University of Southern Philippines Foundation

Salinas Drive, Lahug, Cebu City, 6000 Philippines

College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

NAME:___________________________________________________

PROBLEM NO. 1

In the audit of the Heats Corporation’s financial statements at December 31,

2018, 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 dueon June 30, 2019; P100,000 500,000
due on Dec. 31, 2019
Arising from advances by officers, due June 30, 2019 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 170,000
balances of P30,000
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, 2020 1,000,000
First mortgage serial bonds, payable in semi-annual 2,000,000
instalments of P50,000, due April 1 and October 1 of each
year
Overdraft with Allied Bank 90,000
Cash in bank balance with PNB 390,000
Estimated damages to be paid as a result of unsatisfactory 160,000
performance on a contract
Estimated expenses on meeting guarantee for service 120,000
requirements on merchandise sold
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, 2019, 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, 2019. The 2018 financial
statements were issued on March 31, 2019.

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 University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

On December 1, 2018, 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, 2019, the BIR assessed Heats an additional income tax of
P300,000 for the 2016 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, 2018:

1. Total current liabilities

2. Total noncurrent liabilities

3. Total liabilities

PROBLEM NO. 2

During your regular annual audit of Rockets Company for the year ended
December 31, 2018, you obtain the following evidence and data relative to your
examination of the bonds payable and related accounts.

From your permanent file working papers:

Client is authorized to issue 20,000 bonds with par value of P1,000 each. Bonds
are dated May 1, 2015 and are due May 1, 2025. Interest at 12% per annum is
due semiannually every May 1 and November 1.

The December 31, 2017 balance of P9,500,000 represents proceeds from

issuance of 10,000 bonds on November 2, 2016.

From the client’s ledger:

12%, 10-year Bonds Payable

12/31/2017 Bal P9,500,000
07/01/2018 CR 2,100,000

Interest Expense
05/01/2018 CV-120 P600,000 07/01/2018 CR P40,000
11/01/2018 CV-531 720,000

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 University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

From supporting documents:

CR Cash receipts entry for issuance of 2,000 bonds for a total of
P2,100,000 on July 1, 2018. Trustee’s remittance statement
attached.

Entry recorded
Cash P2,140,000
Bonds Payable P2,100,000
Interest expense 40,000

CV-120 Cash payment to trustee for November 1, 2004 through April 30,
2018 interest.
Paid check to trustee attached.

CV-531 Cash payment to trustee for May 1, 2018 through October 31, 2018
interest.
Paid check to trustee attached.

REQUIRED:

1. Adjusting journal entries as of December 31, 2018. Use the straight line
method to amortize bond discount and premium, if any.

2. Compute for the adjusted balances of the following as of December 31,

2018:

a. Bonds payable

b. Bond discount

c. Bond premium

d. Accrued interest

e. Interest expense

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 University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

PROBLEM NO. 3

In conjunction with your firm’s examination of the financial statements of

Pistons Company as of December 31, 2018, you obtained from the
voucher register the information shown in the working paper below.

Item Entry Voucher Account

No. Date Ref Description Amount Charged
1 12.18.18 12-202 Supplies, purchased 20,000 Supplies on
FOB destination, hand
12.15.18; received,
12.17.18
2 12.18.18 12-204 Auto insurance, 24,000 Prepaid
12.15.18 to insurance
12.15.19
3 12.21.18 12-206 Repair services; 24,000 Repairs and
received 12.20.18 maintenance
4 12.21.18 12-214 Merchandise shipped 17,000 Inventory
FOB shipping point,
11.20.18; received,
12.4.18
5 12.21.18 12-219 Payroll, 12.6.18 to 69,000 Salaries and
12.20.18 (12 wages
working days)
6 12.26.18 12-221 Subscription to tax 5,000 Dues and
reporting service for subscription
2019 expense
7 12.28.18 12-230 Utilities for December 29,000 Utilities
2018 expense
8 12.28.18 12-234 Merchandise shipped 111,500 Inventory
FOB destination,
12.24.18; received,
1.2.19
9 12.28.18 12-243 Merchandise shipped 84,000 Inventory
FOB destination,
12.26.18; received,
12.29.18
10 01.02.19 01-001 Legal services, 46,000 Legal and
received 12.28.18 professional
expense
11 01.02.19 01-002 Medical services for 25,000 Medical
employees for expense
December 2018
12 01.05.19 01-003 Merchandise shipped 55,000 Inventory
FOB shipping point,
12.29.18; received,
1.4.19
13 01.10.19 01-004 Payroll, 12.21.18 to 72,000 Salaries and
01.05.19 (12 wages
working days in

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 University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

Item Entry Voucher Account

No. Date Ref Description Amount Charged
total, 4 working days
in Jan.)
14 01.10.19 01-005 Merchandise shipped 64,000 Inventory
FOB shipping point,
1.2.19; received,
1.5.19
15 01.12.19 01-006 Manufacturing 39,000 Manufacturing
royalties, Dec. 2018 costs
16 01.12.19 01-007 Merchandise shipped 38,000 Inventory
FOB destination,
1.3.19; received,
1.10.19
17 01.13.19 01-008 Maintenance services, 9,000 Repairs and
received 1.9.19 maintenance
18 01.14.19 01-009 Interest on bank loan, 30,000 Interest
10.12.18 to 1.10.19 expense
19 01.15.19 01-010 Manufacturing 254,000 Machinery and
equipment, installed equipment
on 12.29.18
20 01.15.19 01-011 Dividends declared, 160,000 Dividends
12.15.18 payable
.
Accrued liabilities as of December 31, 2018 were as follows:

Accrued payroll 48,000

Accrued interest payable 26,667
Dividends payable 160,000
Accrued royalties payable 39,000

The Accrued payroll, Accrued interest payable, and Accrued royalties payable
accounts were reversed on January 1, 2019.

REQUIRED:

Prepare adjusting entries as of December 31, 2018 based on your review of the
data given above.

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 University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

PROBLEM NO. 4

Wizards Company presented to you their records in connection with the

audit of the company’s financial statements for the year ended December 31,
2018. This is the first time the company has been audited. The company
floated a serial bond issue in 2016. Your audit showed the following details of
the issue and the accounts as of December 31, 2018:

Total amount P5,000,000

Date of issue October 2, 2016
Proceeds from issue P4,900,000
Interest rate 5% per annum
Interest payment date October 1
Maturity date P1,000,000 annually, starting October 1, 2018

5% Serial Bonds Payable

10/02/18 VR P1,000,000 10/02/16 CR P4,900,000

Accrued Interest Payable

01/02/18 P62,500

REQUIRED:

1. Adjusting journal entries as of December 31, 2018. Use the bond

outstanding method to amortize bond discount and premium, if any.

2. Compute for the adjusted balances of the following as of December 31,

2018:

a. Bonds payable

b. Bond discount

c. Accrued interest payable

d. Bond interest expense

PROBLEM NO. 5

On January 2, 2017, the Suns, Inc. issued P2,000,000 of 8% convertible

bonds at par. The bonds will mature on January 1, 2021 and interest is payable
annually every January 1. The bond contract entitles the bondholders to
receive 6 shares of P100 par value common stock in exchange for each
P1,000 bond. On the date of issue, the prevailing market interest rate for
similar debt without the conversion option is 10%.

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 University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

On December 31, 2018, the holders of the bonds with total face value of
P1,000,000 exercised their conversion privilege. In addition, the company
reacquired at 110, bonds with a face value of P500,000.

The balances in the capital accounts as of December 31, 2017 were:

Common stock, P100 par, authorized 50,000 shares, issued

and outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000

Market value of the common stock and bonds were as follows:

Date Bonds Common stock

December 31, 2017 118 40
December 31, 2018 110 42

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. How much of the proceeds from the issuance of convertible bonds should be
allocated to equity?

2. How much is the carrying value of the bonds payable as of December 31,
2017?

3. How much is the interest expense for the year 2018?

4. The entry to record the conversion on December 31, 2018 will include a
credit to APIC of ___________.

5. How much is the loss on bond reacquisition on December 31, 2018?

PROBLEM NO. 6

In connection with your audit of Ginebra Corporation’s financial statements for

the year 2018, you noted the following liability account balances as of December
31, 2017:

Note payable, bank P 5,600,000

Liability under finance lease 430,000
Deferred income taxes 700,000

Transactions during 2018 and other information relating to Ginebra’s liabilities

were as follows:

a. The principal amount of the note payable is P5,600,000 and bears interest
at 12%. The note is dated April 1, 2017 and is payable in four equal
annual installments of P1,400,000 beginning April 1, 2018. The first
principal and interest payment was made on April 1, 2018.

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 University of Southern Philippines Foundation
Salinas Drive, Lahug, Cebu City, 6000 Philippines
College of Accountancy
Seatwork # 6 – Liabilites
Auditing Problem

b. The capitalized lease is for a ten-year period beginning December 31,

2015. Equal annual payments of P100,000 are due on December 31 of
each year, and the 14% interest rate implicit in the lease known by
Ginebra. The present value at December 31, 2017 of the seven remaining
lease payments (due December 31, 2018 through December 31, 2024)
discounted at 14% was P430,000.

c. Deferred income taxes are provided in recognition of timing differences

between financial and income tax reporting of depreciation. For the year
ended December 31, 2018, depreciation per tax return exceeded
book depreciation by P312,500. Ginebra’s effective income tax rate for
2017 was 32%.

d. On July 1, 2018, Ginebra issued for P1,774,000, P2,000,000 face amount

of its 10%, P1,000 bonds. The Bonds were issued to yield 12%. The
bonds are dated July 1, 2017 and will mature on July 1, 2027. Interest is
payable annually on July 1. Ginebra uses the interest method to amortize
bond discount.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Liability under finance lease as of December 31, 2018

2. Total noncurrent liabilities as of December 31, 2018

3. Current portion of long-term liabilities as of December 31, 2018

4. Accrued interest payable as of December 31, 2018

5. Total interest expense for the year 2018

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