranty at the end of 2020 is:
2. The balance of estimated premium claims outstanding at the end of 2020 is:
3. Interest payable on the notes at the end of 2020 is:
4. Total current liabilities is:
5. As an auditor, your proposed adjusting entry for the other matters will include:
Page 2 of 3 Compiled & Adapted
ACC124AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 BSA
PROBLEM 3
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 2020 were P7,200,000 – P5,400,000 from musical instrument and sound reproduction
equipment and P1,800,000 from recorded music and sheet music. Replacement parts and labor for warranty
work totaled P164,000 during 2020. A total of 6,500 AM/FM radio used in the premium program were
purchased during the year and there were 1,200,000 coupons redeemed in 2020.
The accrual method is used by Dolores to account for the warranty and premium costs for financial reporting
purposes. The balance in the accounts related to warranties and premiums on January 1, 2020 were shown
below:
Inventory of Premium AM/FM radio 33,950
Estimated Premium Claims 44,800
Outstanding
Estimated Liability from Warranties 136,000
Based on the above and the result of your audit, determine the amounts that will be shown on the 2020
financial statements for the following:
1. Warranty expense
2. Estimated liability from warranties
3. Premium expense
4. Inventory of AM/FM radio
5. Estimated liability for premiums
Page 3 of 3 Compiled & Adapted
