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CPA REVIEW SCHOOL OF THE PHILIPPINES Manila
AUDITING PROBL PROBLEMS EMS AUDIT OF LIAB ILITIES – QUIZZERS QUIZZERS PROBLEM NO. 1 Cavaliers Cavaliers Corporation is selling selling audio and video appliances. appliances. The company’s company’s fiscal fiscal year year ends on March March 31. The following inform information ation relates relates to the obligations obligations of the company company as of March 31, 2005:
Notes payable Cavaliers has signed signed several long-term long-term notes with with financial institutions. institutions. The maturit maturities ies of these notes are given below. below. The total total unpaid interest interest for all of these notes amoun amounts ts to P 340,000 340,000 on March 31, 2005. 2005. Due date April 31, 2005 J uly 31, 2005 S eptember eptember 1, 2005 F ebruary 1, 2006 April 1, 2006 – March 31, 2007 2007
Amount P 600,000 600,000 900,00 ,000 450,000 450,000 2,700,000 2,700,000 P 5,100,00 5,100,000 0
Estimated warranties Cavaliers has a one-year product product warranty warranty on some selected selected items. items. The estimated estimated warranty warranty liability on sales made during the the 2003 – 2004 fisc fiscal al year and still still outstanding outstanding as of March 31, 2004 2004,, amounted amounted to to P252 P 252,000. ,000. The warranty warranty costs costs on sales made from April 1, 2004 to March 31, 2005, 2005, are estimated estimated at P 630,000. 630,000. The actual warranty warranty costs costs incurred during 2004 – 2005 fiscal year are as follows: Warranty claims honored on 2003 2003 – 2004 sales sales Warranty claims honored on 2004 2004 – 2005 sales sales Total Total
P 252,000 252,000 285,000 285,000 P 53 537,00 ,000
Trad Trade e payab ayablles Accounts payable for supplies, goods, and services purchases on open account amount to P 560,000 560,000 as of March March 31, 2005. 2005. Dividends On March 10, 2005, Cavaliers’ board of directors declared a cash dividend of P0.30 per common common share share and a 10% comm common stock dividend. Both Both dividends were to be dis distributed tributed on April 5, 2005 to common stockholders on record at the close of business on March 31, 2005. 2005. As of of March 31, 31, 2005, 2005, Cavaliers Cavaliers has 5 million, million, P2 P2 p par ar value, value, common common shares issued iss ued and outstanding. outstanding. Bonds payable payable Cavaliers issued issued P 5,000,000, 5,000,000, 12% 12% bonds, on October 1, 1999 1999 at 96. The bonds will mature ature on October 1, 2009. 2009. Interest is paid semi-annually on October 1 and April 1. Cavaliers 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, 2005: 1.
E stimated warranty payable a. P252,000 b. P345,000
c. P 63 630,00 0,000 0
d. P 88 882,00 2,000 0
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2. 3. 4. 5.
Unamortized bond discount a. P110,000 b. P200,000
c. P100,000
d. P90,000
Bond interest payable a. P0 b. P300,000
c. P150,000
d. P250,000
Total current liabilities a. P6,445,000 b. P5,105,000
c. P5,445,000
d. P3,945,000
Total noncurrent liabilities a. P7,700,000 b. P7,590,000
c. P7,500,000
d. P7,610,000
SUGGESTED ANSWERS: B, D, B, C, D
PROBLEM NO. 2
Pirates’ 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. Pirates pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed. Pirates’ total sales for 2005 were P7,200,000 - P 5,400,000 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 2005. 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 2005. The accrual method is used by Pirates to account for the warranty and premium costs for financial reporting purposes. The balance in the accounts related to warranties and premiums on J anuary 1, 2005, were as shown below: Inventory of Premium AM/FM radio Estimated Premium Claims Outstanding Estimated Liability from Warranties
P39,950 44,800 136,000
QUESTIONS:
Based on the above and the result of your audit, determine the amounts that will be shown on the 2005 financial statements for the following: 1. 2. 3. 4. 5.
Warranty expense a. P108,000
b. P164,000
c. P144,000
d. P80,000
Estimated liability from warranties a. P108,000 b. P136,000
c. P164,000
d. P80,000
Premium expense a. P 75,600
c. P183,600
d. P126,000
Inventory of AM/FM radio a. P46,950 b. P77,350
c. P39,950
d. P56,950
Estimated liability for premiums a. P75,600 b. P63,450
c. P36,400
d. P44,800
b. P108,000
SUGGESTED ANSWERS: A, D, A, D, C
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PROBLEM NO. 3
In the audit process, the following data were obtained from the books of the Spurs Company which uses a voucher system. All invoices are subject to term 2/10, n/30 and are entered net with the discount entered in the Purchase Discount column of the voucher register. The accountant in charge of the books went on leave to attend to his family based in New J ersey. A fresh accounting graduate has been assigned to record the transactions. At year-end, the substitute accountant finds that the unpaid vouchers do not agree with the Vouchers Payable control account. You are called to adjust the matter. A schedule of unpaid vouchers as of December 31, 2005, all of which are net of discount, is presented to you: Date Nov. 27 Dec. 02 11 20 21 22 31
Voucher No. 797 821 829 836 842 856 865
Supplier Duncan Supply Co. Ginobili Distributors Parker Sales Mohamed Dealers Bowen Merchandising Horry Mercantile J ackson Traders
Amount P 78,400 19,600 44,100 17,150 22,050 80,850 78,400 P340,550
Vouchers Payable (control account) Cash disbursements P1,309,500 Purchases journal Purchase returns journal 36,750*
P1,645,000
* Voucher Nos. 821 and 836 cancelled as g oods were returned in December.
REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31, 2005: 1. 2. 3. 4.
Adjusted balance of Vouchers Payable a. P310,000 b. P306,750
c. P303,800
d. P344,250
Purchase discounts lost on unpaid vouchers a. P6,200 b. P2,950 c. P3,700
d. P0
Purchase discounts lost on paid vouchers a. P28,750 b. P8,000 c. P5,050
d. P41,800
Adjusting journal entry or entries to correct the accounts will include a. A debit to Purchase Discounts Lost of P11,250. b. A debit to Purchase Discounts Lost of P5,050. c. A credit to Vouchers Payable of P8,000. d. A credit to Vouchers Payable of P11,250.
SUGGESTED ANSWERS: B, B, C, C
PROBLEM NO. 4
In your initial audit of Bulls Finance Co ., you find the following ledger account balances. 12%, 25-year Bonds P ayable, 2001 issue 01/01/2001 CR
P 1,600,000
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10/01/2005
CD
Treasury Bonds P 216,000
Bond P remium 01/01/2001
01/01/2005 07/01/2005
CD CD
CR
P 80,000
Bond Interest Expense P 96,000 96,000
The bonds were redeemed for permanent cancellation on October 1, 2005 at 105 plus accrued interest. QUESTIONS:
Based on the above and the result of your audit, determine the following: 1. The adjusted balance of bonds payable as of December 31, 2005 is a. P1,400,000 b. P1,600,000 c. P1,000,000 d. P1,384,000 2. The unamortized bond premium on December 31, 2005 is a. P80,000 b. P64,000 c. P56,000
d. P58,800
3. The total bond interest expense for the year 2005 is a. P189,100 b. P182,900 c. P188,800
d. P182,800
4. The gain or loss on partial bond redemption is a. P1,900 loss b. P1,900 gain c. P18,100 loss
d. P18,100 gain
SUGGESTED ANSWERS: A, C, B, A – End o f AP-5902Q –
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