CPA REVIEW SCHOOL OF THE PHILIPPINES AP-8902

Manila
AUDITING PROBLEMS
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, 2020, 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 31, 2021.

1. A P1,000,000 short-term obligation due on March 1, 2021. Its maturity could be extended to
March 1, 2023, provided Pukpok agrees to provide additional collateral. On February 12,
2021, an agreement is reached to extend the loan’s maturity to March 1, 2023.

2. A short-term obligation of P1,350,000 in the form of notes payable due February 5, 2021.
The company issued 7,500 ordinary shares for P120 per share on January 25, 2021. The
proceeds from the issuance, plus P450,000 cash, were used to fully settle the debt on
February 5, 2021.

3. A P1,500,000 note payable due July 31, 2021. Pukpok intends to refinance the note by issuing
long-term bonds. On January 10, 2021, the company prepaid P200,000 of the note because
the company temporarily had excess cash. A P2,000,000 bond offering was completed in
March 2021. The proceeds will be used to repay the note payable at maturity.

4. Deferred serial bonds, issued at face value of P5,000,000, and bearing interest at 12%. The
bonds are payable in semiannual installment of P500,000 due April 1 and October 1 of each
year. The last bond is to be paid on October 1, 2026. The interest is also paid semiannually.

5. 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 1, 2020, and the first maturity date is
September 1, 2021.

6. A debt obligation of P600,000 maturing on December 31, 2023. The debt is callable on
demand by the lender at any time.

7. A P2,000,000,10% mortgage note issued October 1, 2019 with a term of 10 years. The terms
of the note give the holder the right to demand immediate payment if the entity fails to make
a monthly interest payment within 10 days of the date the payment is due. On December
31, 2020, Pukpok is three months behind in making the required interest payment. An
agreement was reached to provide a waiver of the breach on January 31, 2021.

8. Bank notes payable which include two separate notes payable to Beckla Bank:
a. A P3,000,000, 10% note issued March 1, 2019, payable on demand. Interest is payable
every 6 months.
b. A one-year, P5,000,000, 11% note issued January 2, 2020. On December 31, 2020,
Pukpok negotiated a written agreement with Beckla Bank to replace the note with a 5-
year, P5,000,000, 10% note to be issued January 2, 2021.

9. A P4,000,000, 10-year, 8% bonds issued at par on June 30, 2011. Interest is payable annually
on June 30 and December 31.

1. What amount of current liabilities should be reported on the December 31, 2020, statement
of financial position?
A. P13,950,000 B. P14,250,000 C. P10,250,000 D. P15,250,000

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2. What amount of noncurrent liabilities should be reported on the December 31, 2020,
statement of financial position?
A. P3,500,000 B. P5,000,000 C. P8,500,000 D. P13,500,000
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PROBLEM NO. 2

In conjunction with your firm’s examination of the financial statements of PISTONS Company as
of December 31, 2020, you obtained from the voucher register the information shown in the
working paper below.

Item Entry Voucher

No. Date Ref. Description Amount Account Charged
1 12.18.20 12-202 Supplies, purchased FOB
destination, 12.15.20;
received 12.17.20 P 20,000 Supplies on hand
2 12.18.20 12-204 Auto insurance, 12.15.20
12.15.21 24,000 Prepaid insurance
3 12.21.20 12-206 Repairs services; received Repairs and
12.20.20 24,000 maintenance
4 12.21.20 12-214 Merchandise, shipped FOB
Shipping point, 11.20.20;
received 12.04.20 17,000 Inventory
5 12.21.20 12-219 Payroll, 12.06.20 to 12.20.20 Salaries and
(12 working days) 69,000 wages
6 12.26.20 12-221 Subscription to Industry Dues and
Magazine for 2021 5,000 subscription
7 12.28.20 12-230 Utilities for December 2020 29,000 Utilities expense
8 12.28.20 12-234 Merchandise, shipped FOB
destination, 12.24.20;
received 01.02.21 111,500 Inventory
9 12.28.20 12-243 Merchandise, shipped FOB
destination, 12.26.20;
received 12.29.20 84,000 Inventory
10 01.02.21 01-001 Legal services; received Legal and
12.28.20 46,000 professional
expense
11 01.02.21 01-002 Medical services for employees
for December 2020 25,000 Medical expense
12 01.05.21 01-003 Merchandise, shipped FOB
shipping point, 12.29.20;
received 01.04.21 55,000 Inventory
13 01.10.21 01-004 Payroll, 12.21.20 to 01.05.21
(12 working days in total, 4 Salaries and
working days in Jan. 2021) 72,000 wages
14 01.10.21 01-005 Merchandise, shipped FOB
shipping point, 01.02.21;
received 01.05.21 64,000 Inventory
15 01.12.21 01-007 Merchandise, shipped FOB
destination, 01.03.21;
received 01.10.21 38,000 Inventory
16 01.13.21 01-008 Maintenance services; Repairs and
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received 01.09.21 9,000 maintenance

17 01.14.21 01-009 Interest on bank loan,
10.12.20 to 01.10.21 30,000 Interest expense
18 01.15.21 01-010 Manufacturing equipment; Machinery
installed on 12.29.20 254,000 and equipment
19 01.15.21 01-011 Dividends declared,
12.15.20 160,000 Dividends payable
Accrued liabilities as of December 31, 2020 were as follows:
Accrued payroll P 48,000
Accrued interest payable 26,667
Dividends payable 160,000

The accrued payroll and accrued interest payable accounts were reversed on January 1, 2021.

REQUIRED:
Prepare adjusting entries as of December 31, 2020 based on your review of the data given above.
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PROBLEM NO. 3
In connection with the audit of the TIKI-TIKI COMPANY for the year ended December 31, 2020,
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, 2020, 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 balances prior to 2016.
No information available due to loss of
records in a fire. P 3,000

03/03/18 Manila Co. – Merchandise returned for credit,

but the company is now out of business. 8,000

06/10/19 Cebu Corp. – Merchandise returned, but

Cebu says “never received.” 7,000

07/10/20 Jolo Distributors – Allowance granted on

defective merchandise after the invoice
was paid. 5,000

10/10/20 Bulacan Co. – Overpayment of invoice. 12,000

12/05/20 Advance to Zambales Co. This company agrees

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to supply certain articles on a cost-plus basis. 24,000

12/05/20 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, 2020, marked “Duplicate” which was entered in the Purchases Journal in January
2021. 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, 2021.

The inventory analysis summary discloses goods in transit of P6,000 at December 31, 2020, not
taken up by the company under audit during the year 2020. These goods are included in your
adjusted inventory.

1. The Accounts payable – Trade balance at December 31, 2020, should be

A. P1,471,000 B. P1,614,000 C. P1,214,000 D. P1,477,000

2. The net adjustment 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.
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PROBLEM NO. 4
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, 2020.

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, 2019,
Estimated Liability for Product warranty had a balance of P620,000. By June 30, 2020, this
balance had been reduced to P120,400 by debits for estimated net cost of components returned
that had been sold in 2019.

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The corporation started out in 2020 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.
Percentage of Total
Month Following Sale Returns Expected
First 30%
Second 20
Third 20
Fourth through sixth—10% each month 30
100%
Gross sales of components were as follows for the first six months of 2020:
Month Amount Month Amount
January P4,200,000 April P3,250,000
February 4,700,000 May 2,400,000
March 3,900,000 June 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, 2019, 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 2020
A. P1,481,500 B. P1,651,000 C. P1,424,500 D. P1,553,500
2. Total estimated returns subsequent to June 30, 2020
A. P678,250 B. P648,850 C. P591,850 D. P615,950
3. Estimated loss on component replacement (in percentage of sales price)
A. 65% B. 75% C. 70% D. 80%
4. Required Estimated Liability for Product Warranty balance at June 30, 2020
A. P301,353 B. P421,753 C. P120,400 D. P77,847
5. Required adjustment to liability account
A. P301,353 debit C. P421,753 debit
B. P301,353 credit D. P421,753 credit
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PROBLEM NO. 5
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, 2020.

BONDS PAYABLE
Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2018. The prevailing market rate of
interest for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2028.

Interest is paid semiannually on July 1 and January 1. Feel Na Feel uses the effective interest
rate method to amortize bond premium or discount.

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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, 2020.
Due Date Amount Due
April 1, 2020 P 400,000
July 1, 2020 600,000
October 1, 2020 300,000
January 1, 2021 300,000
April 1, 2021 - March 31, 2022 1,200,000
April 1, 2022 - March 31, 2023 1,000,000
April 1, 2023 - March 31, 2024 1,400,000
April 1, 2024 - March 31, 2025 800,000
April 1, 2025 - March 31, 2026 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 2018-2019 fiscal year and still outstanding
as of March 31, 2019, amounted to P180,000. The warranty costs on sales made from April 1,
2019, through March 31, 2020, are estimated at P520,000. The actual warranty costs incurred
during the current 2019-2020 fiscal year are as follows:

` Warranty claims honored on 2018-2019 sales P 180,000

Warranty claims honored on 2019-2020 sales 178,000
Total warranty claims honored P 358,000

OTHER INFORMATION

1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to
P740,000 as of March 31, 2020.

2. PAYROLL RELATED ITEMS

Accrued salaries and wages P 300,000
Withholding taxes payable 94,000
Other payroll deductions 10,000

3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2020.

4. DIVIDENDS
On March 15, 2020, 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, 2020, to the ordinary shareholders of record at the close of business on March 31,
2020. Data regarding Feel Na Feel ordinary shares are as follows:

Par value P 5.00 per share

Number of shares issued and outstanding 6,000,000 shares

Market values of ordinary shares:

March 15, 2020 P22.00 per share
March 31, 2020 21.50 per share
April 12, 2020 22.50 per share

1. How much was received by Feel na Feel from the bonds issued on July 1, 2018?
A. P8,852,960 B. P10,000,000 C. P10,500,000 D. P10,647,040

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2. On March 31, 2020, 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, 2020, 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
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PROBLEM NO. 6
The following data were obtained from the initial audit of BIBI COMPANY:

15%, 10-year, Bonds Payable, dated January 1, 2019

Debit Credit Balance
Cash proceeds from issue on January 1, 2019,
of 1,000, P1,000 bonds. The market rate of
of interest on the date of issue was 12%. P1,172,044 P1,172,044

Bond Interest Expense

Cash paid, 1/2/20 P 75,000 P 75,000
Cash paid, 7/1/20 75,000 150,000
Accrual, 12/31/20 75,000 225,000
Accrued Interest on Bonds
Balance, 1/1/20 P 75,000 P 75,000
Accrual, 12/31/20 75,000 150,000
Treasury Bonds
Redemption price and interest to date on
200 bonds permanently retired on 12/31/20 P265,000 P265,000

Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2020
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, 2020
A. P75,000 B. P135,000 C. P60,000 D. P52,500
4. Bond Interest Expense for the year ended December 31, 2020
A. P150,000 B. P139,174 C. P69,745 D. P160,826
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PROBLEM NO. 7
Select the best answer for each of the following:
1. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on
management’s assertion of
A. Existence C. Completeness
B. Presentation and disclosure D. Valuation and allocation
2. An auditor performs a test to determine whether all merchandise for which the client was
billed was received. The population for this test consists of all
A. Merchandise received C. Canceled checks
B. Vendors’ invoices D. Receiving reports
3. The primary audit test to determine if accounts payable are valued properly is
A. Confirmation of accounts payable.
B. Vouching accounts payable to supporting documentation.
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C. An analytical procedure.
D. Verification that accounts payable was reported as a current liability in the balance sheet.
4. Which of the following procedures is least likely to be performed before the balance sheet
date?
A. Observation of inventory count.
B. Testing of internal control over cash.
C. Search for unrecorded liabilities.
D. Confirmation of receivables.
5. An audit assistant found a purchase order for a regular supplier in the amount of P5,500.
The purchase order was dated after receipt of goods. The purchasing agent had forgotten
to issue the purchase order. Also, a disbursement of P450 for materials did not have a
receiving report. The assistant wanted to select additional purchase orders for investigation
but was unconcerned about lack of receiving report. The audit director should
A. Agree with the assistant because the amount of the purchase order exception was
considerably larger than the receiving report exception.
B. Agree with the assistant because the cash disbursement clerk had been assured by the
receiving clerk that the failure to fill out a report didn’t happen very often.
C. Disagree with the assistant because two problems have an equal risk of loss associated
with them.
D. Disagree with the assistant because the lack of a receiving report has a greater risk of
loss associated with it.
6. When using confirmation to provide evidence about completeness assertion for accounts
payable, the appropriate population most likely is
A. Vendors with whom the entity has previously done business.
B. Amounts recorded in the accounts payable subsidiary ledger.
C. Payees of checks drawn in the month after the year end.
D. Invoices filed in the entity’s open invoice file.
7. Which of the following is a substantive test that an auditor is most likely to perform to verify
the existence and valuation of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that pre-numbered purchase
orders are used and accounted for.
B. Receiving the client’s mail, unopened, for a reasonable period of time after year end to
search for unrecorded vendor’s invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders
and receiving reports.
D. Confirming accounts payable balances with known suppliers who have zero balances.
8. Unrecorded liabilities are most likely to be found during the review of which of the following
documents?
A. Unpaid bills C. Bills of lading
B. Shipping records D. Unmatched sales invoices
9. Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Reviewing cash disbursements recorded subsequent to the balance sheet date to
determine whether the related payables apply to the prior period.
B. Investigating payables recorded just prior to and just subsequent to the balance sheet
date to determine whether they are supported by receiving reports.
C. Examining unusual relationships between monthly accounts payable balances and
recorded cash payments.
D. Reconciling vendors’ statement to the file of receiving reports to identify items received
just prior to the balance sheet date.
10. Which of the following procedures relating to the examination of accounts payable could
the auditor delegate entirely to the client’s employees?
A. Test footings in the accounts payable ledger.
B. Reconcile unpaid invoices to vendors’ statements.
C. Prepare a schedule of accounts payable.
D. Mail confirmations for selected account balances.
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