AUDIT OF LIABILITIES

CASE 1
On December 31, 2014, the bookkeeper of Mermaid Company provided the following information:

Accounts payable, (net of P20,000 debit balance in creditors’ account) P640,000; Note payable (including note
payable to bank on December 31, 2016 of P1,000,000) P1,500,000; Salaries payable, P800,000; SSS Payable,
P30,000; Pag-ibig Payable, P5,000; Medicare Payable, P15,000; Withholding tax payable, P60,000; Vat Payable,
P120,000; Customers’ accounts with credit balances, P50,000; Stock dividends payable, P800,000; Serial bonds
(payable in semiannual installments of P1,000,000) P10,000,000; Accrued interest on bonds payable, P300,000;
Estimated warranty payable, 420,000; Estimated liability for environmental damages, P50,000; Unearned rent
income, for 3 years starting January 1, 2015, P150,000; Cash advances from shareholders, P200,000.

Requirements:
1. How much from the items presented above comprise the company’s current liabilities?

2. How much from the items presented above comprise the company’s non-current liabilities?

CASE 2
You are auditing the 2014 liabilities of Jojo Inc. which follows the calendar year financial statements reporting. The
following information were available with regard its currently maturing obligations:

a. On December 31, 2014, Jojo had P1M of short-term notes payable due February 7, 2015. On January 15,
2015, the company issued bonds with a face value of P900,000 at 96; brokerage fees and other costs of
issuance were P3,450. On January 22, 2015, the proceeds from the bond issue plus additional cash held by
the company on December 31, 2014 were used to liquidate the P1M of short-term notes.

b. Another short-term debt in the form of notes payable totaling to P500,000 were due on June 1, 2015. On
February 2, 2015, Jojo entered an agreement with National Life Insurance Co. whereby National will lend Jojo
P400,000 payable in 5 years at 14%, the proceeds of which is intended to be used to partly refinance the said
notes The money will be available to the company on May 20, 2015.

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c. Another P500,000 notes payable is due on June 15, 2015. At the financial statement date December 31,
2014, Jojo signed an agreement to borrow up to P500,000 to refinance the notes payable on a long-term

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basis. The financing agreement called for borrowings not to exceed 80 per cent of the value of the collateral
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Jojo was providing. At the date of issue of the December 31, 2014 financial statements, the value of the
collateral was P600,000 and was not expected to fall below this amount during 2015.
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d. Jojo Inc. also have a P1,000,000, 10%, outstanding 5-year bonds payable due December 31, 2018. Interest
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on the bonds is payable every December 31. By the end of 2014 however, due to shortage in working capital,
Jojo Inc. was not able to pay the interest due December 31, 2014. As a result, the liability became
demandable by the bond holder. On December 31, 2014 Jojo Inc. was able to obtain a waiver (grace period)
from the bond holder up to March 31, 2015 since by then Jojo Inc. expects to have enough cash to settle the
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interest due. The bondholder will not be demanding the payment of the bond during the said grace period.
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Assuming that the financial statements of Jojo were authorized to be issued on March 31, 2015:

1. How much liabilities above are short term as of the balance sheet date?

2. How much liabilities above are long term as of the balance sheet date?
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CASE 3
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The accountant of Tarbuck Inc. provided you the following reconciliation of accounts payable control account and
subsidiary ledger account in connection with your audit of its accounts payable account for the period ended
December 31, 2014:
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Balance per control account (General ledger) P4,450,000

Goods received on December 30,
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purchase invoice not yet received from supplier (400,000)

Purchase invoice on goods still in transit as of
December 31, 2014. Term FOB destination. 300,000
Payments to suppliers in which checks were released on
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December 30, 2014 (520,000)

Payments to suppliers in which checks were released on
January 2, 2015 200,000
Purchase returns (50,000)
Credit balance on a suppliers’ account 40,000
Balance per subsidiary ledgers P4,020,000

What is the correct balance of the accounts payable as of December 31, 2014?

CASE 4
JDI Video and Sound sells compact stereo systems with a two-year warranty. Past experience indicates that 10% of
all sets sold will need repair in the first year, and 20% will need repairs in the second year. The average repair cost is
P500 per system. The company was able to sell 5,000 units and 6,000 units in 2014 and 2015, respectively.
Actual repair costs were P325,000 in 2014 and P650,000 in 2015. All repair costs involved cash expenditures and
were all charged to warranties expense on the year of incurrence.

No accrual for additional warranty liability were made by the company at year end.

Requirements:
1. Prepare adjustments in 2015.

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 3. What is the correct Warranties expense to be reported in 2015?

4. What is the correct Estimated warranties liabilities to be reported at the end of 2014?

5. What is the correct Estimated warranties liabilities to be reported at the end of 2015?

CASE 5
To increase sales, on January 1, 2014, Sierra Appliance Corp. inaugurated a two-year sales promotional plan. The
sales promotional plan entitles customer to purchase certain premium items at a very minimal price plus presentation
of certain amount of accumulated official receipts on purchases. The following table summarizes the sales
promotional plan mechanics:

Required Number of
accumulated premium items Purchase price
official receipt purchased during of the
amount to be Minimal the period premium
Premium item presented purchase price items
Vacuum cleaner P15,000 P500 1,000 P2,250
Industrial stand fan 12,500 300 1,500 1,500

Total cash sales during the period amounted to P45,000,000. The company estimates that 30% of the total receipts
for the year will be presented by the customers to redeem vacuum cleaner premium while 40% of the total receipts
will be presented to redeem industrial stand fan.

The company’s count of the premium items remaining on hand on December 31, 2014 revealed that there were 175
vacuum cleaners and 125 industrial stand fan on hand.

Requirements:

1. How much is the correct premiums expense for the year ended December 31, 2014?

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2. How much is the liability for premiums at the end of the year?

CASE 6
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San Mig Corp. began operation on January 2, 2013 with 250 employees. The company provides its employees 2
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weeks paid sick leave and 2 weeks paid vacation leave for every operating year. The company’s policy on sick leave
and vacation leave allows each employee to carry over accumulated leaves for the current period over the next year
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only. The same shall be forfeited if not availed of over the said period allowed.
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On December 31, 2013, records show that there are 55 employees who are yet to avail of any leaves, while there are
25 employees who have remaining 2 weeks unused vacation and sick leaves combined. Employees had an average
daily wage rate of P250 for a 5-day weekly operation in 2013.
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On December 31, 2014, records show that 925 days vacation and sick leaves carried over from the last operating
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period were exercised and paid in 2014. In addition, there are 30 employees who have 6 weeks accumulated unused
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sick leaves and vacation leaves combined; 25 employees who have accumulated 3 weeks unused sick leaves and 2
weeks unused vacation leaves; 30 employees who have accumulated 3 weeks unused sick leaves and vacation leaves
combined; 10 employees who have accumulated 1 week unused sick leaves and 1 week unused vacation leaves.
Employees had an average daily wage rate of P275 for a 5-day weekly operation in 2014.
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You have observed that there has been no accrual made by the client to accrue salaries payable for the unused leaves
at the end of 2013 and 2014.
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Requirements:
1. What is the retroactive adjustment to retained earnings, beg. as a result of your audit?
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2. How much liability for compensated absences should be included as current liabilities as of December 31, 2014?
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CASE 7
You have conducted several wrap-up audit procedures for Baro Corp.’s financial statements audit for the calendar year
ended December 31, 2014. The financial statements were authorized for issue by Baro Corp.’s board on March 30,
2015. As part of these procedures you gathered corroborating evidences with regard the provisions and
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contingencies.

Case 1: On December 31, the company is a defendant in a pending lawsuit which arose from an alleged product
defect that the company sold in 2014. The lawyers, in response to a letter of audit inquiry, stated that it is probable
that the company have to pay between P300,000 to P700,000, with P400,000 as the best estimate. Moreover, it is
reasonably possible that the company will have to pay the P700,000 as a result of the lawsuit.

Case 2: On November 1, 2014, the company entered into a non-cancellable purchase commitment with Sharp Inc. to
acquire 10,000 units of a specific product at P100 per unit fixed price. The purchase commitment is expected to be
executed on February 1, 2015. On December 31, 2014, because of a significant decline in the demand for Sharp’s
products, the net realizable value of the product decreased to P60 per unit. The contract was executed on February 1,
2015 when the net realizable value of the product remained P60.

Case 3: On December 30, 2014 an explosion occurred at the company’s plant totally damaging the plant and causing
additional damages to adjacent neighbors. The carrying value of the plant on the company’s books was at P5M. It
had a prevailing fair value of P4M prior to the explosion. No claims had yet been asserted against the company as of
the date of authorization of the financial statements. The management as corroborated by their counsel, however
believes that it its probable that the company would be responsible for damages and that P5,000,000 would be a
reasonable estimate of its liability. Baro Corp.’s had an insurance covering this type of accident. The insurance shall
reimburse the company at 80% of the prevailing fair value of the asset prior to the fire while it shall reimburse the
company 80% of any payments to be made for damages caused to neighbors. The reimbursements are virtually
certain
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 Case 4: On December 5, 2014 Baro Corp. initiated a lawsuit against Lore Inc. seeking P2 million in damages from
patent infringement. The lawyers are under the impression that the will likely win the case with the damage being
sought to be awarded to Baro Corp.

Requirements: Determine the implication of each case on Baro Corp.’s 2014 financial statements:

Case: A B C D
1. Accrue provision at Accrue provision at Accrue provision at Accrue provision at
P400,000 and P400,000 and P500,000 and P500,000 and
disclose contingency disclose contingency disclose contingency disclose contingency
at P700,000. at P300,000. at P700,000. at P200,000.
2. Disclose contingency Accrue provision at Accrue provision at Disclose provision at
at P1,000,000. P1,000,000. P400,000. P400,000.
3. Accrue provision at Accrue provision at Accrue provision at Accrue provision at
P5,000,000 and P5,000,000 and P1,000,000 and P1,000,000 and
Recognize recognize recognized recognize
impairment loss at impairment loss at impairment loss at impairment loss at
P5,000,000. P1,800,000. P1,800,000 P5,000,000.
4. Neither accrue nor Accrue P2,000,000 Disclose P2,000,000 Accrue a gain on
disclose a contingent contingent asset. contingent asset. reimbursement at
asset. P2,000,000.

CASE 8
Moats Company issued a five-year bonds dated March 1, 2014 in the amount of P1,000,000. These bonds have an
annual coupon rate of 10% payable semi-annually every March 1 and September 1. The prevailing market rate of
interest on the date the bonds were issued was at 8%.

Moats Company as planned, was able to sell all of its bonds on March 1, 2014 at the prevailing market rate of interest.

The entries prepared by the company were: 3/1: Debit to Cash and credit to Bonds Payable for the total proceeds

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from the issuance of the bonds; 9/1 Debit to Interest expense and credit to Cash at P50,000.

Required:
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1. Adjusting entries for the current year 2014.
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2. How much is the interest expense to be reported for the year ended December 31, 2014.
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3. Balance of the Bonds payable to be reported at the end of 2014.

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4. Assuming all the bonds were reacquired on September 30, 2015 for P1,050,000, what is the gain or loss on the
early retirement of the bonds.
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CASE 9
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In line with your audit of MNO Inc.’s financial statement as of and for the period ended December 31, 2014, you were
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provided the following liability balances:

Current Liabilities:
Accounts payable P1,240,000
Current provision 340,000
Noncurrent liabilities:
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Bonds Payable P2,000,000

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Audit notes:
a. Your purchases cut-off revealed the following entries to the purchases journal several days before and after
December 31, 2014:
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Purchases per December Purchases Journal

RR Number RR Date Amount Remarks
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2901 12/26/2014 P20,000 FOB Destination

2902 12/28/2014 25,000 FOB Destination
2903 12/30/2014 30,000 FOB Shipping point (from consignor)
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Purchases per January Purchases Journal

RR Number RR Date Amount Remarks
2904 1/3/2015 35,000 FOB Shipping point (in transit)
2905 1/4/2015 40,000 FOB Destination (in transit)
2906 1/5/2015 50,000 FOB Destination

b. Current provisions balance related to the accrued warranties payable on MNO’s promotional program which
commenced in the previous year. MNO allows customer to return merchandise for repairs for 1 year from
date of purchase free of charge. MNO sold 2,500 units of the merchandise covered by the said program in
2013 and 3,000 units of the same in 2014. The company estimates that 40% of the units sold shall be
returned for repairs and that average repair cost per unit is P900 in parts and labor. Actual warranty cost
incurred in 2013 was P560,000. Actual warranty cost incurred in 2014 was P700,000. Actual warranty costs
were charged to warranty expense as incurred.

c. The bonds payable were issued on January 1, 2013 and is due on December 31, 2017. 12% Annual interest
on the bonds were payable every December 31. The bonds were issued to yield 10% interest. The company
recorded the issue by debiting cash for the proceeds and crediting bonds payable at face value. The
difference was charged to interest expense. Interest payments at the end of each year were debited to
interest expense.

d. The company pays annual bonus to its key executives at 10% of the adjusted net income after 30% tax and
after
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 Requirements:
1. What is the adjusted balance of Accounts Payable?

2. What is the adjusted balance of the Current Provision?

3. What is the correct carrying value of the bonds payable on December 31, 2014?

4. What is the accrued bonus as of December 31, 2014?

5. What is the adjusted net income after tax for 2014?

CASE 10
You auditing Mamalola Corp.’s various liability accounts. The following schedule of liabilities was presented to you by
the company’s accountant in relation to your audit:
Accounts payable P460,000
Warranties payable 153,250
Salaries payable 268,500
10%, Note payable – bank 2,000,000

Audit notes:
a. You have rendered a purchases cut-off to ascertain the completeness of the company’s accounts payable
balance. The following is the summary of the entries 10 days before and after the balance sheet date and
your audit observations:
Purchases Journal Entries: Dec. 20 – Dec. 31, 2014:
Receiving Report Suppliers Invoice Amount FOB Term/Remark
Date Date
Dec. 20, 2014 Dec. 19, 2014 60,000 Shipping Point
Dec. 23, 2014 Dec. 20, 2014 42,000 From Consignor
Dec. 28, 2014 Dec 26, 2014 45,000 Destination
Jan. 3, 2015 Dec. 29, 2014 30,000 Destination
Purchases Journal Entries: January 2 – January 10, 2015

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Receiving Report Suppliers Invoice Amount FOB Term/Remark

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Date Date
Jan. 3, 2015 Dec. 28, 2014 P20,000 From Consignee

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Jan. 5, 2015 Dec. 3, 2015 55,000 Shipping Point
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Jan. 6, 2015 Jan. 3, 2015 84,000 Shipping Point
*note: assume suppliers’ invoice date as suppliers’ shipment date of goods and ending inventories were
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appropriately established through an inventory count.
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b. The company started its 2-year warranty program for merchandise sold starting 2013. The company
estimates that it will incur P350 in part and labor for repairing each unit of merchandise. The company
further estimates that 70% of the units sold shall be returned for repairs and that 40% of the warranty costs
shall be incurred in the year of sale with 60% to be incurred in the year following the year of sale. The
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following information is deemed relevant for your audit:

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2013 2014
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Number of units sold 1,250 1,410

Actual warranty costs 153,000 250,000
The balance of the warranties payable is the accrued warranty cost at the end of 2013. Actual warranty
costs were charged to current-year warranty expense. Adjusting entry at the end of 2014 is yet to be made.
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c. Salaries payable reflects the probable unused sick leaves and vacation leaves in 2013 and prior to 2013
carried over 2014. No entry had been made during the current year affecting the salaries payable account.
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Employees are allowed to carry-over unused leaves over 2 years from year of grant, thereafter, it shall
expire. Salary rates increased for the current year by 10%. An analysis of the cumulative unused sick leaves
and vacation leaves are as follows:
Prior to 2013 leaves carried over to 2014 270 days
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2013 leaves carried over to 2014 625 days

Prior to 2014 leaves used in 2014* 700 days
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Leaves earned in 2014 carried over 2015 550 days

*from prior to 2014 leaves used in 2014, 200 were earned by employees prior to 2013.

d. The 12% note payable to the bank was originated on June 30, 2012 and is due on June 30, 2015. Semi-
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annual interest on the note is payable every June 30 and December 31. On December 31, 2014 the company
has the option of refinancing the liability by issuing another long-term debt security to the same bank due on
June 30, 2016. The proceeds of the loan to be made, as per agreement shall not exceed 80% of the fair
market value of the property to be attached to the loan as a collateral. As of the balance sheet date, the
said property has a fair value of P2,000,000 and is not expected to materially change until the refinancing
transaction is completed.

e. The Board of Directors approved through a resolution, additional incentive to key officers in the form of a
bonus which shall be at 10% of the adjusted net income after 30% income tax and after bonus. The net
income of the company before any adjustments were made is at P2,032,700

Required:
1. What is the adjusted balance of the accounts payable account?

2. What is the balance of warranties payable as of December 31, 2014?

3. What is the correct balance of the salaries payable in the form of liability for compensated absences as of
December 31, 2014?

4. How much from the 10% notes payable shall be presented as non-current?

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 CASE 11
On January 1, 2014, Santos Corp. issued a 3-year, 8,000, P1,000 convertible bonds at 110. Interest is to be paid
annually at the stated coupon rate of 12% every December 31. Each bond is convertible, at the holder’s option, into
50, P10 par value common shares at any time up to maturity. On the date of issuance, prevailing market interest
rate for similar debt without the conversion privilege was 10%. On the same date market price of one common share
was P30. The transaction was recorded as a debit to cash and credit to bonds payable for the total consideration
received. Interest payment at the end of the year was appropriately recorded as a debit to interest expense account.

Required:
1. What is the equity component of the convertible debt?
2. What is the resulting bonds payable carrying value as of December 31, 2014?

3. Assuming that the convertible bonds above were converted on January 1, 2016, how much should be credited
to Share premium/Additional paid-in capital from the equity conversion?

4. Assuming that the convertible bonds above were retired on January 1, 2016 at 104, how much is the gain or
loss on the early retirement of the bonds to be reported in the income statement assuming that the bonds
were selling at 101 without the conversion privilege at that time?

CASE 12
Case 1: On March 1, 2014, Mansion Company entered into five-year nonrenewable lease, commencing on that date,
for office space and made the following payments to ABC Properties:
Bonus to obtain lease 120,000
First month’s rent 40,000
Last month’s rent 40,000
In its income statement for the year ended Dec. 31, 2014, what amount should Mansion report as rent expense?

Case 2: On January 1, 2014, Travel Corporation signed an 8-year operating lease for office space at P300,000 per
year. The lease included a provision for additional rent of 5% of annual company sales in excess of P2,000,000.
Travel’s sales for the year ended Dec. 31, 2014 were P2,500,000. Upon execution of the lease, Travel Corporation

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paid P100,000 as a bonus for the lease. Travel’s rent expense for the year ended Dec. 31, 2014 is

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Case 3: As an inducement to enter a lease, Premier Arts Company, a lessor, grants Marvel Management Corporation,
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a leaseholder, nine months of free rent under a five-year operating lease. The lease is effective on Feb. 1, 2014 and
provides for monthly rental of P30,000 to begin November 1, 2014. What amount of accrued rent should Premier Arts
Company report in its Dec. 31, balance sheet?
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Case 4: On September 1, 2014, Trend Sound System Company leased office space at a monthly rental of P40,000 for
10 years expiring August 31, 2014. As an inducement for Trend to enter into lease, the lessor permitted Trend to
occupy the premises rent-free from September 1 to November 30, 2014. Improvements were made at the leased
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office at a total costs of P300,000, the improvements were finished on September 30, 2014. It was estimated that
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the improvements will be useful for 5 years. For the year ended December 31, 2014, Trend should record total
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expense related to the lease facilities of

Case 5: Orange Company owns an office building and normally charges tenants P3,000 per square meter per year for
the office space. Because the occupancy rate is low, Orange Company lease 100 sq. m to Comical. Company at
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P2,000 per square meter for the first two years of a four year operating lease. Rent for remaining years will be at the
P3,000 rate. Comical Company moved into the building on January 1, 2014, and paid the first year’s rent in advance.
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What amount of unearned rental revenue should Orange Company report in its balance sheet for the year ended
September 30, 2014?
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Case 6: On January 1, 2014, Sabotage Company leased a building to Cosmos Inc. under an operating lease for ten
years at P500,000 per year, payable the first day each lease year. Sabotage paid P150,000 to a real estate broker as
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finder’s fee. The building is depreciated P120,000 per year. For 2014, Sabotage incurred insurance and property tax
expense totaling P90,000, Sabotage’s net rental income for 2014 should be

CASE 13
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Case 1: On January 2, 2014, Nature Company entered into a ten-year non-cancelable lease requiring year end
payments of P200,000. Nature’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to
Nature Company, is 10%. Present value factor for 10% for an ordinary annuity for ten periods is 6.145 at expiration
of the lease. Present value factor for 12% for an ordinary annuity for ten periods is 5.65 at expiration of the lease.
There is no bargain purchase option. The leased property has an estimated economic life of 12 years. What amount
should Nature capitalize for this leased property on January 2, 2014?

Case 2: On January 2, 2014, Steward Co. signed an 8-year non-cancelable lease for a new machine, requiring
P96,000 annual payments at the beginning of the year. Stewards borrowing rate is 10%. Present value of annuity of
10% for eight periods is 5.335 while the present value of 10% for eight periods in advance is 5.868. The machine has
an estimated life of 12 years, with no salvage value. Title passes to Steward at the lease expiration date. Steward
used straight-line depreciation for all its plant assets. For 2014, Steward should record depreciation expense for the
leased machine at:

Case 3: Vanity Company leased a new machine from Beagle Co. on Jan. 1, 2014, under a lease with the following
information:
Annual rental payable at beginning of each lease year 400,000
Lease term 10 years
Useful life of machine 12 years
Implicit
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 Present value of an annuity of 1 for 10 periods 5.22
Present value of 1 for 10 periods at 14% 0.27
Vanity has the option to purchase the machine on Jan. 1, 2024, by paying P200,000, which is less than the expected
fair value of the machine on the option exercise date. In its December 31, 2014 balance sheet, is the leased asset
should have a book value of:

Case 4: Britney Company leased equipment for its nine-year useful life, agreeing to pay P500,000 at the start of the
lease term on December 31, 2014 and P500,000 annually on each December 31 for the next eight years. The present
value on December 31, 2014, of the nine lease payments over the lease term, using the rate implicit in the lease
which Britney knows to be 10%, was P3,165,000. The December 31, 2014, present value of the lease payments
using Britney’s incremental borrowing rate of 12% was P2,985,000. Britney made timely lease payments. What
amount should Britney report as capital lease liability and interest expense, respectively in their December 31, 2016
financial statements?

CASE 14
On December 31, 2013, Anglo Inc. leased a constructed warehouse from Saxon Corp. The following data relate to the
lease transaction at the inception of the lease: Lease term, 10 years; Annual rental payable every December 31
starting December 31, 2013, P500,000; Useful life of the warehouse, 15 years; Implicit interest rate, 10%. Fair
market value of the warehouse, P4,000,000. The lease has no renewal option, and the possession of the machine
reverts to Saxon when the lease terminates. Anglo recorded the transaction as a finance lease and charge whatever
the related expense accounts are in relation to the capitalized lease during the 2014 operating year including
depreciation which was recognized over the lease term under straight-line basis.

Required:
1. What is the net effect of the related audit adjustments, if there are any in relation to the transaction in the 2014
income statement?

2. What is the carrying value of the any lease liability at the end of the year?

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CASE 15

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Lactum Inc. leases its single warehouse having a useful life of 15 years from Enfra Corp. The terms of the lease
provide for minimum lease payments of P150,000 per quarter, payable at the beginning of the quarter. The initial

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lease term runs for ten years with no renewal or purchase option. Lactum Inc. is responsible for paying the property
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taxes and also for any needed repairs to the warehouse. The cost of the warehouse to Enfra Corp. was P3M and the
market value at the date of completion was P4,185,388. The explicit interest rate stated in the lease agreement is
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8%. The lease was signed and the warehouse occupied on January 2, 2014. The company accounts for the
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transaction as an operating lease debiting rent expense for the quarterly payment and crediting cash.
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Required:
1. What is the net effect of the related audit adjustments, if there are any in relation to the transaction in the 2014
income statement?
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2. What is the carrying value of the any lease liability at the end of the year?
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3. What is the current portion of the long-term lease liability, if there are any?

CASE 16
Case 1: The following information pertains to an operating sale and leaseback of equipment by Tremble Co. on
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December 31, 2014: Sales price, P420,000; Carrying amount, P360,000; Monthly lease payment, P37,316; Estimated
remaining life, 12 years; Lease term, 1 year; Implicit rate, 12%.
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1. What amount of realized gain on the sale should Tremble report at December 31, 2014, assuming that the
fair market value of the equipment is at P420,000?

2. What amount of deferred gain on the sale should Tremble report at December 31, 2014, assuming that the
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fair market value of the equipment is at P380,000?

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3. What amount of deferred gain on the sale should Tremble report at December 31, 2014, assuming that the
fair market value of the equipment is at P320,000?

4. What amount of realized gain on the sale should Tremble report at December 31, 2014, assuming that the
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fair market value of the equipment is at P450,000?

Case 2: On June 30, 2014 Forest Co. sold equipment with an estimated useful life of 10 years and immediately leased
it back for 5 years. The equipment’s carrying amount was P540,000. The sales price was P400,000. The lease
agreement is an operating lease.
1. What amount of deferred loss should the company recognized on June 30, 2014 assuming future rental is
below market rate rent, and that the fair market value of the equipment is at P480,000?

2. What amount of deferred loss should the company recognized on June 30, 2014 assuming future rental is
higher than market rate rent, and that the fair market value of the equipment is at P480,000?

Case 3: On January 1, 2014 Alan Corp. sold an equipment to Conrad Inc. and immediately leased it back for 3 years.
The carrying value of the equipment was at P500,000 with a fair market value of P600,000, which was also the agreed
selling price. The implicit lease rate known to both parties on the transaction date was at 10%.

1. What is the total amount to be recognized in the 2014 profit or loss assuming that the remaining life of the
equipment was 3 years and annual rental payable every December 31, was at P241,269.

2. What is the total amount to be recognized in the 2014 profit or loss assuming that the remaining life of the
equipment
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 Case 4: On January 1, 2014 Earl Corp. sold an equipment to Nes Inc. and immediately leased it back for 3 years. The
carrying value of the equipment was at P200,000 with a fair market value of P150,000, which was also the agreed
selling price. The implicit lease rate known to both parties on the transaction date was at 8%. Annual rental payable
every December 31, was at P58,205.
1. What is the total amount to be recognized in the 2014 profit or loss assuming that the remaining life of the
equipment was 3 years.

2. What is the total amount to be recognized in the 2014 profit or loss assuming that the remaining life of the
equipment was 8 years.

CASE 17
Case 1: ABC Finance Corp. leased an equipment with a cost of P700,000 to XYZ on January 1, 2015. The company
incurred direct cost related to the negotiation and arranging the lease agreement at P20,955. Under the lease
agreement appropriately accounted for on the books of ABC as a direct finance lease, since ABC is engaged solely in
financing operations, XYZ shall pay P200,000 annually for five years every December 31, starting 2015. The
equipment has a useful life of five years. The implicit lease rate as a result of the direct lease cost was at 12%.

1. How much profit from sale should be immediately recognized by ABC Finance Corp.?

2. What is the interest income should be recognized by ABC Finance Corp. in 2016?

3. What is the balance of the lease receivable as of December 31, 2016?

Case 2: DEF Corp., a dealer of specialized machinery, leased an equipment with a cost of P600,000 to XYZ Inc. on
January 1, 2015. The company incurred direct cost related to the negotiation and arranging the lease agreement at
P20,000. Under the lease agreement appropriately accounted for as a sales type lease, XYZ Inc. shall pay P200,000
annually for five years at the beginning of each year starting the lease inception. The equipment has a useful life of
five years. The implicit lease rate is at 10%.

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1. How much profit from sale that should be immediately recognized by DEF Corp.?

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2. What is the interest income should be recognized by DEF Corp. in 2016?

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3. What is the balance of the lease receivable as of December 31, 2016?
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Case 3: GHI Corp., a dealer of specialized machinery, leased an equipment with a cost of P1,000,000 to XYZ Inc. on
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January 1, 2015. The company incurred direct cost related to the negotiation and arranging the lease agreement at
P50,000. Under the lease agreement appropriately accounted for as a sales type lease, XYZ Inc. shall pay P400,000
annually for five years at the end of each year. The equipment has a useful life of six years. The implicit lease rate is
at 10%. The asset has an expected residual value of P100,000 after five years and shall be reverted back to the
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company after the lease term.

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If XYZ guaranteed the residual value of the asset after 5 years at P100,000,

1. What is the amount to be credited to Sales account as a result of the transaction?

2. What is the cost of sales?

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3. What is the profit from sale that should be immediately recognized by GHI Corp.?
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4. What is the interest income to be recognized in 2016?

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Case 4: Using the information in the previous case except that XYZ does not guarantee the residual value of the asset
after 5 years:
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1. What is the amount to be credited to Sales account as a result of the transaction?

2. What is the cost of sales?

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3. What is the profit from sale that should be immediately recognized by GHI Corp.?

4. What is the interest income to be recognized in 2016?

CASE 18
ABC Co. reported net income for the current year 2014 at P10,000,000 before taxes. Included in the determination of
the said net income were:
Permanent differences
Non-deductible expenses P100,000
Non-taxable income 500,000
Temporary differences
Accrued warranty expenses 250,000
Rental payments made in advance 400,000
Advance collections from customers 500,000
Provision for probable losses 900,000

The income tax rate is 40% and is not expected to change in the future.

Required:
1. How much is the current tax expense?
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2. How much is the total tax expense?
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 3. What is the total deferred tax asset to be presented in the 2014 Statement of Financial Position?

4. What is the total deferred tax liability to be presented in the 2014 Statement of Financial Position?

5. Assuming that the expected income tax rate for the following year is 35%, what is the total tax expense?

6. Assuming that the expected income tax rate for the following year is 35%, what is the total deferred tax liability?

7. Assuming that the expected income tax rate for the following year is 35%, what is the total deferred tax asset?

CASE 19
XYZ Co. reported net income for the current year 2014 at P5,000,000 before taxes. Included in the determination of
the said net income were:
Permanent differences
Non-deductible expenses P150,000
Non-taxable income 50,000

Temporary differences at the beginning of the year:

Cumulative temporary difference creating
future deductible amount P1,200,000
Cumulative temporary difference creating
Future taxable amount 800,000

Temporary differences at the end of the year:

Cumulative temporary difference creating
future deductible amount P1,600,000
Cumulative temporary difference creating
Future taxable amount 500,000

The income tax rate is 40% and is not expected to change in the future.

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Required:
1. How much is the current tax expense?

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2. How much is the total tax expense?
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3. What is the total deferred tax asset to be presented in the 2014 Statement of Financial Position?
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4. What is the total deferred tax liability to be presented in the 2014 Statement of Financial Position?

CASE20
You are auditing Japs Corp.’s post-retirement benefits accounts. The following selected accounts were lifted from the
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2014 unadjusted trial balance. No adjusting entry had been made yet at year end in relation the post-retirement
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benefits related accounts.

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Accrued Pension Expense, January 1, 2014 P630,000

Pension expense for 2014, amount contributed to the plan 1,200,000

Additional information:
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The memorandum account balances and other off-books transactions are as follows:
Plan asset at fair market value, January 1, 2014 P9,450,000
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Accumulated benefit obligation at present value, January 1, 2014 10,080,000

Payments to retirees at scheduled retirement in 2014 1,400,000
Payments to early retirees (settlement price) in 2014 800,000
Carrying value of accrued benefits of early retirees in 2014 650,000
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Current service cost 855,000

Past service cost recognized in the current year 120,000
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Settlement rate 12%

Plan asset at fair market value, December 31, 2014 9,800,000
Accumulated benefit obligation at present value, December 31, 2014 10,500,000
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There had been no remeasurement (actuarial) gain or loss from plan asset and accumulated retirement obligation in
the prior years.

Required:
1. What is the total pension expense in 2014?

2. How much from the pension expense is recognized in the 2014 profit or loss?

3. How much from the pension expense is recognized in the 2014 other comprehensive income or loss?

4. What is the accrued pension liability as of December 31, 2014?

CASE 21
You are auditing Ireland Corp.’s post-retirement benefits accounts. The following selected accounts were lifted from
the 2014 unadjusted trial balance. No adjusting entry had been made yet at year end in relation the post-retirement
benefits related accounts.

Prepaid Pension Expense, January 1, 2014 P220,000

Pension expense for 2014, amount contributed to the plan 750,000

Additional information:
The
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10-23-2021 22:17:15 as follows:
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Plan asset at fair market value, January 1, 2014 P3,200,000
https://www.coursehero.com/file/40792823/AUDIT-OF-LIABILITIES-pup-cln-evalspdf/
 Accumulated benefit obligation at present value, January 1, 2014 2,980,000
Payments to retirees at scheduled retirement in 2014 560,000
Current service cost 480,000
Settlement rate 8%
Actuarial loss on plan asset 80,000
Actuarial loss on accumulated benefit obligation 30,000

There had been no remeasurement (actuarial) gain or loss from plan asset and accumulated retirement obligation in
the prior years. The asset ceiling at the beginning and at the end of the year was at P250,000 and P350,000,
respectively.

Required:
1. What is the total pension expense in 2014?

2. How much from the pension expense is recognized in the 2014 profit or loss?

3. How much from the pension expense is recognized in the 2014 other comprehensive income or loss?

4. What is the prepaid pension expense as of December 31, 2014?

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